Historical cost
Inventory valuation
Depreciation
Calculation: net realisable value = the amount for
which the existing inventory can be sold ‒ cost of
selling it
Used when NRV is estimated to be below historical
cost
Purchased 10 pairs of shoes for $10 each
3
pairs
remaining
unsold,
can
only
be
sold
at
a
Example 1: Shoe shop
reduced price of $8 each
NRV of 3 pairs of shoes is $24
Dining table bought for $60
Damaged and needs a repair costing $20
Example 2: Furniture retailer
After repair, table could be sold for $70
NRV is $70 - $20 = $50
Net realisable value (NRV)
Normal wear and tear through usage
Reasons for asset decline in value
Technological change that makes the asset obsolete
Recording value of each year's depreciation as a cost
on the income statement
Retaining
value
of
assets
on
the
statement
of
Role of depreciation in the accounts
financial position through net book value calculation
Reducing profits by the amount of each year's
depreciation
Formula: original cost of asset - expected residual
value / expected useful life of asset (years)
Calculation of depreciation using the straight-line
Information needed: original cost, expected useful
method
life, residual value
Example: depreciation of three computers over four
years
Yearly
depreciation
charge
Net book value decline with each annual
depreciation
Net book value of the three computers
Reduction of profit from operations on the statement
of profit or loss
Impact of depreciation and the financial statements
Decrease in the value of non-current assets on the
statement of financial position
Statement of Profit or Loss
Statement of Profit or Loss
Intangible Assets
Trade Receivables (Debtors)
Revenue
Costs
Profit (or Loss)
Intangible Assets
Trade Receivables (Debtors)
Assets
Statement of Financial Position
Financial Statements
Revenue
Costs
Profit (or Loss)
Net Current Assets
Non-Current Assets
Statement of Financial Position
Current Assets
Current Liabilities
Net Book Value
Depreciation
Liability
Liabilities
Trade Payables (Creditors)
Non-Current Liabilities
Share Capital
Shareholders' Equity
Reserves
Gross Profit
Cost of Sales
Profit from Operations
Expenses
Profit Before Tax
Interest Costs
Profit for the Year (Profit After Tax)
Profit (or Corporation) Tax
Dividends
Low-Quality Profit
High-Quality Profit
Goodwill
Window Dressing
Net Assets
Equity
Net Realisable Value (NRV)
Financial Statements
Current Assets
Assets
Net Current Assets
Current Liabilities
Property, Plant, and Equipment
Non-Current Assets
Goodwill
Trade Payables (Creditors)
Liabilities
Non-Current Liabilities
Share Capital
Shareholders' Equity
Reserves
Gross Profit
Cost of Sales
Profit from Operations
Expenses
Profit Before Tax
Interest Costs
Profit for the Year (Profit After Tax)
Profit (or Corporation) Tax
Dividends
Low-Quality Profit
High-Quality Profit
Net Assets
Equity
Net Realisable Value (NRV)
Net Book Value
Depreciation
Straight-Line Depreciation
Window Dressing