Hercules Ltd started trading on 1 January 2016. The income statement and the sta
ID: 2601413 • Letter: H
Question
Hercules Ltd started trading on 1 January 2016. The income statement and the statement of financial position for the first year of trading re as follows (all figures are in £) Income statement Sales Cost of sales 700,000 Opening inventory Purchases 150,000 350,000 (50,000) Closing inventory Gross profift Sundry expenses Depreciation (450,000) 250,000 (70,000) (20,000) 160,000 Profit for year Statement of financial position 360,000 50,000 400,000 810,000 Non-current assets (net book value) Other monetary assets Net assets Share capital (£1 shares) Retained eamings Debentures Share capital and reserves 420,000 160,000 230,000 810,000 Movement in the RPI and specific indices for the year was as follows: 1 January 2016 30 June 2016 (average) 30 November 2016 31 December 2016 Inventory NC assets Retail prices 120 140 160 170 125 150 165 185 100 150 180 Sales and purchases and general expenses accrue evenly throughout the year. Closing inventory was acquired on 30 November 2016. All non-current assets and opening inventories were acquired on the first day of trading. Required (a) What are current value financial statements? Discuss the advantages and limitations of current value financial statements in relation to historical cost accounting. (12 marks) Discussing the technique and identify the concepts and key adjustments included within CVA method (2 marks) 4 P a ge Discussing the advantages and disadvantages of CVA techniques, including in relation to the types of adjustments made, ease of calculation, consistency of unit of measurement, economic value, subjectivity, complexity, the use of indexes and how appropriate they are and which problems with historic cost are addressed and which are not. (6 marks) Appropriate examples and illustrations (3 marks) Logic and integrity of presentation (l mark) (b) Prepare the current value financial statements for Hercules Ltd for the year ended 31 December 2016 and statement of financial position as at 31 December 2016 on a physical capital maintenance basis. (13 marks) Workings for income statement for the year (4 marks) Capital maintenance reserve (Unrealised/realised holding gains) (5 marks) Workings for statement of financial position (4 marks)Explanation / Answer
A. Current value financial statements are so called because the value of current assets and liabilities are carried on their current value rather than on their acquisition value which may be not correct for the time being.
Current value financial statements depicts the real picture of the company's business whereas historical accounting shows the accquire value of assets and liabilities which are not material now.
Current value is also of use when there is a prolonged period of excessive Inflation. As historical method that time will show much lower values.
Technique of CVA is to identify which components of financial statements have the values which are recorded at historical cost such as land, investments, monetary assets etc. And adjustments are done through revaluation account to reflect current value of those components.
Advantages of CVA are
1. Provides correct information to the readers as it is quite close to the performance of the company. Historical method is quite conservative.
2. The technique is very useful when there is a period of prolonged Inflation.
Disadvantages:
1. Accounting cost is the cost and time which is required for CVA which adds up a lot.
2. Accuracy, some assets current value are less based upon facts which questions its accuracy.
3. Availability of information: it is difficult to obtain current value for some assets and liabilities.
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