22.3: Current Assets and Liabilities Flashcards
Define current assets. What information does it reveal about the firm?
Current assets include cash and other assets that will likely be converted into cash or used up within one year or one operating cycle.
Current assets reveal information about the operating activities of the firm.
How current assets presented on B/S?
Current assets are usually presented in the order of liquidity.
Name current assets classified on B/S (5).
- Cash and cash equivalents
- Marketable securities
- A/R
- Inventories
- Other current assets (prepaid expenses)
How is A/R reported on B/S?
A/R are reported under current assets at NRV based on estimated bad debt expenses.
NRV = gross receivables - allowance for doubtful accounts
How are inventories reported on B/S?
Inventories are reported under current assets at the lower of cost or NRV under IFRS and GAAP for firms that do not use LIFO or retail.
NRV = selling price - (completion costs + selling costs)
Under US GAAP companies using LIFO or retail report inventories at the lower of cost or market.
Market = replacement cost
If NRV or market < carrying value, inventory is written down and a loss is recognized on I/S.
Name current liabilities classified on B/S (4).
- A/P
- Notes payables and portions of
- Accrued liabilities (expenses) such as taxes payable
- Unearned revenue (unearned income, deferred revenue, deferred income)
Name non-current liabilities on B/S (3).
- PPE
- Investment property
- Deferred tax assets
How is PPE reported on B/S?
PPE is reported using revaluation model or cost model under IFRS. Under GAAP, only cost model is allowed.
Revaluation model is where PPE is reported at fair value - accumulated depreciation.
Cost model is where PPE is reported at amortized cost (historical cost - accumulated depreciation + depletion + impairment losses) where historical cost = purchase price + cost necessary to prepare asset for use.
Under the cost model, PPE must also be tested for impairment. An asset is impaired if carrying value > recoverable amount.
The recoverable amount of an asset is the greater of fair value - selling costs or the asset’s value in use, which is the PV of the asset’s future cash flow stream. If impaired, the asset is written down to its recoverable amount and a loss is recognized in the I/S.
How are investment properties reported on B/S?
Investment properties are reported at amortized cost or fair value (a change in fair value is recognized in the income statement).
What are deferred tax assets? Deferred tax liabilities?
Deferred tax assets are created when the amount of taxes payable exceeds the amount of income tax expense recognized in the I/S.
Deferred tax liabilities are created when the amount of taxes payable does not exceed the amount of income tax expense recognized in the I/S.
What is the difference between identifiable and unidentifiable intangible assets? Provide examples.
Identifiable intangible assets can be acquired separately or are the results or privileges conveyed to their owner. Examples of identifiable intangible assets are patents, trademarks, and copyrights.
Unidentifiable intangible assets cannot be acquired separately and may have an unlimited life. An example of unidentifiable intangible asset is goodwill.
How are identifiable intangibles reported on the B/S?
Identifiable intangibles that can be purchased can be reported on the B/S using the cost model or revaluation model under IFRS. The revaluation model can only be used if an active market for the intangible asset exists.
Under US GAAP, only the cost model is allowed.
How are research and development costs (intangible costs) treated under IFRS vs. GAAP?
Under GAAP, both research and development costs are expensed as incurred.
Under IFRS, the firm must expense costs incurred during the research stage but can capitalize costs incurred during the development stage.
How are finite-lived intangible assets treated?
Finite-lived intangible assets are amortized over useful live and tested for impairment in the same way as PPE.
Under both IFRS and US GAAP, which costs should be expensed as incurred (5)?
- Startup costs
- Administrative overhead
- Advertising and promotion costs
- Relocation and reorganization costs
- Termination costs
Define goodwill. How is it recognized in financial statements? How can goodwill be used to manipulate net income?
Goodwill is the excess of purchase price over the fair value of the identifiable net assets acquired in a business acquisition. It is only created in a purchase acquisition.
Internally generated goodwill is expensed as incurred. Goodwill is not amortized but must be tested for impairment at least annually. If impaired, goodwill is reduced and a loss is recognized in the I/S. If not impaired, goodwill can remain on the B/S indefinitely.
Goodwill can manipulate net income upward by allocation more of the acquisition price to goodwill and less to the identifiable assets. The result is less depreciation and amortization expense, resulting in higher net income.
