Accounting: Assets and Classification

Fourth Lecture: Accounting Recaps and Assets

• Assets are split into current and non-current categories for firms

• Current assets are utilized/realized within 12 months or the operating cycle and are cash or cash equivalents

• Assets that does not meet the time constraint are classified as non-current

• Non-current assets are divided into fixed, intangible, and financial investments.

• Fixed assets are controlled by the company and possess physical substance

• Fixed assets are utilized in operations and are not intended for direct sale

• They are anticipated to provide economic benefits over multiple years

• Fixed assets are finite and encompass properties like plants and equipment

• Recognizing assets involves applying their historical cost at acquisition

• The cost includes expenditures to prepare the asset for its intended use

• Expenditures included are freight, handling, insurance, installment. and dismantling cost.

• Land costs include the purchase price, attorney fees, estate broker commissions, property taxes, and liabilities

• Land improvements consist of structural additions, with costs considered in depreciation

• Building costs incorporate the purchase or construction price, broker fees, and any remodeling expenses.

• Equipment costs are similar to before--freight, transit insurance, and testing costs

• An asset's useful time is calculated after recognition, with consideration for possible events

• Ordinary repairs maintain operating efficiency and product life, falling under Revenue Expenditures

• Additions and improvements increase operating efficiency and asset value, categorized as Capital expenditures

• Depreciation allocates the part of an asset's cost to the income statement and follows a depreciation plan

• Depreciation is a cost allocation

• Depreciation is applied to improvements, buildings, and equipment, not land

• A fair depreciation method needs cost, useful life, and salvage value.

• Depreciation expenses appear on the income statement

• Accumulated depreciation on the balance sheet deducts from Plant Assets

• The straight-line depreciation method is known

• The units of activity and declining balance methods are also used

• Activity units estimate depreciation cost per unit

• Expense with activity units varies from unit to unit

• Depreciable cost is the cost minus salvage value

• Declining balance reduces annual depreciation over an asset's life

• Declining balance is twice the straight-line method with a double-declining balance, applied to book value

• Firms use depreciation methods

Fifth Lecture: Asset Disposal

• Asset disposals occur through sale, retirement, or exchange
• Accountants record depreciation up to the disposal date and eliminate the asset from the account
• Debiting the Depreciation account ensures it no longer exists, and crediting the related Asset shows net book value
• In retirement scenarios, there is no cash movement; the Asset is credited for original cost and the Accumulated Depreciation is debited
• Sales involve comparing book value with sale proceeds
• Proceeds can be equal to, higher, or lower than the net book value
• Higher value triggers closing the accumulated depreciation account while losses close too
• Credit inventories for full amount
• Raising cash for the same amount will credit the revenue account called Gain on Disposal
• Credit inventories for full amount
• Raising cash for the amount will debit a Loss account

Fifth Lecture: Intangible Non-Current Assets

• Intangible assets with indefinite lives cannot be amortized, instead, they undergo periodic impairment tests.
• Patents grant exclusive rights to manufacture, sell, or control an invention for 20 years
• Patent costs are expensed or capitalized per IAS 38 and amortized over 20 years or useful life
• Legal fees defending patents are capitalized
• Copyrights grant exclusive reproduction and sales rights for artistic/published works
• Copyrights for the life of the creator, plus 70 years
• Trademark and trade name legal rights are unlimited with 20 year renewals
• Trademark and trade name capitalization is the acquisition cost
• Goodwill only recorded when an entire business is purchased
• Goodwill includes aspects like management, location, customer relations, etc
• Goodwill is not amortized and appears on the balance sheet upon acquisitions
• Record the opposite of goodwill as an expense

Sixth Lecture: Inventories

• Fixed assets are sold at their useful and result in monetary losses
• Inventories are categorized differently across service, merchandising, and manufacturing companies
• There is no actual inventory for sales within service companies
• Merchandise inventory will be found within merchandising companies
• Raw materials, WIP goods, and finished goods will be found within manufacturing goods
• Inventories are reported under current assets, with a portion expensed when sold
• Expenses are classified as COGS or inventory/material expense, based on function or nature

