Current Assets & Liabilities

Question 1

What is a current asset?

Answer 1

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

Question 2

What is a current liability?

Answer 2

A liability expected to be paid within 12 months or less

Question 3

How is the Quick Ratio calculated?

Answer 3

(Cash + A/R + Trading Securities) / Current Liabilities

Question 4

How is the Current Ratio calculated?

Answer 4

Currents Assets / Current Liabilities

Question 5

How is Working Capital calculated?

Answer 5

Currents Assets - Current Liabilities

Question 6

How is A/R Turnover calculated?

Answer 6

Credit Sales / Average A/R

Question 7

How is Inventory Turnover calculated?

Answer 7

COGS / Average Inventory

Question 8

How is Day Sales in Inventory calculated?

Answer 8

365 / Inventory Turnover

Question 9

How is Days to Collect A/R calculated?

Answer 9

Average A/R / Average Sales per Day

Question 10

How are gain contingencies recorded?

Answer 10

They are NOT accrued due to Conservatism

Question 11

When are loss contingencies recorded?

Answer 11

If Probable - they are accrued (if estimable) and disclosed
If Reasonably Possible - they are disclosed
If Remote - don’t accrue or disclose

Question 12

Accounts Payable Gross Method

Answer 12

Purchases are shown at gross, if the discount is taken, it is considered a reduction of Cost of Sales

Purchases 100
A/P 100

A/P 100
Cash 90
Discount* 10

*Discount is a contra account to COGS

Question 13

Accounts Payable Net Method

Answer 13

Purchases are shown at net, if discount is NOT taken considered interest expense.

Purchases 90
A/P 90

A/P 90
Interest Exp 10
Cash 100

Question 14

Deferred Revenue

Answer 14

Revenue Collected, but not yet earned

Cash XX
Unearned Revenue XX
Unearned Revenue XX
Revenue XX

Question 15

Service Contract

Answer 15

Service Contracts are recorded like Deferred Revenue. Recognize revenue over the life of the service contract:

Cash XX
Deferred Service Revenue XX
Deferred Service Revenue XX
Service Revenue XX

Question 16

Compensated Absences

Answer 16

A company will report a liability for future compensated absences if all 4 of the following conditions are met:

1. Obligation for compensation of future absences result from services already rendered
2. Right to compensated absences either vests or accumulates.
3. Payment is probable
4. Amount of the payment can be reasonably estimated

Question 17

Purchase Commitment

Answer 17

If obligation to purchase goods for a period of time at a fixed price, the liability is disclosed for each of the 5 years following the Balance Sheet

Accrue Loss if the market value of the item falls below the purchase price. The loss will be for the minimum quantity required to be purchased.

Question 18

What are the 3 ways to calculate bad debt expense and which are GAAP allowable?

Answer 18

1. Direct Write-Off Method (Violates GAAP, used for Tax)
2. I/S Approach: % of Credit Sales (GAAP)
3. B/S Approach: % of Receivables (GAAP)

Question 19

Calculating Bad Debt Expense: Direct Write-Off Method

Answer 19

• Bad Debt is recognized when a specific account is determined to be uncollectible
• No valuation account is used

Bad Debt Expense XX
A/R XX

Question 20

Calculating Bad Debt Expense: I/S Approach: % of Credit Sales Method

Answer 20

• Base expense on a % of Credit Sales
• Record expense at point of sale

Credit Sales x % estimate uncollectible = Actual Bad Debt Expense to be recorded

Bad Debt Expense XX
Allowance XX

Question 21

Calculating Bad Debt Expense: B/S Approach: % of Receivables

Answer 21

Outstanding A/R x Uncollect. % of A/R (estimate) = Total Allowance

Entry is made to “adjust” the allowance to what it should be

To W/O Receivable:
Allowance XX
A/R XX

Question 22

A/R is recorded at FV or PV?

LT Rec’v recorded at FV or PV?

Answer 22

A/R occurs in the normal course of business - so record at FV

LT Rec’v do not occur in the normal course of business - so record at PV

Question 23

What is the difference between factoring receivables WITH recourse and WITHOUT?

Answer 23

WITH - The risk of the transfer remains with the Transferor

WITHOUT - risk is assumed by the Transferee (the factor)