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

Recording legally restricted or segregated cash

Answer 12

As long term asset - Investment

Question 13

Treatment of unmarked check

Answer 13

Not deducted from cash balance

Question 14

Treatment of overdrawn bank balance

Answer 14

Presented as current liability unless other accounts at same bank have sufficient cash

Question 15

Examples of credits to AR

Answer 15

Sales returns, write-offs, collections

Question 16

Treatment of interest from note receivable

Answer 16

Included as current asset in interest receivable

Question 17

Calculate interest receivable

Answer 17

Face value x stated rate x time

Question 18

Calculate interest revenue

Answer 18

Carrying amount x effective rate x time

Question 19

Treatment of accounting loss

Answer 19

Cannot exceed the amount of AR recognized as an asset

Question 20

Basis of aging receivables method of I collectible accounts

Answer 20

Theory that bad debts are function of AR collections during the period

Question 21

Treatment of previously written of bad debts

Answer 21

1. DR - AR ; CR - allowance for doubtful accounts

2. DR - Cash ; CR - AR

Question 22

What is an assignment

Answer 22

Owner obtains loan by pledging receivable

Question 23

What is factoring

Answer 23

Sale of receivables

Question 24

Treatment of factored receivables and control surrendered

Answer 24

Treat as sale, risk of uncollectible accounts not retained by seller without recourse

Question 25

Calculate cash for factoring

Answer 25

Ar - holdback - fee - interest expense ( AR x rate x avg days / 365

Question 26

What is financial component approach

Answer 26

Seller has continued involvement, reduce AR, recog asset obtained and liabilities incurred, record g/l DR - cash , holdback , loss CR - AR , recourse liability at FV

Question 27

What is due from factor (holdback)

Answer 27

Account for probable sales discounts, returns, allowances.

Question 28

What is recourse liability

Answer 28

Recorded to indicate probable uncollectibles

Question 29

When is sale of receivables recognized?

Answer 29

1. Receivables beyond reach of transferor and transferors creditors 2. Transferor has no repurchase agreement 3. Tranferee can resell or pledge receivables

Question 30

How should serving assets and liabilities be amortized?

Answer 30

In proportion to and over period of estimated net servicing income or net servicing loss

Question 31

Treatment of transfer of financial asset but continuing interest in serving asset

Answer 31

Held at difference between carrying value and amount de-recognized

Question 32

What is a pledge

Answer 32

An arrangement of having collateral transferred to secured party

Question 33

Calculate net proceeds and gain of loan sold with swaps and options

Answer 33

Net proceeds = cash received + call options + interest rate swaps - recourse obligation Gain = net proceeds - carrying value of loan sold

Question 34

How are financial assets subject to prepay measured

Answer 34

As investments in debt securities classified as AFS or trading

Question 35

Calculate effective interest rate

Answer 35

Effective interest rate = interest paid / cash received

Question 36

Calculate contributions (like a bonus) based on percentage of income after bonus

Answer 36

C = C% x (income - C) C = C%xIncome - C%xC C + C%x C = C%xIncome C%xIncome / (C + C%xC)

Question 37

Disclosure of aggregate amount of payments for unconditional purchase obligations

Answer 37

Disclose for each year for 5 years after balance sheet date

Question 38

Estimate to use when contingent liability is probable

Answer 38

Best estimate or lower range of estimate

Question 39

When are remote contingencies disclosed

Answer 39

Guarantee of others debts, standby letter of credit by bank, agreement to repurchase receivables, related party transactions

Question 40

When to accrue vacation time?

Answer 40

1. Obligation arises from prior services 2. Arises from rights that vest or accumulate 3. Payment probable 4. Amount estimateable

Question 41

When can warranty obligation be recorded at FV?

Answer 41

Only if contract can be settled by 3rd party

Question 42

How is asset retirement obligation (ARO) recorded and adjusted

Answer 42

Recorded at FV and adjusted for estimates using discounted cash flows and accretion expense (increase in expense due to time)

Question 43

Treatment of land held for resale

Answer 43

Included in current assets

Question 44

Examples of current liabilities

Answer 44

AP, dividends payable, bonds payable in next year (less discounts)

Question 45

Calculate operating cycle

Answer 45

days sales in inventory + # days sales in AR

Question 46

IFRS disclosure of contingent assets

Answer 46

Not accrued, disclose if probable

Question 47

Under IFRS, treatment of debt if covenant missed

Answer 47

Debt reclassified as current

Question 48

What are IFRS provisions

Answer 48

Accounts that are uncertain to amounts or timing

Question 49

What are IFRS contingencies

Answer 49

Event which is not recognized on F/S because it is not probable that an outflow will be required or the amount cannot be reasonably estimated