7. Cash, Cash Equivalents, Receivables, Inventory Flashcards
What’s included in cash equivalent?
Us treasury obligations (bills, notes, bonds), commercial paper, money market funds
What’s compensating balance? How is it classified?
Minimum balance required in relation to borrowing.
Related to ST: current but not restricted cash
Related to LT: noncurrent
What are two methods for AR?
Gross method Net method (any discounts netted)
Two methods to record uncollectibles?
Direct WO: records bad debt only when AR is considered uncollectible and wo. Only used when a firm can’t estimate uncollectible reliably
Poor BS valuation(overstated), poor matching
Allowance: Required by GAAP.
WO uncollectible under allowance method. Any impacts on NI, net assets, net AR?
No
Dr allowance for doubtful acct
Cr AR
JE for recovery of accts previously wo?
Dr AR
Cr allowance for doubtful acct
Dr cash
Cr AR
Two approaches for allowance?
IS approach: % of credit sales. Calculate bad debt expense. Matching.
BS approach: % of AR or aging. Calculate allowance for doubtful acct. once calculated - compared to the existing balance in acct - difference = bad debt expense.
What is factoring?
Transfer receivables to a factor. Transferor prefers to pay the factor a fee in return for the factor’s administration of the receivables. The factor performs credit checks and collect pmts.
What’s factoring without recourse?
Considered sale
What must be determined about factoring with recourse?
Loan or sale
Impaired loans receivables are written down to which two options?
The PV of the future CF expected to be collected using the original effective interest rate for the loan or
MV if this is more determinable
IFRS impairment loss reversing allowed?
Yes
Subsequent measurement in inventory
For all valuation method except LIFO or RIM (retail inventory method)
How to determine?
LC - NRV (selling price - cost of sale)
Subsequent measurement of inventory
LIFO or RIM. How to determine?
L - CM (cost or MV)
If floor value (NRV - normal profit margin) < RC (replacement cost) < ceiling value (NRV), MV = RC
If floor value > RC, MV = floor value
If ceiling value < RC, MV = ceiling value
Reconciliation made in both book and bank?
No, just book
Do bank items need to be reconciled such as insufficient checks and bank fees?
No. Bank already has the info
Watch for double counting of reconciled items in one month and actual items (which includes reconciled items) in the following month
..
WO of uncollectible account. Affect which accts?
Gross AR only
No impacts on NI, Working capital,
What does aging and credit sale method result in?
Required Allowance of uncollectible account
How does uncollectible accounts expense computed?
Adjusting to meet required allowance for uncollectible amount by aging method
Does ending allowance for uncollectible account get affected by any adjustments?
No. Only bad debt expense computation
Difference between what is bad debt expense?
Between required allowance for uncollectible account and actual allowance for uncollectible account
Does credit sales method require adjustment of existing allowance for uncollectible account to compute bad debt expense?
No. Just aging method
How is the total interest revenue computed?
The amount received over the term of the note less PV of the note
Selling note receivable. What amount do you receive from the bank?
Maturity value less discount.
Maturity value: Face amount + total interest (weighted if length less than a year).
Discount: Maturity value x discount% for remaining (weighted if rate term less than a year).
How to compute maturity value when there in no bearing?
the face amount = maturity value
Under perpetual inventory system, when is the COGS recognized?
At the time of each sale
COGS consists of which two items?
Beg inv + purchases
How to compute Ending DV LIFO
- Covert end inv to base year dollars: End inv/index.
- Compute current year layer at base year cost: beg inv base year cost - end inv base year cost.
- Covert current year layer to current year cost: #2 x index.
- Compute end DV LIFO=Beg DV LIFO + #3
How to compute increase to DV LIFO when the original base yr cost is not available
Get index from the current yr: current yr cost / base yr cost
Index x base yr cost of the current yr layer
When items are purchased as a group, the total cost of the group is allocated using which costs?
Replacement cost
When gross profit margin on sales is 40%, what % on sales should be used for COGS?
60%
When mark up is 40% of cost, what’s the relationship between sales and COGS?