Sixth Lecture: Inventory Records and Methods

• The perpetual system verifies record accuracy and lost inventory amounts due to waste, theft, etc
• Accuracy in COGS calculations at the end of inventory periods
• Physical headcount of inventory occurs at business closures/slower periods and accounting periods
• Whatever method a company uses, firms compare ending inventories and their net realizable value:
• Estimated selling price MINUS costs of competition AND of making the sale
• Write Down inventories if NV is higher than NRV; which is a non-monetary event
• FIFO (first in, first out) recognizes costs of earliest goods sold, aligning with physical flow
• With FIFO, calculate ending inventory by knowing the unit cost of most recent and working backward
• This method is IFRS compliant
• LIFO recognizes costs of latest goods purchased for COGS, not aligning with the physical flow
• LIFO is not IFRS compliant
• COGAS is allocated based on incurred weighted-average unit cost
• Weighted-average applies to units in hand to determine ending inventory costs

Sixth Lecture: Inventory Valuation

• Inventory cost of inventory does not to be consistent with the item's physical movement
• Companies Write Down inventory when the value is less than the cost
• Writte Down inventory uses the amount the company expects to get from the item from the sale: NRV
• Inventory value has no changed if NRV is higher; no revenue
• Inventory errors affect COGS and are income across two periods; errors offset due to an income effect
• Inventory accuracy ensures ending counts are accurate

Seventh Lecture: Impairment

• Non-current assets that can be depreciated, amortized or cannot be are subject to an Impairment test
• Impairment signifies losses in value that relate to assets
• Accounting for impairment follows the Principle of Prudence and chooses lower values due to production
• Losses are recognized when probable, ensuring financial statements appear "right"
• Balance sheets display assets at their true value
• Income statements reflect any losses incurred during the current year
• Impairment can revert an acquired asset's value
• Depreciation and impairment are both expenses
• Expenses both lead to lower book value and are non-cash
• The Net Book Value compared against a Benchmark Value identifies possible impairment
• If Net Book Value is lower, there are no losses
• If Net Book Value is higher, impairments write down the loss, so recognized in the IS

Seventh Lecture: Accounting Standards for non-current Assets

• Non-current assets has to be impaired when a company is not able to recover assest carrying amount
• Recovery is determined with using or selling the asset
• Recoverable Amount can be higher than the Fair Value or Value In-Use
• Value-In-Use is derived from future cash flows.
• Fair Value is a determined by a specific amount and standard.
• Fair Market Value is expected value collected or paid in an ordinary transaction between two parties
• Cash-generating units are assets that cannot be impaired because they need other units to work
• A machine in a factory is an example of a cash-generating unit
• Impairment here is done on a CGU level
• Annual tests must be done on indefinite-life assets
• Conditions that persist and re-estimating Benchmark value will determine the reversal
• Recovery of lost "value" is called reversal
• Some assets cannot be reversed
• Reversal brings back the value where it belongs
• Goodwill is an example of this scenario
• Reversal is unaccepted for assets with indefinite life
• No need for accumulated amortization with amortization
• Maximum reversal amount is only until all previous tests
• Impairment tests and Re-evaluation amount is an alternative treatment because it is not always allowed

Seventh Lecture: Historical Cost Approach

• Re-evaluation is when an asset is sold
• If an amount is higher for evaluation than the original, you may bring the value higher
• If there is a gain, you can bring it into account
• An account will not be distributable and will transfer into the comprehensive income
• Maximum Reversal about, same with the test, is all the yeas

Eighth Lecture: Provisions

• Provisions require the Principle of Prudence and Probable events to recognize losses with a counterpart
• Counterparts for losses are liabilities
• Financial statements are "right" because the sheet show all liabilities and losses
• As soon as a potential loss, then immediately expensed in the income statement
• Provisions and impairments both represent future potential losses and are both expenses, however;
• Impairments decrease assets, and are non-cash expenses

