22207: Accounting for Business Decisions B
Table of Contents
Non-Current Assets ... 3
Depreciation ... 3
Straight Line ... 3
Reducing Balance ... 3
Units of Production ... 3
Changing Methods ... 3
Acquisition ... 4
Disposals ... 4
Impairing Assets ... 4
Cost Model ... 4
Revaluation Model ... 5
Intangible Assets ... 5
Goodwill ... 6
Partnership ... 7
Formation of the Partnership ... 7
Distribution of Profit ... 7
Investing in the Partnership ... 7
Bonus to new partner ... 7
Bonus to existing partners ... 8
Investing in Partnership – where the new partner hasn’t paid anything to the partnership ... 8
New Partner ... 8
Buying out an existing partner ... 8
Withdrawal of a partner ... 8
Liquidation ... 8
Settling liabilities ... 8
Sale of assets with a loss ... 8
Sale of assets with a gain ... 9
Distribution of loss between partners ... 9
Distribution of gain between partners ... 9
Paying out remaining cash ... 9
Shares ... 10
Cash Flows ... 11
Direct Method ... 11
Financial Statement Analysis ... 12
The nature of financial statement analysis ... 12
Calculate and interpret horizontal and vertical analysis ... 12
Horizontal analysis: ... 12
Vertical Analysis ... 12
Asses Profitability through calculation and interpretation of ratios ... 12
Who are concerned with profitability? ... 12
Profitability Ratios ... 12
Assess Liquidity through the calculation and interpretation of ratios ... 13
Liquidity Ratio ... 13
Assess solvency through the calculation and interpretation of ratios ... 14
Solvency Ratios ... 14
Calculate and interpret a DuPont Analysis ... 14
Ethics ... 15
Budgets ... 17
Variance Analysis ... 20
Decentralisation and the BSC ... 21
Decentralisation ... 21
Responsibility Accounting and Segment Reporting ... 21
Management Accounting Calculations ... 22
Segment Margin ... 22
ROI and residual income ... 22
Quality Costs ... 23
Performance Management Systems ... 24
The Balanced Scorecard ... 24
Motivating Managers ... 24
Accounting for Sustainability ... 25
Non-Current Assets
What is examined:
•
Depreciation (straight-line, reducing balance and units of production)
•
Disposal (recognising gains/losses, final depreciation transaction and getting rid of asset/accumulated depreciation and/or impairment accounts)
•
Impairment (cost and re-evaluation model)
•
Amortisation (intangibles – done same way as depreciation, just called amortisation) Depreciation
Straight Line
Ø cost - residual value / life = depreciation per year of useful life Reducing Balance
• Useful for assets that are used more in early years of the asset.
• Used for matching principle
Simplified: Depreciation Expense = 2 * (1/Useful life) * Carrying Amount Units of Production
• Units of activity method calculates depreciation based on use
• Relies on an asset of asset's lifetime activity - and is limited to particular assets
• C - R / Expected units produced over useful life = rate of depreciation per unit
• Remember can't depreciate more than whatever C - R = equals.
Changing Methods
Many times, company's may change their method of calculating depreciation based on new information available to them.
Equation: Carrying amount - residual value / no. of years left of useful life = expense (change equation slightly depending on the method used or changed over to)
CA – (RV /UL Remaining) = Expense
Adjustments may be based on:
• Changes in estimates
• Additional expenditures to improve the non-current asset
• Significant declines in the asset's net realisable value
NB: changes in depreciation methods are prospective and only apply going forward. If the residual life changes or expected residual value changes - take these away from the net book value / carrying amount
Acquisition
Capital Expenditure
• Any expenses that improve useful life or productivity of an asset can be capitalised
• Calculate net book value after capital expenditure (add upgrades) then calculate new depreciable expense Revenue Expenditure
• Maintains assets such as repairs or maintenance costs
• Must be expensed
Disposals
1. Record any necessary depreciation expense (possibly for a partial period) to update the accumulated depreciation.
2. Calculate any gain or loss on the disposal by comparing the asset’s carrying amount.
3. Prepare a journal entry that decreases the asset account and its related accumulated depreciation account.
4. Record any gain or loss on the disposal.
Car (cost) = $30,000
(-) Acc. Depreciation = $10,000 (-) Acc. Impairment = $4,000 Net book value = $16,000 Sold for $18,000 (cash)
DR Cash (recognise cash received from sale)
DR Acc. Depreciation (get acc. depreciation account to 0) DR Acc. Impairment (get acc. impairment account to 0)
CR PPE (get rid of asset at cost – remember not net book value because the acc. depreciation and impairment accounts offset against asset and now your left with the cost of the car) CR Gain (you sold the car for more than its book value, to balance the transaction you must
recognise the gain)
Impairing Assets
• AASB 136 entities apply conservatism by writing these assets down from their carrying amount to their recoverable amount (through use or sale)
• When a non-current asset's recoverable amount falls below its carrying amount, the asset is considered impaired.
• Impairment lowers the value of a non-current asset.
Cost Model
Recognising impairment (reduction in value) DR Loss
CR Accumulated Impairment Reversing impairment DR Accumulated Impairment CR Gain on Reversal
NB: You can only reverse only to the value the asset was had it not been impaired.
