Syllabus A2

Memory test

Test yourself on these notes:

Carrying amount under Historic Cost is calculated:

Historic Cost

Carrying amount CA = Cost – Accumulated Depreciation

Dep’n = (Cost - Residual value) / expected life

Fair Value means:

Fair Value

= the price that would be received to sell an asset or paid to transfer a liability

Current Cost means:

Current Cost

The amount that would have to be paid if the same or an equivalent asset was acquired currently.

Carrying amount CA = Current Cost – Accumulated Depreciation

Dep’n = (Current Cost - Residual value) / expected life

Value in Use means:

Value in Use

The present discounted value of the future net cash inflows that the item is expected to generate.

Advantages of Historical Cost Accounting are:

Advantages of Historical Cost Accounting

  • Enhances comparability
  • Cost is known and can be checked to an invoice (easy to verify)

Disadvantages of Historical Cost Accounting are:

Disadvantages of Historical Cost Accounting

  • contain mixed values, some items are at current values and some are at out of date values
  • understate assets and overstate profit
  • overstate gearing in the SFP (because we don’t revalue the asset, therefore nothing in the Revaluation reserve (EQUITY)