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Define working capital.
Current assets - Current liabilities
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How is the current ratio computed?
Current assets / Current liabilities
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How is the quick ratio computed?
(Cash + Net receivables + Short-term investments) / Current liabilities
Note: Excludes inventory.
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Current assets are defined as...
Those resources that are reasonably expected to be realized in cash, sold or consumed (prepaid items) during the normal operating cycle of a business or one year, whichever is longer.
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Current liabilities are defined as...
Obligations whose liquidation is reasonably expected to require the use of current assets or the creation of other current liabilities.
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When can a short-term obligation be included in noncurrent liabilities?
- If the enterprise intends to refinance the debt on a long-term basis and the intent is supported by the ability to do so as evidenced by:
- - Actual refinancing prior to the issuance of the financial statements, or
- - Existence of a noncancelable financing agreement from a lender having the financial resources to accomplish the refinancing.
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Define cash and cash equivalents.
- Cash includes both currency and demand deposits with banks and/or other financial institutions.
- Cash equivalents includes short-term, highly liquid investments that are both readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from date of purchase) that they represent insignificant risk of changes in value.
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Name two methods of accounting for uncollectible accounts.
- Direct Write-Off
- Dr. Bad debt expense
- Cr. Accounts receivable
- Weaknesses: Bad debts are not matched to sales and accounts receivable are overstated. Not GAAP.
- Allowance Method
- Dr. Allowance for uncollectible accounts
- Cr. Accounts receivable
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Name three methods for estimating uncollectible accounts.
- Percentage of credit sales
- Percentage of accounts receivable at year-end
- Aging of accounts receivable at year-end
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Using the allowance method, give the two jounral entries to provide for and then to write off an uncollectible account.
- Provide for
- Dr. Bad debt expense
- Cr. Allowance for uncollectible accounts
- Write-off
- Dr. Allowance for uncollectible accounts
- Cr. Accounts receivable
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What is the difference between factoring with recourse and without recourse?
- With Recourse
- The factor may return the account to the company if it proves to be uncollectible. Potential liability and risk of loss remains with the company.
- Without Recourse
- The factor assumes the risk of loss if the account is uncollectible.
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State the three conditions that must exist for control of a financial asset to be considered surrendered.
- The transferred assets have been isolated from the transferor,
- The transferee has the right to pledge or exchange the assets, and
- The transferor does not maintain control over transferred assets under a repurchase agreement.
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If control of a financial asset is surrendered, what is the accounting treatment of the transfer?
- No Continuing Involvement
- Recorded as a sale with appropriate reduction in receivables and recognition of any gain or loss.
- Continuing Involvement
- - Asset for which there is no retained interest is recorded as a sale using the financial-components approach.
- - Assets for which there is retained interest is carried on the books of transferor and allocated a book value based on relative value of all transferred assets at the date of transfer.
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If control of a financial asset is not surrendered, what is the accounting treatment of the transfer?
- Account for transfer as a secured borrowing with pledged collateral.
- Recognize the appropriate asset/liability amounts and interest revenue/expense amounts.
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At what value should non-interest bearing promissory notes be recorded?
At present value of all future payments required by the note. The payments should be discounted at the market interest rate.
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Notes receivable may be discounted "with" or "without" recourse. What is the difference?
- Discounting with Recourse
- The holder remains contingently liable.
- Discounting without Recourse
- The holder assumes no further liability after discounting.
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Describe the computational steps required in "discounting a note."
- 1. Compute maturity value (remember to include interest to maturity)
- 2. Compute the "discount" (remember to use maturity value)
- 3. Get proceeds by subtracting discount from maturity value
- 4. Compute interest income as difference between proceeds and face of note.
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When does the title to goods pass for each of the following?
F.O.B. destination
F.O.B. shipping point
C.O.D.
Consigned goods
- F.O.B. destination - When received by buyer
- F.O.B. shipping point - When given to a common carrier
- C.O.D. - When received and paid for by buyer
- Consigned goods - When sold to a third party
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How is market calculated in the U.S. GAAP lower-of-cost-or-market method?
- Market generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor.
- - Ceiling - Net realizable value (estimated net selling price less completion and disposal costs).
- - Floor - Net realizable value minus allowance for normal profit margin.
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How is net realizable value calculated in the IFRS lower-of-cost-or-net-realizable-value method?
Net realizable value is the net selling price less completion and disposal costs.
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Explain the difference between periodic and perpetual inventory methods.
- Periodic
- - The quantity of inventory is determined only by physical count.
- - Ending inventory is physically counted and priced.
- Perpetual
- - Inventory is updated for each purchase and for each sale.
- - Keeps a running total of inventory balances.
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