Financial F4

  1. What is working capital?
    • CA-CL
    • measure of company's solvency
  2. Current and Quick ratio
    • Current ratio=CA/CL
    • Quick ratio=(cash+net receivables+marketable securities)/CL
  3. How are ST L expected to be refinanced treated?
    • 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
  4. Cash and Cash equivalents
    • 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
  5. 2 forms of bank recs
    • Simple reconciliation
    • Reconciliation of cash receipts and disbursments
  6. Changes to bank balance under simple rec
    • Deposits in transfer (+)
    • Outstanding checks (-)
    • Errors
  7. Changes to book balance under simple rec
    • Services charges (-)
    • Bank collections (+)
    • Errors
    • NSF checks (-)
    • Interest income (+)
  8. Simple reconciliation
    • 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
  9. Cash receipts and disbursements reconciliation
    • four column or proof of cash
    • determine difference between what the co recorded as deposits and the bank recorded as deposits
  10. trade vs. non trade a/r
    • 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.)
  11. How are a/r treated?
    • oral promises, in CA
    • D (+), C (-)
    • recorded on BS at NRV
  12. NRV of a/r
    balance of a/r acct adjusted for a/r that may be uncollectible, sales discounts, and sales returns and allowances
  13. Discounts for speedy pmt
    • Based on % of sales and assumes customers will take advantage of it.
    • 2 ways to record the discount-Gross method or Net method
  14. Gross 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
  15. Net method
    • 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)
  16. Trade discounts
    • quantity discounts based on %
    • sales and a/r accts recorded net of discounts
  17. How are sales returns and allowances treated?
    • 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
  18. 2 methods to recognize uncollectible a/r
    • Direct write off (tax, not accrual, no GAAP)
    • Allowance method (GAAP)
  19. Allowance method
    • Estimate and book uncollectible now. Follows accrual and matching
    • 3 ways to estimate-% of sales, % of a/r, aging of a/r
  20. % of sales method
    • % of each sale deemed uncollectible
    • Journal Entry
    • D to bad debt expense
    • C to allowance for uncollectibles (contra A acct)
  21. % of a/r at year end
    • calculated estimate is EB that should be in allowance acct
    • Plug BDE based on BB and EB
  22. Aging of receivables method
    calculate based on percentage collectible for each category. Sum is desired EB in allowance acct.
  23. Collection of a/r that was written off
    • 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)
  24. Pledging
    • 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
  25. Factoring
    • Covert a/r into cash by assigning a/r to factor.
    • Can be with or without recourse
  26. Factoring 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
  27. Factoring with recourse
    • Either a sale or a borrowing with a/r as collateral
    • Factor has option to sell a/r back to seller.
  28. Conditions for factoring with recourse to be a sale
    • 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
  29. How are notes receivable recorded?
    PV of FCF. Unearned interest and finance charges deducted from face amt in order to state receivable at PV
  30. Discounting n/r with recourse
    • 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)
  31. Discounting n/r with recourse
    • 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
  32. Title passage
    If no conditions specified, title passes when sellers performance regarding delivery is done
  33. FOB
    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
  34. Sale with a right to return
    • 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
  35. Conditions for sale with right to return to be recognized
    • 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
  36. GAAP inventory valuation general rule
    Recorded at cost even if replacement cost is lower
  37. When not to record inventory at cost
    • 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
  38. lower of cost or market terms
    • market ceiling=NRV=selling price-disposal costs
    • market floor=NRV-PM
  39. determining lower of cost or market GAAP
    compare RC, NRV, and NRV-PM, choose middle and compare to cost of inventory. choose lower.
  40. How is inventory write down treated?
    • if immaterial=increase COGS
    • if material=separately state on income statement
  41. Revenue from life insurance proceeds
    total proceeds-CSV
  42. IFRS inventory write down
    choose lower of cost or NRV
  43. Reversal of inventory write downs
    • GAAP=no reversal. once down, never up
    • IFRS=reversal limited to amount of original write down. reduces total inventory costs in period of reversal
  44. Periodic inventory system
    • inventory valued at end of period.
    • COGS=BI+purchases-EI
  45. Effect of misstated ending inventory
    EI overstated=COGS understated=NI overstated
  46. FIFO
    • EI has most recently incurred costs
    • using FIFO with increasing prices=higher profit
    • EI and COGS are the same with periodic or perpetual
  47. weighted average inventory
    • total cost/total units
    • good for period system with homogeneous products
  48. moving average inventory
    • computes weighted average after each purchase
    • requires use of perpetual system
    • more current than weighted average
    • higher EI and lower COGS than weighted average
  49. LIFO
    • EI includes the oldest costs incurred
    • using LIFO with increasing prices=lower profit
    • EI and COGS are different with periodic and perpetual
  50. dollar value LIFO
    inventory is measured in dollars and adjusted for changing price levels
  51. Price index to compute dollar value LIFO
    Price index=EI at current year cost/EI at base year cost
  52. How to compute dollar value LIFO of new layer
    LIFO layer at base cost*PI
  53. Retail method
    perpetual system that records inventory at retail price and coverts to cost through cost to retail ratio
  54. How to determine EI with retail method
    • 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
  55. LIFO application of retail method
    • include both mark ups and mark downs in ratio
    • exclude BI from ratio
  56. What to do with donated fixed assets
    gain on income statement
  57. GAAP fixed A valuation
    basis=historical cost=cash or cash equivalent price of purchase
  58. IFRS fixed A valuation
    • 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
  59. changes from revalue
    • losses=go to income statement
    • gains=OCI and equity as revalue surplus
    • impairment=first reduce revalue surplus then go to income statement
  60. capitalizing improvements and replacements when old A carrying value is known
    • remove old A carrying value and recognize g/l
    • capitalize new cost
  61. capitalizing improvements and replacements if carrying value of old A is unknown
    • 1. A life is extended=debit accum depr for cost and credit cash
    • 2. If usefulness is increased=capitalize cost to asset account
  62. IFRS investment property capitalize vs. expense costs
    • Capitalize=costs that subsequently add to the property, replace part of the property, service the property
    • Expense=service, repair maintenance, minor parts
  63. 2 models to report investment property
    • 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
  64. Construction period interest
    capitalized based on weighted average of accum expenditures during construction
  65. Component depreciation
    • required in IFRS
    • separate significant components of an asset are recorded and depreciated separately
  66. Composite depreciation
    • average economic lives of group and depreciate whole class over one life
    • gain or loss on one retired assets absorbed into accum depr.
  67. Straight line depreciation
    depreciation=(cost-salvage value)/estimated useful life
  68. sum of the years digits
    • higher expense earlier in life
    • depreciation=(cost-salvage value)*(years remaining/sum of the years digits)
  69. double declining balance
    • ignore salvage value in calculation but it limits total depreciation that can be taken
    • depreciation=(2/useful life)*NBV
  70. asset disposal
    • C asset
    • D accum depr
    • C or D g/l
  71. When is a FA impaired?
    • If sum of undiscounted FCF<carrying amount
    • GAAP loss=amount that carrying amount is over FCF
Card Set
Financial F4
Working Capital and Fixed Assets