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98 AS 6 (revised 1994)
Accounting Standard (AS) 6
AS 6 (issued 1982)
Accounting Standard (AS) 6*
[This Accounting Standard includes paragraphs set in bold italic type and
plain type, which have equal authority. Paragraphs in bold italic type indicate
the main principles. This Accounting Standard should be read in the context
of the Preface to the Statements of Accounting Standards 1 and the
‘Applicability of Accounting
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How to value tangible non current assets
“Valuing tangible non-current assets is subjective and complex and can therefore result in different companies valuing similar assets very differently.”
Discuss this statement with specific regard to your knowledge of how tangible non-current assets discussion.
Valuing tangible non-current assets can be subjective and complicated. This essay explains it from two aspects, costs of PPE and depreciation respectively, under the international accounting standards.
Property, plant and equipment are the representative of tangible non-current assets which commonly are held by business entity. When to value assets the definition from the outset
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adjustments in the Journal and the respective ledger accounts. Create and clear a suspense account where necessary.
* Accounting for capital expenditure and depreciation: Distinguish between capital and revenue expenditure; Record depreciation using: straight line method, reducing balance method. Prepare accounts for depreciation and provision for depreciation.
* Year end adjustments: Write off bad debts; Create and increase/reduce the provision for doubtful debts account; Account for accruals and prepayments in ledger accounts; Make appropriate adjustments in the journal; Prepare a trial balance from cash book and ledger balances; Prepare a revised trial balance from one initially
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YOUR NEXT QUIZ (ON TUE) WILL BE OVER ACCOUNTS AND NOTES RECEIVABLE AND FIXED ASSETS
FOR ACCOUNTS RECEIVABLE:
HOW TO CALCULATE AND RECORD BAD DEBTS FROM AN AGING SCHEDULE
JOURNAL ENTRY TO FACTOR AN ACCOUNT RECEIVABLE
WRITEOFF OF A BAD DEBT
FOR NOTES RECEIVABLE
KNOW HOW THEY DIFFER FROM ACCOUNTS RECEIVABLE
KNOW THAT STRAIGHT LINE, DECLINING BALANCE, MACRS AND UNITS OF ACTIVITY ARE ALL DEPRECIATION METHODS
KNOW HOW TO CALCULATE STRAIGHT LINE AND DOUBLE DECLINING BALANCE DEPRECIATION FOR THE FIRST TWO YEARS OF AN ASSET’S LIFE
KNOW WHAT BOOK VALUE AND SALVAGE VALLUE MEAN
KNOW HOW TO RECORD SALE AND DISPOSAL OF FIXED ASSETS
Practice questions for bonus quiz two. The
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stems from the allocation of depreciation from the newly completed projects that now have been put to use.
3. Palfingerdepreciatesitspropertyandequipmentbyusingstraight-linedepreciation over the prospective useful lives of the relevant assets. We see that there was an allocation of 8-50 years on buildings, 3-15 years on plant and machinery, and 3-10 years on fixtures, fittings, and equipment. This policy does not seem reasonable, as there is a short 8-year building useful life. However, Palfinger’s ROA and EPS ratios are heavily impacted as a result of this.
4. Palfingerhandledtheseexpendituresinsuchawaythatdepreciatedreplacements investments, and value enhanced investments that are
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1. Temperature Conversion
Fahrenheit temperatures are converted to Celsius (centigrade) by the following formula:
Celsius = x (Fahrenheit - 32)
Write a program to convert Fahrenheit temperatures to their equivalent Celsius temperatures using a user-terminated loop. Input the Fahrenheit temperature and display both the Fahrenheit and Celsius temperatures. Use the following temperatures to test the program:
78.4 -50 98.6 32 212 0
2. Annual Depreciation
The annual depreciation of an asset by the straight-line method is calculated by the following formula:
Write a program that accepts the cost
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Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capitalinvestment proposal. The proposed asset costs $50,000 and has installation costs of $3,000.The asset will be depreciated using a five-year recovery schedule. The existing equipment,which originally cost $25,000 and will be sold for $10,000, has been depreciated using anMACRS five-year recovery schedule and three years of depreciation has already been taken.The new equipment is expected to result in incremental before-tax net profits of $15,000 peryear. The firm has a 40 percent tax rate.The tax effect on the sale of the existing asset results in ________. (See Table 8.5)
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Classify the following items as:
a) Deferred expense (prepaid expense)
b) Deferred revenue (unearned revenue)
c) Accrued expense (accrued liability)
d) Accrued revenue (accrued asset)
| 1. A three-year premium paid on a fire insurance policy. |
| 2. Utilities owed but not yet paid. |
| 3. Supplies on hand. |
| 4. Salary owed but not yet paid. |
| 5. Interest owed but payable in the following period. |
| 6. Subscriptions received in advance by a newspaper publisher. (publisher’s point of view) |
| 7. Professional Fees received but not yet earned. |
| 8. Professional Fees earned but not yet received. |
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1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements. The following summarize the accounting changes made and noted by Harnischfeger:
a. Included equipment purchased and resold from Kobe LTD in net sales (full sales amount) as opposed to disclosing only margin. Since the purchase of equipment from Kobe Steel, Ltd. was for the purpose of resale (vs. use or lease), this change more accurately reflects net sales.
