Assets 資產(chǎn) and liabilities 負債

1、MANG 6269Fundamentals of Financial AccountingSession 3 Accounting for assets: Property, plant and equipment inventories receivablesTodays lecture: Recap from last time Measurement issues and estimates in financial statements: Non current assets and depreciation Current assets: Inventories Receivable

2、s prepayments Current liabilities Accruals NON-CURRENT (OR FIXED) ASSETS AND DEPRECIATION What is a Non Current Asset? What is Meant by: Property, plant and equipment Intangible Fixed Assets Investments held for long term What is meant by “Cost” of a fixed asset? What is meant by Depreciation? Metho

3、ds of DepreciationDefinitions - AssetAsset: A resource controlled by the enterprise and There must be an exclusive right of control a future economic benefit associated with the item is expected to flow to the enterprise The benefit must have arisen from some past transaction or events the item has

4、a cost or value that can be measured with reliabilityAdapted from International Accounting Committee, Framework for the Preparation and Presentation of Financial Statements, 1989Non-current assetAssets acquired for use in the enterprise on a continuing basis not for resaleUse may be in the productio

5、n or supply of goods or services for rental to others or for administrative purposesIAS16Examples Tangible IntangibleCost of property, plant and equipment includes: its purchase price + import duties and non-refundable purchase taxes - trade discounts and rebates. any costs directly attributable to

6、bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Any obligations for costs to be incurred for dismantling etc. Examples of attributable costRepairs and improvements Cost of Repairs are charged to the income statement e

7、.g. Cost of improvements - added to the cost of a buildinge.g.Depreciation Non-current (fixed) assets are gradually used up in providing goods and services over time. Purpose of accounting depreciation is to spread the cost of a non-current (fixed) asset over its expected useful life. Depreciation i

8、s a method of allocating cost. Achieves a matching of costs against the related revenues. WeetmanEffect on Accounting EquationAssets = Liabilities + Owners FundsDepreciation: “The measure of the cost or revalued amount of the economic benefits of the tangible fixed asset that have been consumed duri

9、ng the period”. Consumption includes the wearing out, the using up or other reduction in the useful economic life of a tangible fixed asset whether arising from use, effluxion of time, or obsolescence through either changes in technology or demand for the goods and services produced by the asset.” “

10、The fundamental objective of depreciation is to reflect in operating profit the cost of use of the tangible fixed assets (i.e. the amount of economic benefits consumed by the entity ) in the period.FRS15 Depreciable amount is the cost of an asset, less its residual value.” “Depreciation is the syste

11、matic allocation of the depreciable amount of an asset over its useful life.”IAS16Note: influence of accruals concept. Net book value is Cost less accumulated depreciation (i.e. The portion of cost that has not yet been used up)Methods of Depreciation include: Straight line Reducing Balance Machine

12、hoursExample A machine is bought for 20,000. Its expected useful life is 3 years or 60,000 machine hours of use, and its estimated residual value is 8,000. For the Reducing balance method, use 25%.Actual hours used: Year 1 19,000; year 2 21,000; year 3 19,500. Profit before depreciation in year 1 is

13、 4,500. What is net profit under each of 3 depreciation methods?Example A small business buys a machine for 20,000. The owner expects it to last for four years and to be scrapped for nothing at the end of that time. She decides to use straight line depreciation. What will be shown in the Income stat

14、ement each year? What will be shown in the balance sheet each year?Land and Buildings at Valuation Most fixed assets are shown in the accounts at cost (less accumulated depreciation). However some companies may choose to include land and buildings at revalued amount (less depreciation). If a company

15、 makes this choice, all the assets in the category must be revalued, and they must be revalued at regular intervals. Revaluation reserve Look out for the accounting policy. IAS 16 refers to open market value whereas FRS 15 required valuation to be at existing use value, ImpairmentIf circumstances ch

16、ange, directors need to review their non-current assets and see if their value in the accounts (the net book value) has been impaired. If necessary, they will need to reduce the value of the fixed assets to the higher of the net realisable value (what it can be sold for less expenses) or the value i

17、n use (the “present” value of estimated future cash flows).Inventories (Stocks and work-in progress) What are inventories? Accounting for inventories Objectives of inventories valuation Normal valuation: Lower of cost and net realisable value What is the cost of inventories?cost flow assumptionscost

18、 of manufactured goods, or of services What is net realisable value?What are inventories? Examples from different types of business: Corner shop Crisp manufacturer Toy manufacturer Builder SolicitorWHAT ARE INVENTORIES?Assets:(a) held for sale in the ordinary course of business;(b) in the process of

19、 production for such sale; or(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.(IAS2)Common categories:“a) goods or other assets purchased for resaleb) consumable storesc) raw materials and components purchased for incorporation into pr

20、oducts for saled) products and services in intermediate stages of completion (Work-in-Progress)e) long term contract balancesf)finished goods.”SSAP 9Accounting for inventories inventories is likely to be a very material figure i.e. large relative to profit. Consider the impact on A - L = C + Profits

21、 ExampleFor a retailer or wholesaler:Opening inventories + Purchases = Cost of the inventories available during the yearHow much of this cost has been “used up” and should be charged against profit as Cost of Sales?How much of this cost has not been used up and should be carried forward as closing i

22、nventories with future economic benefit?Note: Accruals concept: matching sales revenue of goods sold with cost of goods sold.Practicalities Where there are no detailed records of cost of sales then:Step 1:Physical stocktakeStep 2: Value at cost Where detailed records of cost of sales and inventories

