Financial F4

• CA-CL
• measure of company's solvency

• Current ratio=CA/CL
• Quick ratio=(cash+net receivables+marketable securities)/CL

• GAAP excluded from CL if
• 1. actual refinancing prior to issuance of fin stmts
• 2. there is a noncancelable financing agreement from lender who has the ability to do the refinancing

Not allowed under IFRS

• ST, very liquid, original maturity <=90 days.
• No time certificates of deposit longer than 90 days
• No legal restrictions against money or held as compensating balances

• Simple reconciliation
• Reconciliation of cash receipts and disbursments

• Deposits in transfer (+)
• Outstanding checks (-)
• Errors

• Services charges (-)
• Bank collections (+)
• Errors
• NSF checks (-)
• Interest income (+)

• reconcile both book and bank to common "true balance" that goes on BS
• 1. Adjust book to true balance
• 2. then adjust bank balance to match

• four column or proof of cash
• determine difference between what the co recorded as deposits and the bank recorded as deposits

• trade= a/r for purchase of co's goods and services
• non trade=a/r from ppl other than customers (employee advances, tax refunds, etc.)

• oral promises, in CA
• D (+), C (-)
• recorded on BS at NRV

balance of a/r acct adjusted for a/r that may be uncollectible, sales discounts, and sales returns and allowances

• Based on % of sales and assumes customers will take advantage of it.
• 2 ways to record the discount-Gross method or Net method

• records sale without discount then adjusts if discount is taken
• Journal Entry

• Record sale
• D to a/r
• C to sales

• Pmt within discount period
• D to cash
• D to sales discount taken (contra rev.)
• C to a/r

• Pmt after discount period
• D to cash
• C to a/r

• records sale net of discount and adjusts if discount is not taken
• Journal entry

• Record sale
• D to a/r
• C to sales

• Pmt within discount period
• D to cash
• C to a/r

• Pmt after discount
• D to cash
• C to a/r
• C to sales discount not taken (rev acct)

• quantity discounts based on %
• sales and a/r accts recorded net of discounts

• General rule=wait and book actual
• If past experience indicates material % of a/r are returned establish an allowance with a reasonable estimate

• Journal Entry to record sales return
• D to sales returns and allowances (contra sales acct)
• C to a/r

reduces sales and reduces a/r

• Direct write off (tax, not accrual, no GAAP)
• Allowance method (GAAP)

• Estimate and book uncollectible now. Follows accrual and matching
• 3 ways to estimate-% of sales, % of a/r, aging of a/r

• % of each sale deemed uncollectible
• Journal Entry
• D to bad debt expense
• C to allowance for uncollectibles (contra A acct)

• calculated estimate is EB that should be in allowance acct
• Plug BDE based on BB and EB

calculate based on percentage collectible for each category. Sum is desired EB in allowance acct.

• Allowance method
• 1. reverse write off
• D to a/r
• C to allowance
• 2. record collection
• D to cash
• C to a/r

• Direct write off method
• D to cash
• C uncollectible accts recovered (rev. acct)

• uses a/r as collateral for a loan. Pledges that co will use proceeds to pay off loan.
• Footnote disclosure
• a/r acct not adjusted

• Covert a/r into cash by assigning a/r to factor.
• Can be with or without recourse

• True sale-factor assumes risk of loss on collections
• Journal entry
• D to cash
• D to due from factor (factors margin)
• D to loss on sale of a/r
• C to a/r

• Either a sale or a borrowing with a/r as collateral
• Factor has option to sell a/r back to seller.

• 1. sellers obligation for uncollectible can be reasonably estimated (post security-due from entry)
• 2. seller surrenders control of future economic benefit of a/r
• 3. seller cannot be required to repurchase a/r.