b. Financial Statements of some foreign (consolidated) subsidiaries are included on the basis of fiscal year end (July 31) vs. previous of (Sept 30 as described in Note 1).
c. Changed depreciation
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Statement of Cash Flows (Indirect Method)
AAA Company Limited
Statement of Cash Flows for the year ended December 31, 20XX
Cash flows from Operating activities
Net Income / Profit
Adjustment for Non-operating Expenses
Add: Depreciation expenses
Add: Loss on Disposal of assets ( Net Book Value > Sale Proceeds )
Less: Profit on Disposal of assets ( Net Book Value < Sale Proceeds )
Changes in Current Assets and Current Liabilities
(Increase)/Decrease in Account Receivables
(Increase)/Decrease in Inventories
Increase/(Decrease) in Account Payables
Increase/(Decrease) in Accrued Expense
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accountant to switch from LIFO back to FIFO. This is a violation of the consistency principle. Bobby can make a justifiable change in accounting method like in the first example, but he cannot switch back and forth year after year.
Example: (2) Tommy’s IT Company, has been using declining balance depreciation method for its IT equipment. According to consistency concept it should continue to use declining balance depreciation method in respect of its IT equipment in the following periods. If the company wants to change it to another depreciation method, say for example the straight line method, it must provide in its financial report, the reason for the change, the nature of the change and the
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IFRS vs. GAAP
June 1, 2015
IFRS vs. GAAP
The International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP) are rules used to ensure ethical reporting of financial information. During Accounting 291, we have learned how to apply these rules however the differences between the United States GAAP and the IFRS make it difficult to compare companies. Some of these differences appear in the measurement of “fair value”, component depreciation, the revaluation of plant assets, product development expenditures, contingent liabilities, and the accounting for liabilities.
Moving to Fair Value Measurement
To the average
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rate fluctuates in order to maintain equilibrium. These changes are known as appreciation and depreciation. An appreciation is when the value or purchasing power of the AU$ rises, whilst a depreciation is when it declines.
An appreciation in the AU$ will occur if the demand for the AU$ exceeds the supply. This may be due to either an increase in demand or a decrease in supply. The graph below shows that a shift to the right (increase in demand) of the demand curve has led to a rise in the $Au from $0.70 US to $0.75 US. This may be the result of a rise in world growth, leading to a rise in the demand for Aust exports.
The graph below shows demand a shifting to the
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difference between EBIT and
taxable income must be the interest expense. Use this procedure to work some of the
(2-4) Talbot Enterprises recently reported an EBITDA of $8 million and net income of $2.4
million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What
was its charge for depreciation and amortization?
(2-5) Kendall Corners Inc. recently reported net income of $3.1 million and depreciation of
$500,000. What was its net cash flow? Assume it had no amortization expense.
(2-6) In its most recent financial statements, Del-Castillo Inc. reported $70 million of net
income and $900 million of retained earnings. The previous retained earnings were $855
million. How much in dividends did the firm pay to shareholders during the year?
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amount ; “the amount for which an asset could be exchanged between knowledgeable, willing parties”. United airlines have failed to acknowledge the price of their assets at present time, thereby erosion of capital occurring and overestimation of profit. Adopting this model allows depreciable assets such as their major assets such as airplanes to be properly depreciated thereby acknowledging and increasing future depreciation expense and decreasing future profits. While adopting the revaluation ensures the management understands the actual status of the business it does not find ways for the business to increase its capital to cover its replacement costs. The author has suggested the increased
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and its effects on the items of financial statements.
Consistency concept is important because of the need for comparability, that is, it enables investors and other users of financial statements to easily and correctly compare the financial statements of a company.