1.4 cost = sales
COGS = 1/1.4 = 0.71 (71%)
Retail inventory method: how to compute end inventory @ retail?
EI (cost) = EI (retail) x C/R (cost to retail ratio)
How to compute C/R?
FIFO: Net pur / GAFS @ retail: pur + markups - markdown)
FIFO LC-M: Net purchase / GAFS (don’t compute markdown)
Average: GAFS @cost / GAFS (beg inv, all markups less markdown)
Average LC-M: GAFS @ cost / GAFS and add back markdown
Retail inve method: how to compute COGS?
Beg inv + purchases - End inve (end inv retail x C/R)
DV LIFO: which method does it use? Is beg inventory and markdown included?
FIFO. No. Yes
How to compute DV LIFO end inv current index?
Beg inv + mark up - sales
End inv retail base. How to compute?
EI retail current index / ending price index
Increase in EI retail base?
EI retail base - the base yr amount of the beg inv
Increase in EI retail current?
Increase in EI retail base x ending price index
C/R using FIFO?
Cost Net purchase / Mark up
Increase in EI cost?
C/R x increase in EI retail current
EI cost?
Beg inve cost + increase in EI cost
COGS computation?
Beg inv + purchase = GAFS - end inv = COGS
Can G/L be recognized for committed inventory change in value? Up to what?
Yes. Up to the original contractual amount
Accounting treatment of decrease in net assets?
Classify as liability for the portion of the purchase price that has no value
IFRS: how to measure subsequent value in inventory?
LC-NRV
IFRS: recovery of change in value permitted? Up to what?
Original cost
What valuation does the individual item application use?
LC-M
What’s the result in inventory value when valuing separately each item?
Lowest inventory account
Does the total loss must be reported immediately when contract is impaired?
Yes. Not just the current yr loss
Computing note receivable: how when it’s non bearing and when it has contracted rate?
No: face amount x PV
Rate: (face amount x PV) + (face amount x contracted rate x term x PV)
When is gross margin method allowed?
Is this allowed for financial stmt under GAAP?
When it’s not possible to physically count the ending inventory due to destruction and so on.
No.
How to compute cost/sales ratio when sales margin is given? When cost margin is given?
Set sales to 100. 100 - Cost = Margin given. Then compute Cost/Sales ratio.
Set Cost to 100. Sales - 100 = Margin given. Then compute Cost/Sales ratio.
What are three calculations for retail inventory method to get the ending inventory at cost?
- Ending inventory at retail.
- Cost to retail ratio.
- # 1 x #2 = Ending inventory at cost
Retail inventory method: Included in cost or retail?
1. Purchases. 2. Freight in. 3. Purchase discounts. 4. Purchase returns. 5. Net markups. 6. Abnormal shortage. 7. Markdowns, sales, sales returns, employee discounts, normal shortage.
- yes, yes. 2. yes, no. 3. yes, no. 4. yes, yes. 5. no, yes. 6. yes, yes. 7. no, yes.
Retail inventory method variations: FIFO. FIFO, LC-M. Average. Average, LC-M. LIFO.
FIFO: Exclude beg inver from both.
FIFO, LC-M: Exclude beg inv from both. Don’t subtract net markdown for C/R ratio.
Average: Normal C/R ratio.
Average, LC-M: Don’t subtract net markdown.
LIFO: Same as FIFO not LC-M.
How to compute conversion index?
Ending inventory in current year dollars / end inv in base year dollars
How to compute index when only the beg inv and layers of each year?
Treat it as cumulative. (add all current year cost) / (add all base year cost)
Retail inv method: How to compute retail end inv
GAFS - sales
Selling receivable: JE when it’s borrowing. When sale.
Dr: Interest receivable. Cr: Interest revenue.
Dr: Cash. Dr: Interest expense=BV: [Face + (Face x weighted interest%)] - cash received. Cr: Liability on note (face). Cr: Interest receivable.
Dr: Interest receivable. Cr: Interest revenue.
Dr: Cash. Dr: Loss (same amount as interest expense above). Cr: Note receivable (face). CR: Interest receivable.
