1. Total capital employed =?
    = Capital + Non-Current Liabilities.
  2. 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)
  3. 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
  4. 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.
  5. What is the straight line/ fixed instalment method?
    • Depreciation = (Cost - Estimated residual value) / Estimated useful life in years
    • = Rate of depreciation * Cost of asset
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. Money spent on non-current assets is called?
    capital expenditure
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. what is the impact of 'Successful product launch'?
    You would normally expect a successful produce launch to increase profits.
  17. 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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