All 3 must be met or it is a loan, not a sale

PV of FCF. Unearned interest and finance charges deducted from face amt in order to state receivable at PV

• holder remains liable for pmt.
• On BS with contra acct (notes rec discounted) or removed from BS and disclosed in fin stmt note

• Journal Entry
• D to cash
• C to n/r discounted (contra asset) or n/r (to remove from BS)

• true sale-holder has no further L
• Sold and removed from BS

• Journal entry
• D to cash
• C to loss on sale of n/r
• C to n/r

If no conditions specified, title passes when sellers performance regarding delivery is done

free on board=seller delivers at sellers expense

shipping point=title passes to buyer when goods are delivered to common carrier. Goods in buyers inventory upon shipment

destination=title passes when buyer receives goods from common carrier

• If amt to be returned can't be estimated=no sale
• If amt to be returned can be estimated=record sale and allowance for estimated returns

• sale price substantially fixed at date of sale
• buyer assumes all risk of loss because goods are in buyers posession
• product sold is substantially complete
• amt of future returns can be reasonably estimated

Recorded at cost even if replacement cost is lower

• 1. Lower of cost or market=when utility of goods is no longer as great as their cost
• 2. Precious metals and farm products=valued at NRV

• market ceiling=NRV=selling price-disposal costs
• market floor=NRV-PM

compare RC, NRV, and NRV-PM, choose middle and compare to cost of inventory. choose lower.

• if immaterial=increase COGS
• if material=separately state on income statement

total proceeds-CSV

choose lower of cost or NRV

• GAAP=no reversal. once down, never up
• IFRS=reversal limited to amount of original write down. reduces total inventory costs in period of reversal

• inventory valued at end of period.
• COGS=BI+purchases-EI

EI overstated=COGS understated=NI overstated

• EI has most recently incurred costs
• using FIFO with increasing prices=higher profit
• EI and COGS are the same with periodic or perpetual

• total cost/total units
• good for period system with homogeneous products

• computes weighted average after each purchase
• requires use of perpetual system
• more current than weighted average
• higher EI and lower COGS than weighted average

• EI includes the oldest costs incurred
• using LIFO with increasing prices=lower profit
• EI and COGS are different with periodic and perpetual

inventory is measured in dollars and adjusted for changing price levels

Price index=EI at current year cost/EI at base year cost

LIFO layer at base cost*PI

perpetual system that records inventory at retail price and coverts to cost through cost to retail ratio

• 1. amt of goods available for sale-retail sale=EI at retail
• 2. cost to retail ratio=aggregate cost/aggregate retail
• only take into acct markups to find ratio
• 3. EI at retail*cost to retail ratio

• include both mark ups and mark downs in ratio
• exclude BI from ratio

gain on income statement

basis=historical cost=cash or cash equivalent price of purchase

• 1. Cost model-basis is historical cost. then adjusted for accum depr and impairment
• 2. Revaluation model-class of assets are reported at fair value then adjusted for depr and impairment in future. cost model equivelant value must be disclosed

• losses=go to income statement
• gains=OCI and equity as revalue surplus
• impairment=first reduce revalue surplus then go to income statement

• remove old A carrying value and recognize g/l
• capitalize new cost

• 1. A life is extended=debit accum depr for cost and credit cash
• 2. If usefulness is increased=capitalize cost to asset account

• Capitalize=costs that subsequently add to the property, replace part of the property, service the property
• Expense=service, repair maintenance, minor parts

• Cost model=historical cost less accum depr. Must disclose FMV
• Fair value=reported at fair value and not depreciated. Gains/losses in earnings of corresponding period

capitalized based on weighted average of accum expenditures during construction

• required in IFRS
• separate significant components of an asset are recorded and depreciated separately

• average economic lives of group and depreciate whole class over one life
• gain or loss on one retired assets absorbed into accum depr.

depreciation=(cost-salvage value)/estimated useful life

• higher expense earlier in life
• depreciation=(cost-salvage value)*(years remaining/sum of the years digits)

• ignore salvage value in calculation but it limits total depreciation that can be taken
• depreciation=(2/useful life)*NBV

• C asset
• D accum depr
• C or D g/l

• If sum of undiscounted FCF<carrying amount
• GAAP loss=amount that carrying amount is over FCF