Current Assets & Liabilities (18.3)

Question 1

Define current assets & non-current assets.

Answer 1

Current assets include cash and other assets that will likely be converted into cash or used up within one year or one operating cycle, whichever is greater.

Noncurrent assets do not meet the definition of current assets because they will not be converted into cash or used up within one year or operating cycle.

Question 2

Define operating cycle

Answer 2

The operating cycle is the time it takes to produce or purchase inventory, sell the product, and collect the cash.

Question 3

How are current assets usually presented on the balance sheet (in what order)?

Answer 3

Current assets are usually presented in the order of their liquidity, with cash being the most liquid.

Question 4

define current liabilities & non-current liabilities

Answer 4

Current liabilities are obligations that will be satisfied within one year or one operating cycle, whichever is greater. More specifically, a liability that meets any of the following criteria is considered current:

Settlement is expected during the normal operating cycle.
Settlement is expected within one year.
Held primarily for trading purposes.
There is not an unconditional right to defer settlement for more than one year.

Noncurrent liabilities do not meet the criteria of current liabilities.

Question 5

What is working capital & how is it calculated

Answer 5

Current assets minus current liabilities equals working capital. Not enough working capital may indicate liquidity problems. Too much working capital may be an indication of inefficient use of assets.

Question 6

Current assets reveal info. about the _____ activities of a firm.
Non-current assets reveal info. about the _____ activities of a firm.

Answer 6

Current assets reveal information about the operating activities of the firm.

Noncurrent assets provide information about the firm’s investing activities, which form the foundation upon which the firm operates.

Question 7

Non-current liabilities reveal info. about the _____ activities of a firm.

Answer 7

Noncurrent liabilities provide information about the firm’s long-term financing activities.

Question 8

Describe cash & cash-equivalents

Answer 8

Cash equivalents are short-term, highly liquid investments that are readily convertible to cash and near enough to maturity that interest rate risk is insignificant.

Examples of cash equivalents include Treasury bills, commercial paper, and money market funds.

Cash and equivalents are considered financial assets. Generally, financial assets are reported on the balance sheet at amortized cost or fair value. For cash equivalents, either measurement base should result in about the same value.

Question 9

Describe marketable securities

Answer 9

Marketable securities are financial assets that are traded in a public market and whose value can be readily determined.

Examples include Treasury bills, notes, bonds, and equity securities. Details of the investment are disclosed in the financial footnotes.

Question 10

Describe accounts receivable

Answer 10

Accounts receivable (also known as trade receivables) are financial assets that represent amounts owed to the firm by customers for goods or services sold on credit.

Accounts receivable are reported at net realizable value, which is based on estimated bad debt expense. Bad debt expense increases the allowance for doubtful accounts, a contra-asset account.

Question 11

Define a contra account

Answer 11

A contra account is used to reduce the value of its controlling account. Thus, gross receivables less the allowance for doubtful accounts is equal to accounts receivable at net realizable value, the amount the firm expects to collect.

When receivables are “written off” (removed from the balance sheet because they are uncollectible), both gross receivables and the allowance account are reduced.

Question 12

Analyzing receivables relative to sales can reveal _____ problems.

Answer 12

Analyzing receivables relative to sales can reveal collection problems.

Question 13

Describe Inventories

Answer 13

Inventories are goods held for sale to customers or used in manufacture of goods to be sold. Manufacturing firms separately report inventories of raw materials, work-in-process, and finished goods.

The costs included in inventory include purchase cost, conversion costs, and other costs necessary to bring the inventory to its present location and condition.

Question 14

What are the 2 inventory costing methods? Describe them

Answer 14

Standard costing and the retail method are used by some firms to measure inventory costs.

Standard costing, often used by manufacturing firms, involves assigning predetermined amounts of materials, labor, and overhead to goods produced.

Firms that use the retail method measure inventory at retail prices and then subtract gross profit in order to determine cost.

Question 15

List examples of current assets

Answer 15

cash/cash equivalents, marketable securities, accounts recievable, inventories, other current assets (like prepaid expenses)

Question 16

Describe ‘other current assets’

Answer 16

Other current assets. Other current assets include amounts that may not be material if shown separately; thus, the items are combined into a single amount.

Question 17

List examples of current liabilities

Answer 17

accounts payable, notes payable, ‘current’ portion of LT debt, accrued liabilities (expenses, taxes), unearned revenue

Question 18

Describe accounts payable

Answer 18

Accounts payable (also known as trade payables) are amounts the firm owes to suppliers for goods or services purchased on credit.

Question 19

Analyzing payables relative to purchases can signal _____ problems with _____

Answer 19

Analyzing payables relative to purchases can signal credit problems with suppliers.

Question 20

Describe notes payable and current portion of long-term debt.

Answer 20

Notes payable are obligations in the form of promissory notes owed to creditors and lenders. Notes payable can also be reported as noncurrent liabilities if their maturities are greater than one year.

The current portion of long-term debt is the principal portion of debt due within one year or operating cycle, whichever is greater.

Question 21

Describe accrued liabilities

Answer 21

Accrued liabilities (accrued expenses) are expenses that have been recognized in the income statement but are not yet contractually due.

Accrued liabilities result from the accrual method of accounting, under which expenses are recognized as incurred.

Question 22

Describe unearned revenue

Answer 22

Unearned revenue (also known as unearned income, deferred revenue, or deferred income) is cash collected in advance of providing goods and services.

*Note: When analyzing liquidity, keep in mind that unearned revenue does not require a future outflow of cash like accounts payable. Also, unearned revenue may be an indication of future growth as the revenue will ultimately be recognized in the income statement.