1. Company A has been using declining balance depreciation method for its IT equipment. According to consistency concept it should continue to use declining balance depreciation method in respect of its IT equipment in the following periods. If the company wants to change it to another depreciation method, say for example the straight line method, it must provide in its financial report, the reason(s) for the
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Chapter 3 The Balance Sheet and Financial Disclosures
1. f Accrued interest payable 10. a Supplies
2. d Franchise 11. c Machinery
3. -c Accumulated depreciation 12. c Land, in use
4. a Prepaid insurance, for 2014 13. f Unearned revenue
5. g Bonds payable, due in 10 years 14. d Copyrights
6. f Current maturities of long-term debt 15. h Preferred stock
7. f Note payable, due in 3 months 16. b Land, held for speculation
8. b Long-term receivables 17. a Cash equivalents
9. b Bond sinking fund
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Kansas City Zephyrs Baseball Club
Bill Ahern had to resolve the profitability issues between the owners of the major baseball leagues and the players. The main differences were the following:
- Roster depreciation: Per IRS code, 50% of the purchase price ($6M) was designated as the value of the player roaster at that time, and the owners decided to spread it over six years (they did it because they could). Players argue that no depreciation should take place because, they believe that with the experience they acquire with years of playing and practice they gain more skills which makes them more valuable.
Who is right? The players, no roaster depreciation
Why? Because good players
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were outsourced. Direct labor costs for those two components then fell to 0 at 1989 and 1990, since the reduced labor were transferred and paid by the union, and this was no longer a plant burden cost. Therefore, direct labor went down 46% from 1988 to 1989, when total budget overhead just dropped 28%.
Q4: The product costs reported by the cost system were not appropriate for use in the strategic analysis. This cost accounting system used a single cost pool, and 435% of direct labor was used to allocate total overhead. However, direct labor was not compatible with the characteristics of certain overhead. For instance, overhead 8000 was depreciation, and depreciation should have been allocated to machine hours rather than labor cost. What’s more, setup overhead 11000 was not closely related to labor cost, nor was production supplies, or wearing tools. Product costs could have been more precise, if the system had applied multiple allocation methods for overhead costs.
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= Revenues – COGS – Depreciation
= $3,000,000 – $2,500,000 – $200,000 = $300,000
Interest expense = interest rate × debt face value = 8% × 1,000,000 = $80,000
Times interest earned = EBIT/Interest expense = 300,000/80,000 = 3.75
10. NPV = 3,000 + 800 annuity factor(10%, 6 years) = $484.21
At this discount rate, you should accept the project.
You can solve for IRR by setting the PV of cash flows equal to 3,000 on your calculator and solving for the interest rate: PV = 3000; n = 6; FV = 0; PMT = 800; compute i. The IRR is 15.34%, which is the highest discount rate before project NPV turns negative.
11. Payback = 2500/600 = 4.167 years, which is less
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If Tommy's business was not going to be operating soon at another location the smart thing to do would be to end the lease so that they would no longer have to pay for the equipment. Tommy, however, has a location where he can be operating shortly so he should consider not recording lease expense on the equipment during its downtime, and distributing it to the rest of the year evenly. It would not make sense to maintain the same lease expense during which time the equipment is not generating revenue; doing so would violate the matching principle. The best way to do this is to allocate the depreciation for the equipment to later periods when the equipment will be up and running. For
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$30,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days?
Final Exam Answers just a click away ACC 291 Final Exam
Multiple Choice Question 119
Stine Company purchased machinery with a list price of $64,000. They were given a 10% discount by the manufacturer. They paid $400 for shipping and sales tax of $3,000. Stine estimates that the machinery will have a useful life of 10 years and a residual value of $20,000. If Stine uses straight-line depreciation, annual depreciation will be
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Caledonia Products Integrative Problem
1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project?
Free cash flows are being focused on because it the amount that Caledonia will receive and they will be able to reinvest that amount. Caledonia should analyze the free cash flow so that they are able to see the real amount of value or what the cost may be. The marginal value from the project would be in the incremental cash flow. The earnings would be much less if they were looking at it through the accounting profits. It would be less because of the depreciation would be considered an
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Depreciation refers to a fall in the value of the domestic currency which is caused by the
demand for foreign currency exceeding its supply in the market. In such a situation one
has to pay more than before to get units of foreign currency. This fall takes place in the
market and on its own. Market determined exchange rate serves the purpose of aligning
the domestic economy with the world economy was the price route. As consequences
the domestic price gets linked up with those of the world price. With the liberalizations
and globalization of the economy in recent years, imports are bound to increase. The
lessening of restrictions on imports
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imported with a dollar-cost basis and competitors are all manufactured locally. Therefore, we can find room for hedging. If the Material Hospitalar Company is concern about a Real depreciation, they can take a position where if the Real’s value falls, they would make money and offset any increase in the costs incurred because of that depreciation. For example, they can buy a call option on USD or “long the call” which would give them the right to buy USD (International Finance, Sercu. 8.1.1 Call options, p.263) at a spot price indicated in the contract that should be, of course, very similar to the current spot price. This way they are protected against any lose caused by a possible Real
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| Per Unit |
Direct Materials | $0.30 |
Direct Labor | 0.35 |
Variable Overhead | 0.10 |
Fixed Overhead (including $0.10 depreciation and $0.10 for direct departmental fixed overhead) | 0.25 |
Total Cost | $1.00 |
The new equipment will cost $188,000 cash, will last 7 years, and will have a disposal value of $20,000. The current disposal value of the old equipment is $10,000.
