F4 Notecards Flashcards
Working Capital definition
- Current assets - current liabilities
- Measures solvency of a company (ability to pay its debts)
Examples of Current Assets
- Cash
- Trading securities
- AR & NR
- Trade installment receivables
- Inventories
- Prepaid expenses
- Cash surrender value of life insurance (if intent to surrender for cash is during normal operating cycle)
Examples of Current Liabilities
- Trade accounts and NP
- Current portions of long-term debt
- Cash dividends payable
- Accrued liabilities
- Payroll liabilities
- Taxes payable
- Advances from customers
US GAAP: How to classify ST obligations expected to be refinanced:
-May be moved to noncurrent section if company intends to refinance and has the ability to
Ability to Refinance shown by:
1- Actual refinancing before statements OR
2- Existence of a noncancelable financing agreement
IFRS: How to classify ST obligations expected to be refinanced:
Have to be shown in current section- no special treatment
Cash & Cash Equivalents definitions:
Cash- currency and demand deposits
Cash Equivalents- includes ST highly liquid investments both readily convertible to cash and has an original maturity of 90 days or less
Examples of Cash & Cash Equivalents:
- Coin/currency/petty cash
- Checking accounts
- Savings accounts
- Money market funds
- Negotiable paper
- Compensating balances that are NOT legally restricted
Items NOT cash or cash equivalents:
- CDs with maturity over 90 days
- Legally restricted deposits held as compensating balances
Definition of Restricted Cash
Cash that has been set aside for specific use
Definition of Unrestricted Cash
Cash used for all current operations
If cash restriction is associated with a CA or CL:
Classify as current asset by separate from unrestricted cash
If cash restriction is associated with a noncurrent A or L:
Classify as a noncurrent asset but separate from either Investments or Other Assets section
2 Types of Bank Reconciliations
1- Simple Reconciliation
2- Reconciliation of cash receipts and disbursements
Goal of simple bank reconciliation:
To calculate the true balance
How to treat items in a simple reconciliation:
- Deposits in transit - add to bank balance
- Outstanding checks - subtract from bank balance
- Service charges - subtract from books
- Bank collections - add to books
- Errors- add/subtract
- NSF Items - subtract from books
- Interset Income - add to books
Accounts Receivable definition:
- Oral promises to pay debts
- Classified as trade receivables or non-trade receivables
NRV of AR definition:
The balance of the AR account adjusted for allowances and sales returns
Discounts
- For speedy payments
- Can be net or gross
Gross Method of Discounts
Ignores discount during booking. If discount taken, book adjustment later
Net Method of Discounts
- Records the discount at the beginning. If discount not taken, book adjustment later
- If not taken, “Sales Discounts not taken” account needs to be credited
Trade Discounts
- Emphasis on quantity, not speed
- Applied sequentially, not added together
General Rule of recognizing sales returns and allowances
- Wait until actual
- Only if past experience shows material percentage, then you estimate and accrue
- Estimated exchanges do not affect anything
2 method of recognizing uncollectible accounts receivable
1- Direct Write-off Method
2- Allowance Method
Direct Write-Off Method
- Not GAAP (because it’s a nonaccrual basis)
- Usually just used for tax purposes
- Wait to see who doesn’t pay, and then write off
Allowance Method
- GAAP
- Estimate and book it now
3 Methods under the Allowance Method
1- % Sales Method (I/S approach)
2- % AR Method (B/S approach)
3- Aging AR Method (B/S approach)
Allowance Method for Subsequent Collection of an AR balance already written off (2 steps)
Step 1: Reverse the write-off entry
Step 2: Record the cash collection on the account
Definition and accounting treatment for Pledging:
- Uses existing AR as collateral for a loan
- Dr. Cash; Cr. NP
- Requires footnote
2 Ways to Factor AR:
1- Without Recourse
2- With Recourse
Without Recourse
“True Sale”
-sale is final; assumes risk of any loss
With Recourse
- Can be a sale or loan
- Factor has option to re-sell any uncollectible AR back to the seller
In order for a “with recourse” item to be a sale, ALL must apply:
- Obligation for uncollectible accounts can be reasonably estimated
- Surrenders control of future benefits
- Cannot be required to repurchase
Due from Factor
Security- reflects proceeds retained by factor
Notes Receivable definition
- Written promises to pay debt
- Current asset or LT asset
Discounting Notes Receivable
Selling notes to get cash now
Discounting NR with recourse
Holder remains liable
Discounting NR without recourse
True sale- no further liability
