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 or one year, whichever is longer. Includes: Demand deposits, cash equivalents, accounts receivable, inventory, pre-paids, and short-term investments, trading securities, cash surrender value of life insurance

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

Is cash surrender value of life insurance a current asset or a non-current asset?

Answer 12

If the policy owner intends to surrender the policy for its cash surrender value during the normal operating cycle, it is a current asset. Note: any portion of the premium payment that does not add to that cash surrender value is expensed

Question 13

When may a short-term liability (obligation) be excluded from current liabilities and included in concurrent?

Answer 13

If the company intends to refinance it on a long-term basis and this intent is evidenced by: actual refinancing prior to the issuance of financial statements or a non cancelable financing agreement from a lender exists

Question 14

What are cash equivalents?

Answer 14

Short-term, highly liquid investments that are both readily convertible to cash and so near their maturity (within 90 days or less from date of purchase) when acquired that they present insignificant risk of changes in value. Remember: original maturity date of 90 days or less

Question 15

Name two methods of accounting for uncollectibe accounts.

Answer 15

Direct Write off (Not GAAP)

DR: Bad debt expense

CR: Accounts receivable

Weaknesses: Bad debts are not matched to sales and accounts receivable are overstated

Allowance Method

DR: Allowance for uncollectible accounts

CR: Accounts Receivable

Strengths: Matches bad debts with credit sales. Accounts receivable fairly stated. Required by GAAP

Question 16

Name three methods for estimating uncollectibe accounts under the allowance method

Answer 16

• Percentage of credit sales (estimate the book now)
• Percentage of accounts (emphasizes matching)
• Aging of accounts receivable at year-end (emphasizes asset valuation NRV)

All methods are GAAP

Question 17

What is the difference between factoring with recourse and without recourse?

Answer 17

With Recourse

The factor may return the account to the company if it proves to be uncollectoble. Potential liability and risk of loss remains with the company

With Recourse

The factor assumes the risk of loss if the account is uncollectible

Question 18

Describe the calculation required to “discount” a note

Answer 18

1. Compute the maturity value by adding the interest to the face amount of the note
2. Compute the bank discount on the payoff value at maturity
3. Determine the amount paid by the bank for the note (maturity value-discount)
4. Compute interest income as the difference between proceeds and the face of the note

Question 19

Notes receivable may be discounted “with” or “without” recourse. What is the difference?

Answer 19

Discounting With Recourse

The holder remains contingently liable. Reported on the balance sheet with a corresponding contra account (Notes Receivable Discounted) indicating that they have been discounted to a third party. Alternatively, the notes receivable may be removed from the balance sheet and the dontingent liability disclosed in the notes to the financial statements

Discounting Without Recourse

The holder assumes no further liability after discounting