Eighth Lecture: Provision Types

• Provisions increase liabilities, and are non-cash expenses
• Common types of provisions include litigations, product warranties, restructuring, and decommissioning
• IAS 37 provides 4 criterions for recognizing provisions
• Existence of a third party obligation
• obligation stems from past events, creating an "obligating event" at the reporting date
• Probable outflow of resources
• Uncertainty in the outflow of said source
• All 4 criterions must be met: one missed and you will not be talking about provisions
• Estimate to measure the amount to be paid
• Warranties are calculatable form past experiences
• Restructuring is directly related to the estimating
• Pension has 2 sides, current or year or services

Ninth Lecture: Financial Assets

• Trade receivables are financial assets
• Excess companies need to invest and hold assets to earn income and be strategic
• Assets, based on intention, are Trading, Held for Collection/Maturity and Neither Trading nor Held for Collection
• Trading (12 Months) reesell assets to gain profit when poss
• Frequent buying/selling occurs with this asset
• Companies are reported at fair value through the losses
• (FVTPL): fair value changes for last year will be recognized in IS
• The IS will show changed values immediately, so a sale is expected with a gain Held for Collection/Maturity is a is a debt financial instrument for bond collections

Ninth Lecture: Security Instruments

• Collect contractual cash flows to classify a financial asset
• Measure through asset based on costs to report asset
• Changes in value are ignored: retain until assets expire
• Financial instruments allow under the Neither trading nor hold for collection
• Income components are recognized under a comprehensive income
• Under balance sheets, these are reported as non-distributable equity
• Debt instruments can be reclassified: selling or coming to maturity, assets can be reclassified for a profit
• Assets cannot be reclassified as equity though

Tenth Lecture: Measuring a Company

• Sustainable Income measures a company's level of income in the future
• Differe from net income and accounts for Unusual Revenue Expenses
• Gains and losses, including discontinued items are components of any income reported in the statement
• Cost of disposal finds a firm amount by cutting out an operation
• Comprehensive statements includes unusual and net income
• Discontinued business operations is the disposal of a component of a business that splits in two: operations that are taxed
• Selling the branch has a double income since its performs affects any future assets
• Comprehensive income is a sum of Income and Other Comprehensive Income items with gains and debt securities
• Trading securities affect unreal losses and trade under the income statement
• Preferable change in accounting principles is when Average-Cost becomes FIFO
• A company might need a change to their account/principle and rules will now change

Tenth Lecture: Financial Disclosure

• Aims to measure yearly comparability and consistancy
• Quality of earnings is based on the financial performance, which means measuring expenses/revenue and cash flow
• Companies must need to trade publicly to show they follow GAAP
• Many report pro forma income, which excludes items that the company has non-reoccurring
• Improper revenue recognition is common with abuses
• Improper capitalization is improper

Eleventh Lecture: Financial Analysis

• Core earnings or sustainable companies are interesting to companies making comparisons
• Inter-company bases are 2 years of the same firm
• Inter-company bases are the same year for 2 different firms
• Averages for industry look at this year and ratios
• Horizontal/vertibal are basic statement tools for analyzation
• Evaluate data to make comparisons
• (Present - Base amount) * 100 and you will use the formula
• (Current period amount - Base period amount) / Base period amount*100 is the formal equation

Twelth Lecture: Vertical Analysis

• Common sizes compare different entities
• Use financial statements based on percentage to evaluate all data
• Vertically conduct: compare any % of the statement in comparison to another statement from above
• Horizontal on the other hand is from year to year
• ratio analysis compares another
• 3 types of classifications within the sector
• Liquidity helps with any creditors
• (assets to liabilities) / current = Current Ratio

12th Lecture: Financial Analysis

• Accounts receivble measures any payments within a company
• Average collection asseses for a credit/policy
• Inventory turnover measures how often the company will manage its inventory
• Days in the company helps turnover
• These ratios help measure a companies' ability and profits relative to the sales
• ROI is based on a measure to dollars and divided by assets; measures overall profitability of assets in the income
• Profit measures sales and Net Income / Total Sales
• Efficiency for a company is measured by assets and generate total sales
• Ability indicator will give the company and indicate if selling above COGS
• Earnings are split based on weighted averages
• Comparability with market share prices compare stock
• Dividends are split by percent
• Solvency has 3 portions and measures any long term obloigations
• Liabilities / Debts create all assets
• Interest will create expenses
• Measure cash with companies and maintain assets