Question

-           How is impairment testing handled?

-           How do we calculate book value?

-           How do we calculate the gain or loss on the sale of an asset?

-           What are some measures a business can take to establish stronger internal controls over cash receipts?

Answer 1

How is impairment testing handled?

Following indicators needed to be tested: -         

1. External source
   1. Asset market value declined significantly
   2. Significant change with adverse effect in which entity operates
   3. Market interest rate increased resulting in the reduction in present value
   4. Carrying amount of net assets > market cap
2. Internal source
   1. Obsolescence or physical damage of an asset
   2. Economic performance of asset worse than expected

Impairment loss is written off to profit and loss account. If the assets is revalued then to that extent it is written off to comprehensive income and revaluation surplus is reduced.

How do we calculate book value? -It is assumed that we are asking the book value against shares.

Book Value per share refers to the value of right that the common stockholders have against the net assets of the corporation for each of their share holding at the time of its liquidation.

The book value per share is calculated as:Book Value per share=Total Stockholders Equity/No of Outstanding Shares

How do we calculate the gain or loss on the sale of an asset?

Gain/Loss

• on asset sold there is a difference between selling price and book value of the asset as on date of sale.This difference will be either gain or loss.
• When the selling price is more than the book value it is gain for the company.On the other hand when the selling price is less than the book value it is a loss for the company
• The accurate gain or loss on sale of property of the company can be arrived at only after the company records the depreciation for the year.

What are some measures a business can take to establish stronger internal controls over cash receipts?

List of Measures

• Separate the functions of handling cash from the maintenance of accounting records.Employees who handle cash should not have access to the accounting records and accounting personnel should not have access to cash.
• For each department within the organization prepare a cash budget of planned cash receipts,cash payments ,cash balances scheduled month by month for the coming year.
• Prepare a control listing of cash receipts at the time and place the money is received .For cash sales this listing may be a cash register tape,created for each check on a cash register.
• Make all payments by check.The only exception should be for small payments to be made in cash from a petty cash fund.
• Require that the validity and amount of each expenditure be verified before a check is issued for payment.Separate the function of approving expenditures from the function of signing check.