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What is working capital?
- CA-CL
- measure of company's solvency
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Current and Quick ratio
- Current ratio=CA/CL
- Quick ratio=(cash+net receivables+marketable securities)/CL
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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
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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
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2 forms of bank recs
- Simple reconciliation
- Reconciliation of cash receipts and disbursments
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Changes to bank balance under simple rec
- Deposits in transfer (+)
- Outstanding checks (-)
- Errors
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Changes to book balance under simple rec
- Services charges (-)
- Bank collections (+)
- Errors
- NSF checks (-)
- Interest income (+)
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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
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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
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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.)
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How are a/r treated?
- oral promises, in CA
- D (+), C (-)
- recorded on BS at NRV
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NRV of a/r
balance of a/r acct adjusted for a/r that may be uncollectible, sales discounts, and sales returns and allowances
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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
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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
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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)
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Trade discounts
- quantity discounts based on %
- sales and a/r accts recorded net of discounts
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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
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2 methods to recognize uncollectible a/r
- Direct write off (tax, not accrual, no GAAP)
- Allowance method (GAAP)
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Allowance method
- Estimate and book uncollectible now. Follows accrual and matching
- 3 ways to estimate-% of sales, % of a/r, aging of a/r
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% of sales method
- % of each sale deemed uncollectible
- Journal Entry
- D to bad debt expense
- C to allowance for uncollectibles (contra A acct)
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% of a/r at year end
- calculated estimate is EB that should be in allowance acct
- Plug BDE based on BB and EB
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Aging of receivables method
calculate based on percentage collectible for each category. Sum is desired EB in allowance acct.
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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)
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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
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Factoring
- Covert a/r into cash by assigning a/r to factor.
- Can be with or without recourse
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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
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Factoring with recourse
- Either a sale or a borrowing with a/r as collateral
- Factor has option to sell a/r back to seller.
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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
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How are notes receivable recorded?
PV of FCF. Unearned interest and finance charges deducted from face amt in order to state receivable at PV
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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)
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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
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Title passage
If no conditions specified, title passes when sellers performance regarding delivery is done
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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
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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
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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
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GAAP inventory valuation general rule
Recorded at cost even if replacement cost is lower
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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
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lower of cost or market terms
- market ceiling=NRV=selling price-disposal costs
- market floor=NRV-PM
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determining lower of cost or market GAAP
compare RC, NRV, and NRV-PM, choose middle and compare to cost of inventory. choose lower.
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How is inventory write down treated?
- if immaterial=increase COGS
- if material=separately state on income statement
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Revenue from life insurance proceeds
total proceeds-CSV
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IFRS inventory write down
choose lower of cost or NRV
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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
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Periodic inventory system
- inventory valued at end of period.
- COGS=BI+purchases-EI
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Effect of misstated ending inventory
EI overstated=COGS understated=NI overstated
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FIFO
- EI has most recently incurred costs
- using FIFO with increasing prices=higher profit
- EI and COGS are the same with periodic or perpetual
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weighted average inventory
- total cost/total units
- good for period system with homogeneous products
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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
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LIFO
- EI includes the oldest costs incurred
- using LIFO with increasing prices=lower profit
- EI and COGS are different with periodic and perpetual
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dollar value LIFO
inventory is measured in dollars and adjusted for changing price levels
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Price index to compute dollar value LIFO
Price index=EI at current year cost/EI at base year cost
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How to compute dollar value LIFO of new layer
LIFO layer at base cost*PI
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Retail method
perpetual system that records inventory at retail price and coverts to cost through cost to retail ratio
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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
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LIFO application of retail method
- include both mark ups and mark downs in ratio
- exclude BI from ratio
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What to do with donated fixed assets
gain on income statement
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GAAP fixed A valuation
basis=historical cost=cash or cash equivalent price of purchase
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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
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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
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capitalizing improvements and replacements when old A carrying value is known
- remove old A carrying value and recognize g/l
- capitalize new cost
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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
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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
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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
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Construction period interest
capitalized based on weighted average of accum expenditures during construction
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Component depreciation
- required in IFRS
- separate significant components of an asset are recorded and depreciated separately
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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.
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Straight line depreciation
depreciation=(cost-salvage value)/estimated useful life
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sum of the years digits
- higher expense earlier in life
- depreciation=(cost-salvage value)*(years remaining/sum of the years digits)
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double declining balance
- ignore salvage value in calculation but it limits total depreciation that can be taken
- depreciation=(2/useful life)*NBV
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asset disposal
- C asset
- D accum depr
- C or D g/l
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When is a FA impaired?
- If sum of undiscounted FCF<carrying amount
- GAAP loss=amount that carrying amount is over FCF
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