Current Assets & Liabilities Flashcards
What is a current asset?
Cash plus other assets that are expected to be sold or converted to cash during the current operating cycle
Includes: Demand deposits, cash equivalents, accounts receivable, inventory, pre-paids, and short-term investments
What is a current liability? Pg. 12-1
What are examples?
When can dividends payable be considered a current liability?
A liability expected to be paid within 12 months or operating cycle, whichever is longer
A/P, accrued expenses, dividends payable, income taxes payable, and current portion of L/T debt
Only when they are declared
How is the Quick Ratio calculated?
(Cash + A/R + Trading Securities) / Current Liabilities
How is the Current Ratio calculated?
Currents Assets / Current Liabilities
How is Working Capital calculated?
Currents Assets - Current Liabilities
How is A/R Turnover calculated?
Credit Sales / Average A/R
How is Inventory Turnover calculated?
COGS / Average Inventory
How is Day Sales in Inventory calculated?
365 / Inventory Turnover
How is Days to Collect A/R calculated?
Average A/R / Average Sales per Day
How are gain contingencies recorded?
They are NOT accrued due to Conservatism
What is a contingency?
When are loss contingencies recorded?
What is the definition of a contingency? Pg. 12-8
What does accrue mean?
A gain or loss that may occur in the furture as result of an exisitng condition
If Probable - they are accrued (if estimable) and disclosedIf Reasonably Possible - they are disclosedIf Remote - don’t accrue or disclose
A gain or loss that may occur in the future as a result of an exisitng condition
Means to report on the financial statements
What is a contingency?
What are the choices of a loss contingency? Disclose (disclose in financial statements) VS Accrue (Book) Pg. 12-9
a) Remote
b) Reasonably Possible
c) Probable: Not Estimable VS Estimable
- *Difference with gain contingency?
- *If there is a “range” for the loss, what number do you choose?
A gain or loss that may occur in the future as result of an exisitng condition
a) Slight chance of occuring
Don't Disclose
Don't Accrue
b) More than remote, less than probable
Do Disclose
Don't Accrue
c) "Likely" to occur
*Not estimable: Do disclose
Estimable: Don't Accrue
*Estimable
Do Disclose
Do Accrue
- *DONT EVER ACCRUE!!! Unless realized!!!
- *Pick the least amount
What is a subsequent event? Pg. 12-11
Type 1 VS Type 2
What date must you focus on to classify if its type 1 or type 2?
Occurs after balance sheet date but before issuing; recognized (accrue and disclose) and adjust
Condition existed at the balance sheet date; must adjustment, recognize, and accrue
Condition didn not exist at the balance sheet date; must disclose and don’t recognize (dont accrue)
The BALANCE SHEET DATE
For interest on notes payable, how do you treat N/P…
a) In the ordinary course of business
b) As a long term payable
a) Record at Face
b) Record at present value
What is the order of people getting paid back in a backruptcy? Pg. 12-16
1) Secured creditors: Fully secured and partially (part is secured and the rest is unsecured
2) Priority claims: STOP IT Drunk Driver
S Support and alimony payments
T Trustee, attorney and accountant fees
O Owed to involuntary gap creditors
P Payroll within 180 days
I Individual consumer deposits
T Tax claims within 3 years of filing
Drunk Driver injury claims
How to refinance short-term obligations on a long term basis? Pg. 12-13
When does it have to happen for it to qualify?
The company need intent and ability; also must be financially capable
It has to occur after the balance sheet date, but before the issuance of the financial statements
**The agreement can be AFTER the balance sheet date, and it will be still considered what they agreed upon
Deferred tax liability arising from depreciation is considered? Long term or short term?
Long term because the depreciation has to do with a long term asset
When a company wants to refinance a debt from current to non current, when can they consider it as long term?
When the company has ability (can’t honor the agreement) and intent (signed the agreement)
What do you think of when you impute an interest rate?
Pg. 13-9
Think of receivables and liabilities; pay the note receivable for a good or service Notes receivable: debit Discount on N/R: credit Equipment: credit Gain on sale: credit
- Use PV of carrying value => difference of notes receivable and discount on N/R
- Impute because dont know interest and FMV of note, and it is unreasonable to have zero interest, therefore impute
What is the difference between payroll tax liability and payroll tax expense?
*What is the significance of federal income tax withheld?
Liability: what you give to government (both employer and employee
Expense: EMPLOYER share of the tax
*Employer collects from employee, but must give it to the government => therefore, it is part of payroll tax liability, but not payroll tax expense
Loss contingencies: Disclose VS Accrue Pg. 12-9
*Significance of gain contingency
- Disclose: Disclose information in financial statements
- Accrue: Book it
*Same as loss contingency, but dont accrue it
Type 1 subsequent events VS Type 2 subsequent event Pg. 12-11
Type 1: An event that occured before the balance sheet date (adjustment and recognized)
Type 2: An event that occured after the balance sheet date (disclosed and not recognized)
If there is a probable contingent loss that is within a range, what number will be picked? Liabilities #10
What if there is a “range” of number to pick from? Liabilities #26
The most likely amount
Pick the lowest in the “range”
What number would be warranty expense? Pg. 12-3
The estimated expense
If interest in involved, what is important to look out for? Liabilities #16
Look at DATES!!!
What is the journal entry for warranty expense? Pg. 12-3
a) Estimated warranty expense
b) Amount spent on actual repairs
a) Warranty expense: debit
Estimated warranty liability: credit
b) Estimated warranty liability: debit
Cash: credit
What is the journal entry for an accrued liability? (An expense incurred but not yet paid in cash) Pg. 12-2
*When you pay
Expense: debit (I/S)
Accrued liability: credit
*Accrued liability: debit
Cash: credit
Journal entry for Prepaid Expense (Expenses paid in cash, but not yet incurred) Pg. 12-2
*When incurred
Prepaid Expense: debit
Cash: credit
Expense: debit (I/S)
Prepaid Expense: credit
Journal entry deferred revenue (Revenue collected, but not yet earned) Pg. 12-2
*When earned
Cash: debit
Unearned Revenue: credit
*Unearned revenue: debit
Revenue: credit (I/S)
If a bank loan is in violation of an agreement, what is it considered as? Liabilities #21
Current liability => Long term liability would be better, but there is a VIOLATION
Are dividend in arrears considered a current liability? Liability #25
No, only if the dividend is declared
*Think of…
Retained earnings: debit
Dividends payable: credit
If there are borrowed funds to CONSTRUCT an asset, how do you classify the interest? An expense or capitalize
Liability # 27
Capitalize, dont expense
What is a troubled debt? Pg. 12-14
*What must exist?
When a debtor cannot apy a debt as it comes due
- 1) The restructuring constitutes a concession
2) The debtor is experiencing financial difficulties
*Use total future cash payments
What is a 3 year baloon note considered as?
Long term liability; note that is it not due in annual installments
What is an exception to a subsequent event? Pg. 12-11
If there is intent and ability, then it can be considered a type 1 (recognized and adjusted) => both accrue and disclose
What is important to look for when doing an accounts payable problem? Liabilities #15
If its to be manufactured, then reverse out
What is an important concept when dealing with refinancing of short-term and long-term problems?
2 Characteristics Liabilities #24 Pg. 12-13
Ability and Intent
What is the significance of dividends in arrears? Liabilities #25
The company has not declared theses dividends, therefore they are not in the balance sheet as a liability; however, they must be disclosed in the notes to the balance sheet
