Accounting Case
WEEK 13
Non-Mls valued at the cost of replacing the service potential currently embodied in them, not the cost of a new asset. Revaluations are credited to a reserve, not to the P/L. however, depreciation expense is based on re-valued amount, so if RC is rising sharply, depreciation expense increases similarly, reducing profit, lower profit= lower dividends= more chance of firm being able to replace productive assets when necessary. CCA does not set up a sinking fund replace productive for the replacement of assets, but the above logic is the easiest way to explain.
Q2) CCA ($) HC ($)
Opening Inventory 40,000 30,000
Purchase 50,000 50,000
Less closing inventory 0 0
COGS 90,000 80,000
The higher COGS (lower profit) under CCA reflect the fact that the firm needs to replace in inventories to maintain production capacity. Over this financial period, events have taken place which makes the replacement of inventories more expensive. This is reflected in the different valuation of open inventory and thus COGS.
Q3) spread sheet sent
Asset specificity refers to the degree to which an asset’s value in its current use (best form of use) differs from the asset’s value in its next best form if use. In the extreme case, an asset may only have value in one form of use (eg: making a particular product, helping meet the demand of a single large customer etc) if that single form of use become unnecessary the next best use of the asset could be worth nothing. This