The sales representative for the new equipment has summarized her position as follows: The increase in machine speeds will reduce direct labor and variable overhead by $0.35 per unit. Consider last year’s experience of one of your major competitors with identical equipment. It
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1. One point of concern for you is that there is a trade-off between the higher interest rates in Thailand and the delayed conversion of baht into dollars. Explain what this means.
ANSWER: If the net baht-denominated cash flows are converted into dollars today, Blades will not be obligated to depreciation in the future; in the end, there would be a decrease in the dollar cash flows and a depreciation of the baht.
2. If the net baht received from the Thailand operation are invested in Thailand, how will U.S. operations be affected?
ANSWER: Essentially, Blades, Inc. will need to borrow additional funds in the United States due to the fact that in Thailand, the cash flow is used to
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depreciation for an item of Property Plant and Equipment? Illustrate your
answer by outlining the circumstances when each method of depreciation would be
(guide: 50 – 100 words)
Part c (4 marks)
On 14 March 2013, Wonley Limited purchased a motor vehicle with an invoice price
of $42,000. A trade in allowance of $8,000 was given on the company’s old vehicle
and the balance of $34,000 was paid in cash. Delivery charges (not included in the
invoice price) amounted to $1,300. Insurance charges on the motor vehicle covering
the period 14 March 2013 to 13 March 2014 were paid on the date of purchase and
amounted to $2,850.
Prepare a schedule listing the expenditures
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So, FCF = 301,584 – 550,838
2. Suppose Congress Changed the tax laws so that Berndt’s depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and net cash flow?
If depreciation doubled, reported profit shrinks by 120,000 for 2014 (253,584 – 120,000) to 138,584 in 2014.
Net cash flow would actually increase by $120,000, so it would be $498,584
3. Calculate the2014 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2013?
Current ratio = current assets/current liabilities
Current ratio= 2680112/1039800
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3. Know the Accounting equation
a. Assests = Liabilities + Equity
4. Understand debits and credits
5. Understand the timing of recording transactions
6. Understand when revenue and expenses are recognized
a. Revenue Recognition Principal: Under the accrual basis of accounting, revenues are recorded when they are EARNED not when the company RECEIVES the money
7. Know how to calculate depreciation expense
a. Straight-Line method of depreciation: (cost-residual value)/useful life depreciation method in which the depreciation expense is the same each period
8. Know how to calculate accumulated depreciation
a. Cost principle:
i. Reported on income statement, asset amount is
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benefits importers as it decreases rupee prices of imported goods and harms exporters as it increases foreign currency prices of exported goods. Rupee depreciation harms borrowers who take loans in foreign currencies that are cheaper than Indian loans. (Export)
Since currency fluctuations adversely impact MSMEs, they should determine their risk exposure to various currencies, as well as adopt risk mitigation strategies and methods.
• (Export)The currencies to which the firm is exposed to
• The extent of sales / purchases /receivables / payables denominated in foreign currencies
• The extent to which price fluctuations can be passed on to customers (by increasing price or by entering price variance clauses)
• Cash flow position of the firm and ability to withstand currency fluctuations
• Impact of currency fluctuation on overall profitability of the firm (Export)
Export. (n.d.). Retrieved August 31, 2013, from Small B: http://smallb.in/%20/exports%20/mitigating-exchange-rate-risk
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equity and the liability.
Gross fixed asset: The company purchased new equipment in Oct., so the number increased by 350000 at that time. And it remains 4010000 for Sept.
Depreciation: the old equipment’s depreciation rate is 10000 per month, and the new fixed assets with an 8- year-life (no residue left) will be depreciated using a straight-line depreciation method. Monthly depreciation rate is 350000/8/12=3650
Prepaid expense: It also mentioned in the case that this amount would be remained stable during the next four month.
