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Total capital employed =?
= Capital + Non-Current Liabilities.
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Insurance: Year end 31 Jan 2009, Insurance for the year to 31 March 2009 $ 1440 is being paid in 10 equal instalments May 08 - February 09.
What is the prepayment/ accrual?
Of the $1,440 insurance for the year to 31/3/09, 10/12= $1,200 belongs to this accounting year. We must compare against this the amount actually paid - 9 payments have been made:
- (May - January) 9 * $1,440/10 = $1,298
- Amount due: $1,200
- Amount paid: $1,296
- Paid in advance (i.e. Prepayment $96)
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What is the diminishing/ reducing balance method?
- rate of depreciation = 100 - (ul * 開平方(residual value/ cost) *100
- - (ul = estimated useful life)
- Depreciation = rate of depreciation * WDV of asset (at start of year)
- - WDV = cost - aggregate depreciation of the asset since the date of acquisition
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what are advantages of diminishing/ reducing balance method? and criticisms?
- Advantages:
- - this method gives a decreasing annual charge for depreciation over the useful life of the asset.
- - most appropriate for non-current assets that deteriorate primarily as a result of usage where this is greater in the earlier years of their life (e.g. plant and machinery, etc.)
- - said to be a more realistic measure of the reduction in the market value of non-current assets --> since this is likely to be greater in the earlier years of the asset's life than later years.
- Criticisms:
- - highly questionable whether the WDV of a non-current asset is intended to be a reflection of its market value.
- - complexity
- - an arbitrary assumption about the rate of decline built into the formula.
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What is the straight line/ fixed instalment method?
- Depreciation = (Cost - Estimated residual value) / Estimated useful life in years
- = Rate of depreciation * Cost of asset
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What are the three most common methods of depreciation?
- The straight line/ fixed instalment method.
- The diminishing/ reducing balance method.
- The sum of the years' digits method.
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What are the advantages and disadvantages of the fixed instalment method? what asset does it suit for?
- Adv:
- - easy to understand
- - computations are simple
- Disadv:
- - it may not give an accurate measure of the loss in value or reduction in the useful life of an asset.
- Suitable for:
- - assets that are depleted as a result of the passage of time (e.g. buildings, pipelines, etc.)
- - coz this method gives the same charge for depreciation in each year of the asset's useful life.
- - may also be suitable where the utilization of an asset is the same in each year.
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What is the sum of the years' digits method?
- - It is computed by multiplying the depreciable amount by a fraction.
- - The denominator in this fraction is the same each year, and is the sum of a decreasing arithmetic progression, the first number of which is the useful life of the asset and the last is one (e.g. 3+2+1=6)
This method is similar to, but not the same amount as, the reducing balance method --> the pros and cons are similar, except this method is simpler.
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Definition of an asset
An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
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Def of current assets
Current assets include assets that are, or will be, turned into cash or near cash in the near future - usually in a period of less than one year.
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Money spent on non-current assets is called?
capital expenditure
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all other costs and expenses other than money spent on non-current assets are referred to as?
revenue expenditure
are entered in the I/S of the year in which the costs are incurred.
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What four of the events below which could account for a slow-down in profits growth?
- 1. The market is becoming saturated.
- 2. Lack of new ideas.
- 3. Increased competition.
- 4. Recession.
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What is the impact of 'Lower dividends have been paid'?
- The payment of dividends doesn't directly affect profits: dividends are
- the shareholders' share of the profits. If anything, you could argue
- that lower dividends will allow more to be invested which could increase profits.
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what is the impact of 'Rising inflation'?
Rising inflation would tend to make profits appear to increase as each year prices and costs (hence profits) would grow.
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what is the impact of 'Successful product launch'?
You would normally expect a successful produce launch to increase profits.
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what is the impact of 'Take over during the year of a successful company.'?
You would expect the takeover of a successful company to increase profits.
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