Amendments to the Balance Sheet What is the affect on the Balance Sheet? Sale of Inventories for cash Value of inventories will fall Cash balance will increase Depreciation of equipment Value of FA will fall Shareholders equity will fall (is “worth less”) Creditors want paying quicker Value of Accounts Payable will fall Cash will go down Additional Shares sold and capital raised to buy property Value of share capital goes up Value of FA (non current assets) goes up

Goodwill Should it appear on a company accounts? Convention suggests that... It should not appear as an asset for an existing business Difficult to value Can be damaged due to bad press/reputation It should appear on the balance sheet if a business had bought another firm and has paid for goodwill! BUT – is should be written off asap – fluctuations can mean an unrealistic worth of your business 31.2 (pg 566)

Final Accounts of a Business  Depreciation  Nearly all fixed assets lose value over time.  SO its reasonable to charge to the profit and loss account the amount of depreciation each asset as accumulated over the accounting period (NOT for every year you have had it but only that one year)  The asset retains some value on the balance sheet until it is fully depreciated  Profits will only be reduced by that years depreciation figure so you will not over or under record performance.

Final Accounts of a Business  Two reasons for depreciation ?

Final Accounts of a Business  Two reasons for depreciation ?  Wear and tear and general usage  Technological advances causing obsolesence

Final Accounts of a Business  Two reasons for depreciation ?  Wear and tear and general usage  Technological advances causing obsolesence  How depreciation is calculated.  Straight line method  A constant amount of depreciation subtracted from the value of the asset every year.  You will need to know:  Historical cost of the asset  Expected useful life  An estimation of its value at the end of its useful life (residual value).  The formula used is: Historical cost – residual value expected useful life

Final Accounts of a Business  Example:  You buy 3 vans worth $3k each. Your experience suggests that you will need to replace them after 4 yrs.  At the end of them 4 years you think that they will be worth just $200 each.  So using the straight line depreciation method the annual depreciation charge is......

Final Accounts of a Business  Example:  You buy 3 vans worth $3k each. Your experience suggests that you will need to replace them after 4 yrs.  At the end of them 4 years you think that they will be worth just $200 each.  So using the straight line depreciation method the annual depreciation charge is  $9000 – = $2,100

Final Accounts of a Business  After4 years the value of the vans will be $200 each on the balance sheet  But what happens at the end of the 4 years if you sell them for more than $600 and sell them for $900 ?

Final Accounts of a Business  After4 years the value of the vans will be $200 each on the balance sheet  But what happens at the end of the 4 years if you sell them for more than $600 and sell them for $900 ?  You have made $300 surplus  But if you had to scrap them you have made a loss of $600.

EVALUATION of straight line depreciation EASY to calculate Widely used – so good for comparisons of accounts with other companies  It needs estimates – life of the asset  Human error can result in unrealistic calculation affecting the worth of the business  All years of depreciation have the same value – assets depreciate more in the first 2 years (so, reducing balance method more realistic?)  No thought for technology progressing – your asset might become outdated more quickly that depreciation allows for!  Age reduces the efficiency and profitability of the asset – additional charges incurred – not accounted for in fixed depreciation calculations

Net Realisable Value of Assets Inventories – unsold stock What value of the stock should go into your Bal Sheet? Purchase price? Net present value? Consider the Conservative/Prudence principal Losses should be recorded as soon as they are believed to have occurred! NRV : The amount for which an asset (usually an inventory) can be sold LESS the cost of selling it. ONLY USED IF THE FIGURE IS BELOW THE HISTORICAL COST OF THE ITEM!

Scenario Jeans shop buys 10 pairs of $10 a pair End of year – 3 pairs are unsold – they are now out of fashion Retailer decides to sell at $8 a pair to shift them So, the realisable value of the jeans is... $24 It is the Realisable Value that goes into the Balance Sheet

Scenario A table bought for $60 (cost) has been damaged It will cost $20 to repair It can now be sold, but for $70 What should it be valued in the BS at? NOT $70 – assumes a profit is made (against prudence principal) NOT $60 – ignores the damage following purchase SO, NRV is $70 - $20 = $50 (LESS than historical cost of the asset)