ACCT1046 Lecture Notes - Lecture 11: Book Value, Impaired Asset, Financial Statement
Module 4 Topic 2
Current assets
• For balance sheet purposes, assets are generally subdivided into current and non-
current assets.
– An organisation does not have to classify its assets into current and non-
current, but this is normal practice.
– An alternative presentation format is to present assets on the basis of their
order of liquidity (how quickly the assets can be turned into cash).
• Banks often use this approach.
• Current assets are expected to be sold, consumed or otherwise used to create income
within one year of the date of the balance sheet, or within the current operating cycle of
the business.
• A common definition of current assets is:
– assets that, in the ordinary course of business, would be consumed or
converted into cash within 12 months after the end of the financial period (the
‘12-month test’). This is what is often taught in introductory courses in financial
accounting.
• Non-current assets
• An asset that is not classified as current will be classified as non-current
• Why do we want to differentiate current and non-current assets?
• Current assets are more likely to be used to generate cash in the short run and hence
they provide some indication of future cash flows.
• B lassifig soe assets as urret e are ale to idetif hih of those ere
able to sell or liquidate easier.
• This helps us to assess some aspects of the risk of the organisation, particularly when
we compare the current assets with the current liabilities.
• The measurement of assets
• Whilst we know the definition of assets, and we know when they should be recognised
(on the basis of measurability and probability), the next step is to determine the
amount to be assigned to the asset.
• This a e alled easureet.
• Not all assets are measured on the same basis – this might seem odd, but it is the
case!
• Ad this reates hat e ight refer to as a additiit prole (e add up all the
assets to calculate a total figure but the values of these assets are not on the same
base).
• Some assets might be measured at face value, whilst others might be measured at net
realisable value, present value, or fair value.
• This is alled a ied easureet approah.
• This eas e ust e areful he iterpretig the total: ael total assets.
• Some measurement bases
• Cash
– Measured at ‘face value’
– Face value is the value shown on the face of a security certificate, including
currency.
• Debtors (Accounts receivable)
– At face value, less an allowance for doubtful debts
– Because, it would be unrealistic to believe that all debtors will pay. It is normal
practice to recognise that a certain percentage will not ultimately pay.
find more resources at oneclass.com
find more resources at oneclass.com
Module 4 Topic 2
– For example, if an organisation has $1m in outstanding debtors and past
practice indicates that 5% of debtors typically don’t pay, then the debtors would
be disclosed as follows:
• Debtors $1,000,000
• Less allowance for doubtful debts $50,000
• Net debtors $950,000
• Inventory (also known as stock) can be defined as assets:
– Held for sale in the ordinary course of business.
– In the process of production for sale.
– In the form of materials or supplies to be consumed in the production process
or in the rendering of services.
• Inventory shall be measured at the lower of cost and net realisable value
– Cost is to include
• Cost of purchase.
• Cost of conversion, and;
• Other costs incurred in bringing to inventories to their present location and condition.
– Net realisable value is the estimated proceeds of sale less costs to completion
and costs to sell.
• Prepayments
• Prepayments (and accrued expenses) are adjustments that we make to ensure that
expenses and income are recognised in the correct accounting period.
• According to the accruals concept, expenses should be recognised in the period they
are incurred rather than the period when they are recorded/paid, and income should be
recognised in the period it is earned, not the period it is recorded/received.
• Property, plant and equipment (P,P& E)
• Property, plant and equipment are tangible items that:
• Are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
• Are expected to be used during more than one period.
Measurement of P, P & E
• Strangely (perhaps) reporting entities have a choice between using the ‘cost model’
and the ‘revaluation model’ to measure property, plant and equipment.
• If the cost model is used, then an item of property, plant and equipment shall be
carried at its cost, less any accumulated depreciation and any accumulated impairment
losses.
• If the revaluation model is used then an item of property, plant and equipment shall be
measured at its fair value at the date of revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses.
– Fair value is defined in accounting standards as the price that would be
received to sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date.
– The carrying amount refers to the amounts that the company has on its
books for an asset or a liability.
– Recoverable amount: the higher of an asset's fair value less costs of
disposal* (sometimes called net selling price) and its value in use.
– Value-in-use is the net present value (NPV) of a cash flow or other benefits
that an asset generates for a specific owner under a specific use.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Current assets: for balance sheet purposes, assets are generally subdivided into current and non- current assets. An organisation does not have to classify its assets into current and non- current, but this is normal practice. Assets that, in the ordinary course of business, would be consumed or converted into cash within 12 months after the end of the financial period (the. Face value is the value shown on the face of a security certificate, including currency: debtors (accounts receivable) At face value, less an allowance for doubtful debts. Because, it would be unrealistic to believe that all debtors will pay. It is normal practice to recognise that a certain percentage will not ultimately pay. Inventory (also known as stock) can be defined as assets: Held for sale in the ordinary course of business. In the form of materials or supplies to be consumed in the production process or in the rendering of services.
