Accounting - Unit 2 AOS 3

Historical Cost + Qualitative Characteristic Relations

Original purchase price excluding GST.

Verifiability ensures that its cost can be evidenced by a source document and that an independent observer would come to the same conclusion regarding its cost.

Therefore, the cost of the cost of the non-current asset would be a faithful representation, free from material error or bias.

Fair Value + Qualitative Characteristic Relations

The price received when selling an asset if it was sold at the time it was acquired by the business.

Relevance is important as financial information (the current price of the good) is related to making economic decisions.

Depreciation

The process of allocating the cost of a non-current asset over its useful life.

Straight Line Depreciation

Non-current assets contribute evenly to revenue meaning the depreciation expense is the same yearly.

Straight Line Depreciation Formula

Depreciation Expense ($ per annum) = HC - RV / Useful Life

Straight Line Depreciation Rate Formula

Depreciation Rate (% per annum) = (Depreciation Expense / Historical Cost) x 100

Reducing Balance Depreciation Def

Non-current assets will contribute more to revenue at the start of its life when it is new, efficient and productive. 

Reducing Balance Formula + Carrying Value Formula

Depreciation Expense ($ per annum) = Carrying Value x Depreciation Rate

Carrying Value = Historical Cost - Accumulated Depreciation

Depreciation Rates and Characteristics

Provides a carrying value that is reflective of the non-current asset’s future economic benefit to the business. Ensures that financial reports the most relevant information for decision makers (relevance)

Asset Turnover (ATO) + Formula

Net Sales / Average Total Assets

An efficiency indicator that assesses how efficiently the firm has used its assets to generate revenue which is integral to assessing the businesses profitability.

Asset Turnover Interpretation - ATO = 0.60 times

ATO of 0.60 times indicates that for every dollar of assets in the business, it earned revenue of 60 cents.

Profitability

The ability to generate profit compared to a base.

Return on Assets (ROA) + Average total assets

Net Profit / Average total assets x 100

(Total assets at start + Total Assets at end) / 2

Return on Assets Interpretation - 17.43%

A return on assets of 17.43% means that for every dollar of assets under the control of the business, it has earned 17 centrs profit.

Return on assets definition + higher ROA

A profitability indicator that assesses how effectively a business has used its assets to earn profit.

Higher return on assets means the business is using its assets more effectively to generate profit and that the business is maintaining good expense control.

Assumptions and Characteristics links to non current asset theory questions.

Faithful representation and relevance - for the use of fair value for a contributed non-current asset.

Verifiability - for the use of historical cost

Period Assumption, Accrual Basis Assumption and Relevance - when selecting the more appropriate depreciation method that aligns with a better calculation of depreciation expense and net profit.

Faithful Representation

Information that is reported represents real world economic events or benefits and is complete, free from material error or bias.

Relevance

Financial information is related to making an economic decision and directly assists the user in forming predictions about outcomes of past, present and future events.

Verifiability

Financial information should ensure that different knowledgeable and independent observers of reports reach the same conclusion and that an event is faithfully represented. This characteristic is maintained by the retention of source documents.

Period Assumption

Reports are prepared for a particular period of time in order to obtain comparability of results and to determine profit.

Accrual Basis Assumption

Revenue is recognised in the period it is earned and expenses are recognised in the period they are incurred so profit can be calculated.

Asset

An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce future economic benefit.

Liability 

A liability is a present obligation of the entity to transfer an economic resource as a result of past events.