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3.4 Final Accounts Part 2, Useful if asset's value more closely…
3.4 Final Accounts Part 2
Intangible Assets
Intangible Assets
All assets doesn't exist physically but adds value to company
Intellectual Property
Copyright
owner: exclusive right to copy, distribute, adapt, display & perform creative work for limited time
prevent competitorsusing their published work
Goodwill
reputation & prestige of business operating
give value to business above its physical assets
strong brand name
good customer relations
good employee relations
any patents tech.
Arises when business valued/sold more than Balance Sheet value of its assets
Patents
official rigjht only person/company allowed to make/sell new product for certain time
Trademarks
consist of recognisable desing & expression
identifies product of particular source
distinguish from others
IP: IA been developed by human ideas & knowledge
Intangible Assets important to...
Generate income
Add value to business
Valuing IA
IA difficult to put value on
because rarely bought/sold in open market
IA Values may fluctuate a lot
.
.
For many; IA
Main source of future earnings
Market Value of Companies with many IA
much greater than Balance Sheet/Book Value !!!
Asset Depreciation
Depreciation
Decline in estimated value of non-current asset over time
Non-currrent assets decline value over time
Record in FA -->
Only value of each year's depreciation as expense
FP Statement Record!!! on each years profit & loss account + depreciation in non-current asset
Assets retain some value & Reduced profits in FP Statement on that year.
Why assets decline in value???
Wear & Tear through usage
Tech. changes
Impacts of Depreciation
NO physical movement of cash: non-cash expense
Statement of Profit/Loss: charge of depreciation
Decreases Profits
So, Decreases Tax!
Depreciation included in 'Expenses' - Statement of P/L
Businesses depreciate long-term assets both TAX & ACCOUNTING purposes
Balance Sheet: Depreciation Annual Charge
decreases book value of fixed assets
Historical Cost
Original purchase of asset
Net Book Value
Current Statement of FP value, non-current asset
Historical Cost - Accumulated Depreciation
*
Residual Value
Non-current asset, estimate of how much will be worth end of its lease/end of its useful life
CALCULATING DEPRECIATION
STRAIGHT LINE METHOD
UNITS OF PRODUCTION METHOD
Straight Line Method
constant depreciation amount subtracted from asset value each year
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Disadvantages
Fast changing tech. not taken into account
Estimate both Life Expectancy & Residual Value
Repairs & Maintenance Costs: increase with age & profitablity of asset reduce, not fixed charge
Advantages
Simple to calculate
Suitable assets with accurately estimated residual value
Suitable for less expensive items
Unit of Production Method
constant depreciation amount subracted from asset value each year
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Disadvantages
Only considers usage to calculate depreciation
Often this method not practicak, keeping track of each asset difficult
Only for manufacturing assets, other methods for other assets
Advantages
More accurately related to Wear & Tear
Depreciation: in-line with production revenue
Allow companies to take more depreciation at time when asset more productive & used
Useful if asset's value more closely related to unit number produced than years used
Results greater deductions taken for depreciation in years when asset heavily used: offset periof when equipment used less