23、 are kept after every sale, then Physical stock take (either all at once or a little at a time) to check records to actual inventories. Use inventories figure from the accounting recordsExample Opening inventory5,000 Purchases60,000 Closing inventory8,000 Cost of Sales? Opening inventory8,000 Purcha

24、ses: 90,000 Cost of sales88,000 Closing inventory?Valuation of inventoriesLower of Cost and Net realisable value NB Prudence conceptObjectives of inventories valuation at full cost To determine profit For financial statements basis for cost + pricing (sometimes)Cost:Comprises: All costs of purchase,

25、 costs of conversion and other costs incurred in bringing the inventories to their present location and condition.IAS 2Cost of purchase the purchase price, import duties and other taxes transport, handling and other costs Less Trade discounts, rebates and other similar itemsSSAP 9Cost Flow Models FI

26、FO Weighted Average LIFONB: LIFO is not acceptable under IAS 2 (revised 2003) or SSAP 9Examples - Widgets Jan 10 Bought 200 widgets 10 each Jan 17Bought 300 widgets 11 each Jan 25 Sold 270 widgetsWhat is the Cost of Sales?Cost of conversion Direct labour. Direct expenses a systematic allocation of f

27、ixed and variable production overheads that are incurred in converting materials into finished goods. Example 1: Toy Manufacturer making Teddy BearsCost of Finished Bear: Direct Materials (fluffy material, glass button eyes, stuffing etc etc)3 per unit Direct Labour (piece rate)4 per unit and a shar

28、e of indirect costs: Power:3,000 Rent and Business rates1,800 Foremans salary2,000 Depreciation of machines900 Other300Total for the month8,000 ? per unitDuring the month, 1000 bears have been made.Therefore a reasonable share of production overheads would be:8,000=per unit.1,000Cost of Finished Bea

29、r:Direct Materials 3 per unitDirect Labour (piece rate)4 per unitshare of indirect costs:per unitTotalper unitNB The estimates and judgements which have been used.Valuation of Partly Made Bear, at cost: A share of production overheads could be based on direct labour cost: Cost of direct labour = 100

30、0 bears at 4 each = Production overhead = 8,000 in the month Production overhead / cost of direct labour = Costs of partly made bear:Materials 2.30 ActualLabour 2.00Actual at piece rateOverheads 2 x Direct labour cost Total Net Realisable Value:“The estimated selling price in the ordinary course of

31、business less the estimated costs of completion and the estimated costs necessary to make the sale.” IAS 2NB Normally Cost NRV. Then inventories is valued at cost. Accruals (Realisation) and Prudence concepts Occasionally NRV Cost . Then inventories is valued at NRVPrudence concept Net Realisable Va

32、lue: For a retailer or wholesaler or for the finished goods of a manufacturer, normally:Selling price less selling and distribution costs.Example retailerCost NRVLower of Cost and NRVLine A5,0007,000Line B2,0003,000Line C20080001,000Irreparably damagedLine D1500750Out of fashionTotal12,500Net Realis

33、able Value:For work in progress (or raw materials) of a manufacturer or of a service industry: Normal selling price less costs to completion and selling and distribution costs in the normal course of business.Example 3Valuation of Partly Made Bear: Costs so Far (See example 1):Materials 2.30Labour 2

34、.00Overheads 4.00 Total 8.30 Estimated Costs to Complete: Further Materials plus further Labourplus further Overheadsat 2 x direct labour cost)Total Net Realisable Value: Selling Price less estimated Costs to Completion25 - 6.70 = 18.30 Lower of Cost and NRV = Lower of 8.30 and 18.30= 8.3043Receivab

35、les (Debtors)These are the amounts of money owed to the business by its customers.Normally, when businesses make sales on credit, they expect their customers to pay!Checks on credit rating BEFORE sale is madeIf they are unsure, may ask for deposits or full payment in advance.Importance of credit con

36、trol proceduresNormally it is expected that customers will pay reasonably promptly, and the receivable is valued at invoice amount44Bad and Doubtful DebtsSometimes customers will not pay:They may go bankrupt, or have significant financial difficultiesThey may dispute the debt.The debt can only be sh

37、own as an asset if there is an expected future economic benefitTherefore, when business knows that a customer will not pay, the debt is “written off” as a “bad debt”:The account receivable (asset) balance is reduced to zeroThe bad debt written off is treated as an expense.Doubtful Debts impairment o

38、f receivablesWill the entity get all its money back?At the end of the accounting period, is there evidence that the value of the receivables is impaired? e.g. Significant financial difficulty of the debtor Late payments Probable bankruptcy Granting concessions to the debtor e.g. rescheduling repayme

39、nts Observable data relating to future cash flows for a group of receivables e.g. Increase in rate of Delayed payments or payments on account Unemployment rates in the area going upDoubtful Debts impairment of receivablesIf receivables are impaired, Businesses make an allowance (or provision) for do

40、ubtful debts: Deducted from accounts receivable total on balance sheet Increase charged as an expense in the income statementExample Receivables at invoice value at 31 Dec 2012 amount to 12,500. Included in this amount is 3,500 owing from Bloggs Builders Ltd. This customer has been very late in its

41、payments and is in financial difficulty. The company is still asking for all the moneys but it is estimated that only half of the debt will be recovered. What amount should be shown in the balance sheet?Weir Group plc- accounting policyTrade receivables, which generally are of a short dated nature,

42、are recognised and carried at original invoice amount less an allowance for estimated irrecoverable amounts. Provision is made when there is objective evidence that the Group will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote.Longer term receivables