Tutorial 1

1. Has the company made a profit, or a loss, in 2018?

Yes, the company made a profit in 2018 of 11,339 from 2017.

2. Has the profit before taxation (PBT) increased compared to last year?

Yes, increase a total of 12,368 compared to last year.

3. What is the percentage increase in profits, year on year?

The percentage increase in profits is 45.98% from 2017 to 2018.

4. What is the percentage increase in sales in the year?

The percentage increase in sales in the year is 96.79%.

5. Have the sales gone up by more than the profits, in percentage terms?

Yes, the percentage increase in sales (96.79%) is more than percentage increase in profits
(45.98%).

6. Is this good, or bad for profits?

It can be both good or bad to profits. It is good because it increases the base number for
profits in some circumstances but it is bad because more costs are incurred to generate high
sales and high expenses will result in low profit.

7. What is the gross profit percent in 2018?

52.84% [(306,355/579,800) x 100%]

8. Has the Gross Profit % improved compared to last year?

No, Gross Profit % in 2018 (52.84%) is less than last year, 54.59%.

9. Have Distribution Costs gone up by more than Sales when measured in percentage terms?

Increase in Distribution Costs is (126,757 – 66,849)/66,849 x 100% = 89.62%.

Therefore, no.

10. Is that good or bad for profit?

Yes, low costs mean low expenses and will increase the profits.
Faithful representation, relevance, comparability and understandability (simplicity) are

all characteristics which are identified in the IASB’s Conceptual Framework for Financial

Reporting. Explain what is meant by these terms and how do they make financial

information useful.

Faithful representation is breaking down into idea such as relevance, neutrality and completeness.
Relevance indicates the financial report has to match the needs of investors. For example, if a
company is having a recession, the investors will need information about this problem from financial
report. Therefore, the report will need to focus on this problem.

Neutrality means the financial report is free from bias. The report is prepared without any influence
from any parties. The figures in the report are the true and fair figures so it will show the true status
of the company. Therefore, investors will not be misleading by false information and make loss.

Completeness states the financial report is given in full view of the company status to investors. All
assets and liabilities must be shown in the statement of financial position. All costs and incomes
must be shown in the statement of profit and loss. Therefore, investors will make decision whether
invest in this company based on this information.

Comparability represents the financial report is made to let investors easily know the differences or
similarities of some figures so they can compare between financial reports within company in
different years or compare between different companies to make decision.

Understandability shows the financial report is made consistently in a standard format and
accounting related term. Therefore, investors able to understand the information present by the
report shortly.
Explain 2 core concepts which form the basis of accounts preparation?

The 2 core concepts are recognition and measurement.

Recognition is a process of recognise an item from financial reports with definition of it is probable
that future economic benefit will flow to or from the entity and can be measured with reliability. For
example, an asset is recognized in the balance sheet when it is probable that the future economic
benefits will flow to the entity and the asset has a cost or value that can be measured reliably such
as a machine will produces sales unit which bring profit in future and it is easily to put a value on the
machine with the historical cost.

Measurement means assign a monetary amount to an element that will be recognized and reported
in financial reports. The measurement bases are used are historical cost and net realizable value.
However, the measurement only suitable for short periods to make valid comparisons.

IAS 16 Property, Plant & Equipment Questions

1. What is the link between the “historical cost convention” and “going concern”?

Historical cost convention means the value of fixed assets will be shown at cost less
depreciation. Going concern is presumption that an enterprise will continue in operation
indefinitely. Therefore, fixed assets are valued at cost less depreciation to assume the
enterprise keep using these assets in the future. If the enterprise is not going to operate
indefinitely then the fixed assets are valued at market value.

2. How do we decide whether or not an item falls into the category of property plant and
equipment?

If an item is held by an entity for use in the production or supply of goods or services,
for rental to others, or for administrative purposes, and expected to be
used during more than one period, then this item is categorized into property, plant and
equipment.

3. Why do we depreciate assets?

The purpose is to match up the costs and benefits of holding a fixed assets which are all
tangible and have finite useful economic life.

4. What is the basis of valuation we have learnt so far for property plant and equipment?

The cost of a fixed asset should be recognised where the amount can be reliably measured
and it is probable that the asset will generate future economic benefits. Tangible non-
current assets should initially be measured at cost less depreciation.
5. A building with a cost of £90,000 and accumulated depreciation of £10,000 is revalued to
£75,000. Show the accounting journal entries.

I. NBV = £90,000 - £10,000 = £80,000

Dr. Accumulated Depreciation £10,000
Cr. Building at Cost £10,000
II. NBV decreases by £5,000 from £80,000 to £75,000
Dr. Loss on Building revaluation (Expense on P&L account) $5,000
Cr. Fixed Asset at Cost (valuation) Account $5,000

6. A building was revalued in 20X0 to £150,000 and a revaluation reserve of £60,000 was set
up. In 20X4 the building is revalued to £80,000. Accumulated depreciation on the building prior to
the second valuation was £36,000. Show the accounting journal entries.

I. NBV = £150,000 - £36,000 = £114,000

Dr. Accumulated Depreciation £36,000

Cr. Building at Valuation £36,000

II. NBV = £114,000 - £60,000 = £54,000

Dr. Revaluation Reserve £60,000

Cr. Building at valuation £60,000

III. £80,000 - £54,000 = £26,000

Dr. Building of valuation £26,000

Cr. Gain on Building revaluation (Income on P&L account) £26,000

7. What happens to the excess if the downward revaluation is greater than the balance on
the revaluation arising from a previous upward revaluation of the same asset?

Any downward revision in the book values of the assets is immediately written off to the
Profit and Loss account

8. What are the 2 suggested accounting treatments for a revaluation reserve as per IAS 16?

Increase in the value of fixed assets because of revaluation of fixed assets is credited to
"Revaluation Reserve", and if it is a decrease then debited to the the Statement of Profit and
Loss, charged as an expense.