Notes payable: From Oct., a 1000000 newly taken loan added to notes payable.
Accruals: As mentioned in the case, the Accruals like prepaid expense, would
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1. Trade off is a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect. so it’s mean that if the net baht-denominated cash flows converted to pounds today, they will not be concerned about any future depreciation of the baht that would result in less pound cash flows.
If the cash flows generated in Thailand are all used to support UK operations, then Blades will have to borrow additional funds in the UK at an interest rate of 10%. For example, if the baht depreciated by 10% over the next year the Thai investment will render a yield of roughly 5 percent, while the company pays 10% interest on funds borrowed in the UK Since
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is because the final value of
goods and services must be equal
to the cost involved in their
• GDP F.C = GDP M.P – IT + S.
General Economics: National Income in
India, Concept & Measurement
Net Domestic Product
• While calculating GDP no provision
is made for depreciation allowance
(also called capital consumption
allowance). In such a situation
gross domestic product will not
reveal complete flow of goods and
services through various sectors.
General Economics: National Income in
India, Concept & Measurement
Net Domestic Product
• A part of is therefore, set aside in
the form of depreciation allowance.
When depreciation allowance is
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next 10 years should be calculated first. The initial outflow of cash flow at time “0” is the cost of new equipment. This cost is 3500,000 Pesos. The cash value of 175,000 Pesos obtained by selling the manual equipment should be subtracted from this amount to come up with the net out flow. As far as, the inflows of cash for next 10 years are concerned, they can be calculated by taking the difference of the cost of operating both manual and new equipments. The tax savings owing to the depreciation of the new equipment can be calculated by multiplying the corporate tax rate of 35% with the amount of depreciation each year. These amounts of tax savings should be added to the incremental cost
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assignment no later than the last day of Week 2.
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements.
The company calculated depreciation with a straight-line method as opposed to its principally accelerated methods for its US operating plants. The major accounting change was that the company used a cumulative amount based on all the assets depreciated by the old method. By retroactively combining the cumulative total, net income increased $11 million.
2. What is the effect of the depreciation accounting method change on the reported income in 1984? How will this change affect profits in future years?
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rest would be interest expense.
The rest of chapter 10 we knew how to do general entries for exchange equipment. We should debit new equipment, accumulated depreciation, and credit old equipment, cash and gain when we paid cash with the transaction. When we have commercial substance, we recognize the full amount of gain or loss. When we have lack commercial substance, we receive assets, either at (a) fair value of all assets given up (or received), or (b) fair value of all assets given up (or received) minus gains deferred. When accounting for the gain or losses, (a) Recognize an entire loss, or (b) prorate gain based on ratio of cash received to FV of all assets received. It would be a
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Financial Statement Analysis and Business Valuation
Group No: 1 Members
Deepanker Agarwal 08EM-014
Divya Sethi 08EM-016
Neha Shandilya 08EM-023
Parikshit Jain 08EM-028
Sushan Rungta 08EM-048
Varun Sharma 08EM-051
1. Accounting policy changes that Harnischfeger had made during 1984 and the effect of 3
Effect of change in Sales Calculation 3
Effect of Changes in Depreciation Method 4
Effect of LIFO Inventory Liquidation 5
Effect of Changes in Allowance for Doubtful Accounts 5
Effect of Changes in R&D Expenses 6
Effect of Changes in Pension Plan 6
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non-current assets, leases and pensions. Following is a discussion of some of the accounting methods that Marks and Spencer may or could have used to boost accounting performance during the past years.
Depreciation of fixtures, fittings & equipment
Marks and Spencer’s depreciation policy for fixture, fittings & equipment is to depreciate the assets to their residual values over a period of 3 to 25 years. Although it may be difficult to evaluate whether the company’s useful life estimates are reasonable without more detailed information, the analyst can evaluate trends in depreciation expenses as a percentage of assets’ initial cost.
It appears that Marks & Spencer
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(RRR) Required Rate of Return and the overall (NPV) Net Present Value is positive meaning the value is greater than zero.
4. Explain how depreciation will affect the present value of the project. (10 pts)
Depreciation is not considered a cash flow, but it does generally reduce a company’s tax liability. So when looking at the depreciation of this project, depreciation would cause an increase in the projects (PV) Present Value, due to the fact that, it would save on the amount of taxes and realizes tax shield.
5. Provide examples of at least one of the following as it relates to the project: (5 pts each)
a. Sunk Cost
Air Jet hiring a consulting group to come in and evaluate the