Financial Accounting

Financial Accounting

Student’s Name:

Instructor:

Affiliation:

Date:

Financial Accounting

Q1 Sale of an asset for disposal purposes

1. Capital nature and revenue nature expenses explanation

Capital nature expenses are the acquisition of fixed assets whose utility value can be experienced for a longer duration. The capital nature expenses are non-recurring in nature; therefore, it’s recording to the books of account require yearly devaluation. Capital nature expenses are grouped into three main sections; costs reduction expenses, revenue increase expenses, and non-economic grounds expenses. Example of capital nature expenses includes social activities expenses, plant and machinery buying expenses, and innovation and research work investments expenses.

Revenue nature expenses are generally short term expenditures; therefore, it is the expenses associated with specific operating periods. Moreover, revenue nature expenses generate neither assets nor liabilities. Revenue nature expenses can be grouped into two types; revenue-generating expenditure and revenue-producing assets maintenance expenditure. Revenue generating expenses are expenses related to ongoing operational processes, while revenue-producing asset maintenance expenses are expenses related to general and ordinary repair, cost preservation and revenue expenditure. Example of revenue nature expenses includes legal and advertising expenses, rent payment, wages and salaries, water and electric bills payment and insurance.

1. Straight line depreciation

Initial cost of the machine = OMR 51,000

Estimated salvage value = OMR 3,000

Machines useful life = 8 years

Selling price = OMR 48600

Dismantling and transportation cost = OMR 1200

Annual depreciation expense =

Annual depreciation expense =

Annual depreciation expense = 6000

Period use = 2.5 years

Depreciation = (2.5 * 6000) = 15,000

(Machine selling price –Dismantling cost) = Final price

(48,600-1200) = OMR 47,400

Originally the machine would be disposed at OMR 36,000, but instead, it was disposed at OMR 47,400; therefore, making a profit.

(OMR 47,400 – OMR 36,000) = 11,400

Gain = OMR 11,400

Q2. Amortize intangible assets

1. Process of amortization of an intangible asset

Amortization of intangible asset is the process of charging intangible asset cost as an expense over its useful life. When computing intangible asset amortization, four steps need to be considered. Start date determination is the first step, and it involves when the acquisition or use availability of the intangible asset. The second step is the determination of intangible asset initial cost. The third step is the calculation of an asset’s estimated useful life, and the final step is the calculation of amortization per year.

Therefore: Amortization expense under straight-line method =

Example: A company XYZ purchases a patent of OMR 25,000 for 10 years. Thus, the company can utilize the benefit of the patent for 10 years, and the total value of the patent (OMR 25,000) is amortized over a period of 10 years.

1. Goodwill computation

Jumbo enterprise for a cash payment of OMR 970520

Balance sheet asset of OMR 520,000, Liabilities OMR 100,000 and equity of 420,000

Fair value estimate –OMR 620,000

Amount of goodwill:

Goodwill = consideration paid – fair value of net assets

The fair value of net assets:

Therefore: Goodwill = consideration – Fair value of net assets

Goodwill = (970520-520000) = 450520

Goodwill = OMR 450,520

Q3 Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized.

1. Four possible measurement bases
2. Historical cost – is a measurement basis in which assets are recorded in terms of cash or cash equivalent paid or acquisition consideration’s fair value.
3. Current cost – is the amount of cash or cash equivalent that would be incurred when making purchases of an asset today. Its measurement is based on market participants’ assumption and entity-specific assumption.
4. Net realizable (settlement) value – is the amount of money that an entity is expecting to realize from an inventory sale in the usual business operation.
5. Present value (discounted) – provides a basis for the assessment of any future financial benefit or liability.
6. Value of machine
7. Historical cost

Historical cost = acquisition price – accumulated depreciation

Historical cost = 80,000 – 32,0000

Historical cost = OMR 48,000

2. Current cost

Current cost = Replacement cost = cost of new machine

Current cost = OMR 120,000

3. Net realizable value

Net realizable value = Sale price –transportation cost

Net realizable value = 50,000 – 2,000

Net realizable value = OMR 48,000

4. Present value

Present value = present value of all future cash flows

Future cash flows = (25,000*0.909 + 25,000*0.826 + 20,000*2.619

Future cash flows = (22,725+20650+52380)

Present value = OMR 95,755

Q4. A company needs to analyze its financial needs formally before raising finances

1. Ways in which a company can raise finances
2. Debt capital- this type of raising finances involves borrowing money and agreeing to pay it back at a later date. Examples of debt capital are loans and bonds.
3. Equity capital – this method of raising finances involves selling shares of company stock. Examples of equity capital are common shares and preferred shares.
4. Plan A issuance of 250,000 shares of common stock at OMR 2 per share

Plan B issuance of OMR 5 million 8% bonds at face value.

Income before tax and interest is OMR 2.5 million

Income tax is expected to be 20%

Evaluation of plans available:

From the computation, it is evident that plan B yield more earnings per share more than plan A. Therefore, the company should adopt plan A.

Q5. Use of financial information by internal and external stakeholders

Stakeholders are individuals external or internal to an organization that affect or are infected by the accounting information outcome. Stakeholders can be grouped into two categories; internal and external stakeholders. Internal stakeholders are individuals within the organization who use financial information. Examples of internal stakeholders are managers, employees, the board of directors and owners. External stakeholders are individuals outside the organization that are affected by accounting information.

Internal stakeholders: Owners interest in the financial information is to assess the returns on the investments they made to the firm and how prosperous they do appear in the future. Managers have an interest in financial information to understand the profitability, liquidity and cash flows of an organization for operational and financial decisions. Employees have an interest in financial information to improve employee involvement level and business understanding.

External stakeholders: Customers have an interest in the financial information to make a proper judgement on the financial ability of a supplier to remain in business long enough to provide the goods and services mandated in the contract. The government have an interest in financial information to determine whether the business is paying the right amount of taxes and adhere to relevant laws. Creditors require financial information to establish the ability of an organization to pay back borrowed funds. Suppliers need financial information to make decisions, whether it is safe to make credit sales to the organization.

References

Scott, W. R., & O’Brien, P. C. (2003). Financial accounting theory (Vol. 3). Toronto: prentice hall.

IASB. (2020). Historical Cost. Financial Analysis. https://www.readyratios.com/reference/accounting/historical_cost.html.