Question

1. Explain how the estimated useful life of an asset for depreciation purposes requires that a going assumption be made.

In FY2016, LA reported cash balances of £18.8m, and an overdraft of £14.9m. The overdraft limit had recently been increased from £10m to £15m during the year.

2. How should the cash balance and overdraft be presented on the financial statements? Can they be netted out to a single number? What assertion is at risk of misstatement regarding the cash and overdraft?

Answer 1

1. A tangible asset is an asset in physical for and includes fixed assets such as machinery, land and buildings. Tangible assets can also be current assets such as inventory. Factors involved in determining the useful life of the asset include age of the asset when purchased, how frequently the asset is used, the environmental conditions of the business that purchased the asset. Assumptions in depreciation can impact value of long term assets and this can impact short term earning results. Generally Accepted Accounting Principles state that the expense for a long lived asset must be recorded in the same accounting period in which revenue is earned and hence the need for depreciation. Depreciation places the cost as an asset on the balance sheet and that value is reduced over the life of the asset. The salvage value and the expected useful life are the 2 assumptions made when calculating depreciation which alter the financial results of the company.

2. Available cash balance at the end of the year is presented under the head cash and cash equivalents of current assets in the financial statements. In business accounting, overdraft is considered as current liability which is generally expected to be payable within 12 months. Since interest is charged, overdraft is a kind of short term loan.

In case there is sufficient cash balance available on the assets side of the balance sheet, it can be used to repay the overdraft under the head liabilities of the balance sheet and remaining cash balance available is shown as asset that is available cash balance and overdraft can be netted to a single number. If available cash balance is P18.8m and overdraft is P14.9m they can be netted off and remaining cash balance of P3.9m is shown as asset.