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Cost of sales (CoS)
the value of goods removed from inventory because they have been sold. Their value is converted from an asset to an expense
inventory
opening stock (value of unsold product from last period carried forward to be sold)
cost of sales calculation:
opening stock + purchases - closing stock
make sure to deduct returns from revenue and purchases
2 ways to value non -current assets
historical cost accounting
fair value
historical cost accounting
non-current assets are valued at their cost less the aggregate/accumulated depreciation from the date of acquisition to the date of the statement of financial position
assets are reported in the statement of financial position at the NBV (net book value)
net book value
Net book value – how much an asset should be worth currently (estimate)
= cost - accumulated depreciation
depreciation
total amount of value lost in the time the asset has been used
historical cost
cost the company paid for the asset at the beginning
the nature of depreciation
Everything that is a tangible non current asset needs to be depreciated except for land and property
what are the 2 depreciation methods
straight line method
reducing balance method
the straight line / fixed instalment method
assume the asset loses the same amount of value each year
= (cost - residual value) / useful economic life
residual value
value at the end of it useful economic value
essential data to compute depreciation
historical cost
length of the asset’s expected useful economic life
estimated residual value of the asset
Depreciation = Net Book Value × Depreciation Rate
the reducing balance method
expected a big drop and then it shallows
convex profile (faster depreciation in earlier periods)
operates by applying depreciation rate to net book value brought forward
