3.5 Financial Accounts HL Chapter 22 Part 2 Intangible Assets, FIFO, LIFO

Intangible Assets The reputation, prestige, and/or knowledge that a business possesses that causes the business to have more value than the total of its physical assets. Can you think of something that may be considered an intangible asset? HL

Intangible Assets Intellectual Property Ideas and knowledge developed by a business Patents, Copyrights, Brand Names, Trademarks What are these? Goodwill The reputation of a business. HL

Calculating Intangible Assets Intangible Assets are difficult to value because they are not bought and sold on the open market. Intangible Assets appear on the Balance Sheet briefly – after a business has been bought and GOODWILL was purchased. HL

Sample Balance Sheet ASSETS Fixed Assets: Property300 Vehicles 45 Intangible Assets 67 Total Fixed Assets442 Current Assets: Stocks 34 Debtors 28 Cash 4 Current Liabilities: Creditors 42 Short-Term Loans 31 Net Current Assets (7) NET ASSETS435 HL

Calculating Intangible Assets The market value of the company is $435 ($368+ Goodwill of $67) The company is paid $435 when purchased. The $67 above the $368 must be for GOODWILL owned by the business. ASSETS Fixed Assets: Property300 Vehicles 45 Intangible Assets 67 Total Fixed Assets442 Current Assets: Stocks 34 Debtors 28 Cash 4 Current Liabilities: Creditors 42 Short-Term Loans 31 Net Current Assets (7) NET ASSETS435 Market Value = The estimated total value of a company if it were taken over. HL

Depreciation The decline in the estimated value of a fixed asset over time. Assets decline in value: Normal wear and tear through use Technology changes making it obsolete Net Book Value Original cost minus Depreciation as reported on the balance sheet HL

Net Book Value Book Value is the original purchase price of vehicles minus the amount of depreciation to-date. Net Book Value=40 ASSETS Fixed Assets: Property300 Vehicles 45 Accum. Depr. Vehicles (5) Total Fixed Assets340 Current Assets: Stocks 34 Debtors 28 Cash 4 Current Liabilities: Creditors 42 Short-Term Loans 31 Net Current Assets (7) NET ASSETS333 HL

Depreciation Two methods of calculating depreciation Straight-Line Method Using the same amount of depreciation each year the items useful life. (Ex: $500 per year) Reducing Balance Method Uses a percentage to calculate the depreciation (Ex: 30% per year) HL

Straight-Line Depreciation Office furniture was purchased for $9000. Its useful life is 4 years. The furniture has an expected residual value of $1000. Original price – residual value / useful life $9000 – $1000 = $8000 / 4 = $2000 yearly depreciation YearAnnual Depreciation Charge Net Book Value Present0$9000 1$2000$7000 2$2000$5000 3$2000$3000 4$2000$1000 HL

Reducing Balance Depreciation Office furniture was purchased for $9000. Its useful life is 4 years. The furniture will lose 30% of its value each year. Original Price – (Original Price X 30%) $9000 – ($9000 X 30%) = $6300 net book value $2700 depreciation for the year YearAnnual Depreciation Charge Net Book Value Present0$9000 1$2700$6300 2$1890$4410 3$1323$3087 4$926$2161 HL

Pros & Cons to Depreciation Methods Straight-Line Depreciation Easy to calculate and understand. Requires an estimate of residual value. Assets tend to depreciate quickly in the first few years of ownership which is not reflected in this method. Reducing Balance Method It is more difficult to calculate. It is more accurate than Straight-Line Method. It matches a higher valued and likely more productive asset while new with a higher depreciation rate to match a higher profit. Using a percentage method is not more accurate than using a flat amount. HL

Stock Valuation (Inventory) The value of stock influences financial statements. Affects the Balance Sheet – Value of Assets Affects the Income Statement – Value of Cost of Goods Sold which impacts PROFIT. Two methods of Stock Valuation LIFO FIFO HL

LIFO & FIFO LIFO stock valuation assumes that the last one purchased was sold first. FIFO stock valuation assumes that the first one purchased was the first one sold. LIFOFIFO Last in – First Sold First in – First Sold HL

Issues with LIFO/FIFO When prices are rising – LIFO tends to reduce profits and creates tax savings. Many governments do not allow LIFO valuations for publishing profit results. You cannot switch between methods. These are methods to value inventory NOT rules for physical movement of stock. HL

Calculate LIFO Feb 1 BalanceStock Balance of 10 $190 Feb 210 $200 purchased Feb 750 $220 purchased Feb $250 purchased During February 130 TV’s were $400 each. What is the value of inventory? What is sold: =25,000 Left in Inventory: 220 = = 200 = 2000 Cost of Goods 31, = 1900 Total Inventory Remaining: 8300 Profit: Sold 130 $400 = 52,000 COGS 31,600 Gross Profit 20,400 HL

Calculate FIFO Feb 1 BalanceStock Balance of 10 $190 Feb 210 $200 purchased Feb 750 $220 purchased Feb $250 purchased During February 130 TV’s were $400 each. What is the value of inventory? What is sold: = 1,900 Left in Inventory: 250 = 10, = 2, = 11, = 15,000 Cost of Goods Sold =29,900 Profit: Sold 130 $400 = 52,000 COGS 29,900 Gross Profit 22,100 HL

Compare LIFO/FIFO Profit LIFO Revenue: 52,000 COGS: 31,600 Gross Profit: 20,400 Ending Inventory Value: 8300 FIFO Revenue: 52,000 COGS: 29,900 Gross Profit: 22,100 Ending Inventory Value: 10,000 HL