Put It To The Test 2
Problem given by Vijge (inclusive individual f standards)
Vijge elaborates the system-Bakker in his book 'Winstbepalingsstelsels c.a.' (1989) on the basis of this example.
Successively has to be measured:
- Fiscal profit.
- Net profit.
Opening Balance Sheet at t, in euro
|Fixed assets (new)||100,000 || ||Proprietor's capital ||200,000|
|Stock||100,000|| ||Loans ||100,000|
|10,000 products A|| || || || |
|at € 10 each|| || || || |
|Liquidities||100,000|| || || |
| ||------------|| || ||------------|
|Total assets||300,000|| ||Total liabilities||300,000|
On the opening balance note the 10,000 units of product A.
Is that the NORMAL amount?
Something (and that could be 'nothing') is normal. And someone has to state what is normal, between pessimistic lowest levels and optimistic upper boundaries. If 10,000 is NORMAL, then one will have to replace them eventually, no more, no less.
The same holds true for the fixed assets.
If it is said that it is NORMAL in the present new state, then there is a duty of replacement.
Yes, the fixed assets are also normal (alike 10,000 products A).
It is evident that NORMAL assets are not completely present at an arbitrary balance sheet date. They may even be totally absent.
Concerning liquidities, no special requirements are made by Vijge.
In fact it is 100,000 markers at 1 euro each.
Here, these 100,000 markers are normal.
In the above-mentioned example, there is an enormous lack of information about what is normal. Which NORMAL gearing? It is an arbitrary choice: f1 = 0.80 asset 1 (fixed assets); f2 = 0.65 asset 2 (stock) and f3 = 0.55 asset 3 (liquidities).
Note: f is the standard geared proportion of a specific set of assets.
The problem is gauging i.e. calibration. Some arbitrary choices have been made. They are merely the creation of necessary input, to facilitate measurement.From 2005 on, IFRS are the new gospel. The intentions are quite good. However, there is no proof, no single profit figure - emerging after implementation of all IFRS-regulations - which is incontestable. The reference is nowhere to be found. Like traditional accounting (amongst which are the various GAAP-rulings), IFRS are also not measuring. Moreover, IFRS and US GAAP, a lot of time and effort is involved when applying these systems. While the desired outcome is up for grabs. When measuring the period profit of a company, calibration is the main problem. Only after completion of the calibration can one start measuring. Till then all outcomes are absolutely meaningless.
Some additional data:
Soon after starting point t the New Value (NV) of the fixed assets has risen by € 10,000. At (t + 1) the NV of the fixed assets is € 110,000. These assets are to be depreciated over a ten-period life-cycle by the 'straight-line' method (i.e. at 1/10 of cost per period).
The selling/purchasing facts for period 1 (t to t + 1) are:
- 5,000 products A sold for € 25 cash each.
- 4,000 products A purchased for € 12 (at current cost) cash each.
The selling/purchasing facts for period 2 (t + 1 to t + 2) are:
- 10,000 products A sold for € 15 cash each.
- 5,000 products A purchased for € 13 (at current cost) cash each.
The levels of the general price index and the corresponding periodic increases, are as follows:
|Time||Index level ||Period||Percentage increase|
|t ||100 || || |
|t + 1||105|| || |
| || ||2||10|
|t + 2||115.5|| || |
At (t + 2) the NV of the fixed assets is € 120,000.
- General costs (cash outlay) are € 5,000 per period, in both periods.
- Loans bearing interest at 10 % each period. Interest paid is tax-deductible.
- In both periods € 10,000 repayment loans.
- Tax rate amounts to 50 %.
- Fiscally it holds FIFO (First In, First Out).
Remember: at starting point t the proprietor owns:
- 0.80 of (new) fixed assets
- 0.65 of 10,000 products A
- 0.55 of 100,000 markers liquidities
Total money value to be preserved (at t) is € 200,000.
This is NORMAL.
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Jan F. Jacobs