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?
A liability expected to be paid within 12 months or less
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
When are loss contingencies recorded?
If Probable - they are accrued (if estimable) and disclosed
If Reasonably Possible - they are disclosed
If Remote - don’t accrue or disclose
Accounts Payable Gross Method
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
Accounts Payable Net Method
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
Deferred Revenue
Revenue Collected, but not yet earned
Cash XX
Unearned Revenue XX
Unearned Revenue XX
Revenue XX
Service Contract
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
Compensated Absences
A company will report a liability for future compensated absences if all 4 of the following conditions are met:
- Obligation for compensation of future absences result from services already rendered
- Right to compensated absences either vests or accumulates.
- Payment is probable
- Amount of the payment can be reasonably estimated
Purchase Commitment
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.
What are the 3 ways to calculate bad debt expense and which are GAAP allowable?
- Direct Write-Off Method (Violates GAAP, used for Tax)
- I/S Approach: % of Credit Sales (GAAP)
- B/S Approach: % of Receivables (GAAP)
Calculating Bad Debt Expense: Direct Write-Off Method
- 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
Calculating Bad Debt Expense: I/S Approach: % of Credit Sales Method
- 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
Calculating Bad Debt Expense: B/S Approach: % of Receivables
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
A/R is recorded at FV or PV?
LT Rec’v recorded at FV or PV?
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
What is the difference between factoring receivables WITH recourse and WITHOUT?
WITH - The risk of the transfer remains with the Transferor
WITHOUT - risk is assumed by the Transferee (the factor)
