Chapter 2 - Investments and Short Term Assets Flashcards
Receivables (Trade Receivables, Allowance vs Direct Write-off Method)
Trade Receivables
Trade receivables are the total amounts owing to a company for goods or services it has sold, which are reflected in invoices that the company has issued to its clients, but has not yet received payments for. Rental income nor notes receivable are trades receivable.
1. ALLOWANCE METHOD (BAD DEBT IS RECORDED AT THE SAME TIME OF SALE and in the meantime there is an ALLOWANCE balance)
D. Receivable C. Revenue
D. Bad Debt (PnL) C. Allowance (contra-account for receivables)
When we recognize the write-off
D. Allowance C. Receivable
reverting when paid
D. Receivable C. Allowance
D. Cash C.Receivable
RECEIVABLE - MINUS ALLOWANCE = NET ACCOUNT RECEIVABLE (because there is an allowance)
1.1. Balance sheet approach (check a curve for receivables):
>>> They check the amount they need in the allowance account and back up the debt expense.
1.2. Income statement
>>> Check bad debt expense to see where it reaches (credit sales for example)
WRITE OFF DOES NOT IMPACT NET ACCOUNT RECEIVABLES, BUT IT DOES IMPACT GROSS ACCOUNT RECEIVABLE.
2. Direct write-off method (wait until it should be write-off) – REQUIRED METHOD FOR TAX PURPOSE
D. Rec C. Revenue
Recognize Writeoff
D.Bad Debt C. Receivables
GROSS ACCOUNT METHOD!
Factoring Receivables
- Factoring Receivables
Advantages:
Get money sooner
Alternative to debt
No collateral needed.
Disadvantages:
Short term solution
May signal distress
Fees can be very high
WITH RECOURSE = WITH LIABILITY
WITHOUT RECOURCE = WITHOUT LIABILITY
>>> Factoring with recourse: purchaser of account receivable can come back to the company to collect the amount not paid, receivables are still on the sellers balance sheet
Finance charge of 2% automatically
Plus a withhold an additional 5% to cover for possible uncollectible amounts.
AR 100,000k
Rec Oblig 3.500
=
Cash 100-2-5 = 93k
Cash 93000
Due from factor 5000
Loss 5500 (2000+3500)
Without Recourse Factor (higher charge because they are taking all the responsabilty for customers who don’t pay)
Credit ACC Receivable (to take out) >> 100,00
91
Receivable 4
Loss 5
Receivables Balances Formula
- Beginning accounts receivable
- Credit sales during the period
- – Cash collected on credit sales during the period
- – write offs
- Ending account receivable.
- Beginning Allowance for uncollectible accounts
- +Bad debt expense recognized
- – Write offs for the period
- collection of accounts receibale previously written off
- Ending allowance for uncollectible accounts
Inventory Purchase (Net Purchases)
Net purchases = purchases – returns and allowances – purchase discounts + transportation-in
Goodwill (considerations and calculation)
= Acquisition date fair value of consideration transferred(paid) PLUS NCI - (Fair Value of Assets-FairValue of Liabilities)
>> Goodwill has an indefinite useful life, therefore, is not depreciated.
>> Acquisition-related costs: finders fee, professional and consulting fees, G&A costs ARE EXPENSED AS INCURRED.
PHYSICAL COUNT MUST INCLUDE 1) GOODS IN TRANSIT 2) CONSIGNED GOODS (recorded at cost)
- Consignment (also accounted and recorded at cost)
- FOB Shipping - Buyer has to account for it since it is with the carrier.
FOB Destination - Seller has to account for it since he is liable to get goods to destination.
“DESTINATION TO THE SELLEER!” TINA TURNER SINGING WE DONT NEED ANOTHER HERO!!!
Write down reversals according to GAAP or IFRS
Under U.S. GAAP, write-downs taken to reduce inventories can not be reversed for subsequent increases in value. Under IFRS, write-downs taken to reduce inventories can be reversed for subsequent increases in value, but the reversal is limited to the amount of the original write-down.
Measurement of Inventory Subsequent to Initial Recognition (GAAP vs IFRS)
1.GAAP:
LIFO >>> lower of cost or market (LCM) - ALWAYS CLOSE TO MARKET.
FIFO >>> lower of cost or Net Realizable Value (net realizable value = sales minus sales commissions AND COMPLETION COSTS) (LNRV)
2.IFRS:
LNRV only
>> WHERE MARKET = CURRENT REPLACEMENT COST RESPECTING A MAXIMUM OF NET REALIZABLE VALUE AND MINIMUM OF NORMAL PROFIT MARGIN.
Investment in Equity Securities (and exception without a readily determinable fair value)
- Investment is measured at fair value when below 20%.
- Dividends received from investment in securities appear as income in the income statement.
- Unrealized holding gans and losses are reported in the income statement (NOT OTHER COMPREHENSIVE INCOME)
- Between 20 and 50%, percentage of net income of invested. Dividends from the investee are treated as a return of an investment. They have no effect on the investor’s income.
- More than 50% consolidated.
DEBT SECURITIES
- In addition to the common forms of debt, this category includes: mandatory redeemable preferred stock, preferred stock redeemable at investor’s option, collateralized mortgage obligations.
- Held to maturity (gains or losses are impacting net income, the investment is measured at fair value) – recorded at amortized costs. Cash flow from investing activities.
- FV - Trading(gains or losses REALIZED OR NOT are impacting net income, the investment is measured at fair value) – valuation account is used. Cashflow from operating activities.
- FV - Available for sale valuation account is used. Realized impacts net income, unrealized impacts OCI and therefore equity section at OCI accumulated.
Transfer from held to maturity to sales implies in OCI recognition of unrealized gains and losses.
From sales to held to maturity, amounts in OCI are not reversed but are amoritzed in same wasy as premium.
Warranties (assurance vs service type)
>> Assurance type: does not have the option to purchase separately. (creates A LOSS CONTINGENCY)
Beginning warranty liability
+ Warranty expense recognized in the current period (estimated)
- Warranty payments in the current period
= Ending warranty liability
>> Service type: has the option to purchase separately, like smartphone. IS A SEPARATE PERFORMANCE OBLIGATION. Recognized over time.
Consolidation Detail Regarding Intra-Entity Transactions
In a consolidated balance sheet, reciprocal balances, such as receivables and payables, between a parent and a consolidated subsidiary are eliminated in their entirety, regardless of the portion of the subsidiary’s stock held by the parent. However, intraentity transactions should not be eliminated from the separate financial statements of the entities.
