AC105 - Week 6

What is inventory costing

An entity must determine the cost of goods sold during the period and the cost of goods remaining at the end of the period

What are the 3 most common methods of costing inventories

FIFO

AVCO

LIFO

What is FIFO

First in First Out - Goods bought or produced first are sold first

What is AVCO

Weighted average cost - Weighted average cost of the inventory held (after each inventory acquisition takes place)

What is LIFO

Last in first out - Goods that are bought or produced last are sold first

When does FIFO give higher profits

During periods of increasing prices but vice versa during decreasing prices

What is an intangible asset

An identifiable non-monetary asset without physical substance

What are the 4 requirements to recognise an intangible asset

1) Identifiable

2)Under Control of the Entity

3)Produces Economic Benefits

4) Reliably measurable

What does it mean for an asset to be identifiable

An asset is identifiable if it is either separable or arises from contractual or legal rights

What are the 3 ways in which a company may obtain an intangible asset

1) Separate acquisition

2) Acquisition as part of a business combination

3) Internally generated assets

Why does a separate acquisition allow a company to obtain an intangible asset

- The cost can be measured (=price paid)

- It is identifiable (as it can be bought or sold)

- The purchase transaction is an indication that economic benefits are probable

- The entity has control over the asset

Why does an acquistion as part of a business combination allow a company to obtain an intangible asset

When a company buys another company and they produce a combined balance sheet, they have to include intangible assets (like brand names or customer lists) in the balance sheet, even if the company they bought didn't recognise these intangibles in their separate balance sheet

What is the issue with identifying internally generated intangible assets

difficult to demonstrate that their cost can be reliably measured and that there are expected future economic benefits

What is one of the only cases internally generated intangible assets can be identified

Research and Development

Internally generated intangible assets: Research and Development explained

Research phase costs are expensed and not identifiable however development costs are capitalised (identifiable as an asset) if certain conditions are met

What should an intangible asset be cost at

an intangible asset should be carried at its cost less any accumulated amortisation and any accumulated impairment losse

When can the revaluation model only be applied

The model can only be applied if there is an active market for that type of intangible asset

What is the condition for amortisation

The asset has a finite life

What is the partnership agreement

The partnership agreement provides how partners will share profits and losses

What does the law assume about net income distribution

The law assumes the net income is to be divided among the partners proportionally to the capital contributed

What are the 2 types of money a partner receives

A stated salary or stated percentage interest on the contributed capital or a combination of both

and

A stated share of residual profit after salaries

What are ordinary shares

The basic unit of ownership

What is the nominal (par) value of shares

The value of a share determined at initial public offering (IPO)

What is the difference between market value and nominal value known as

The share premium

What are the 2 types of shares

Ordinary shares and Preference shares

Characteristics of ordinary shares

Basic form of finance

If the business closes down, the ordinary shareholders receive proceeds after lenders, creditors and preference shareholders

Ordinary shareholders have voting rights

Ordinary shareholders benefit from dividends and appreciation of share market price

High risk high return

What are preference shares

A fixed rate of dividend each year

When are preference dividends paid

Before ordinary dividends

Characteristics of preference dividends

Where a business is closed down, preference shareholders have priority over the claims of ordinary shareholders

Preference shares do not have voting rights

Low risk low return

What are the 2 reserves that are non distributable

Share premium

Revaluation reserve (such as upward revaluations of non-current assets)

What is the distributable reserve

Retained earnings

What is a dividend

A dividend represents a drawing by shareholders of a company

What are the 2 types of dividends

An interim dividend

A final dividend

What is an interim dividend

An interim dividend is paid halfway through the accounting year, when the profit for the first six months is known. The amount is decided by the directors.

What is a final dividend

The final dividend is additional to the interim dividend and, although it relates to the same accounting year, is paid just after the end of the year

The final dividend has to be approved by the equity shareholders at the annual general meeting (AGM), and this is always held after the end of the accounting year when the profit for the year is known.

What is important to know about ordinary dividends

Ordinary dividends are not a business expense, therefore they are not deductible for tax purposes and will not appear on the Income Statement

What is the double entry for interim dividend declared

DOWN Dividends

UP Dividends payable (current liability, SOFP)

What is the double entry for interim dividend paid

Dr Dividends payable (current liability, SOFP)

Cr Bank

What is important to note about a proposed dividend

Proposed dividends are not included in the financial statements. Proposed dividend cannot be accounted for because, until it is declared, it would not qualify to be regarded as a liability.

How do profits impact capital

Profits increase capital

How do dividends impact capital

Decreases capital

What is the equation for retained earnings

RE=RE (beg) + profit/loss - dividends

What is the relationship between taxable profit and accounting profit

Taxable profit is NOT equal to accounting profit (before tax)

What are capital allowances

A tax deductible form of depreciation

What is the double entry for corporation tax

UP Tax expense (Income Statement)

UP Tax liability (SOFP)

What is the concept of tax over/under provision

Last period's actual tax paid is likely to have been different from the estimated charge that went through the income statement

The difference needs to be included in this period's tax charge, either as an extra charge (if the tax paid was higher than the charge to the last period's income statement) or as a reduction (if the tax paid was lower)

This ensures that the whole tax bill hits retained profits at some point.