F4 Notecards

Question 1

Working Capital definition

Answer 1

• Current assets - current liabilities

- Measures solvency of a company (ability to pay its debts)

Question 2

Examples of Current Assets

Answer 2

• 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)

Question 3

Examples of Current Liabilities

Answer 3

• Trade accounts and NP
• Current portions of long-term debt
• Cash dividends payable
• Accrued liabilities
• Payroll liabilities
• Taxes payable
• Advances from customers

Question 4

US GAAP: How to classify ST obligations expected to be refinanced:

Answer 4

-May be moved to noncurrent section if company intends to refinance and has the ability to

Question 5

Ability to Refinance shown by:

Answer 5

1- Actual refinancing before statements OR

2- Existence of a noncancelable financing agreement

Question 6

IFRS: How to classify ST obligations expected to be refinanced:

Answer 6

Have to be shown in current section- no special treatment

Question 7

Cash & Cash Equivalents definitions:

Answer 7

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

Question 8

Examples of Cash & Cash Equivalents:

Answer 8

• Coin/currency/petty cash
• Checking accounts
• Savings accounts
• Money market funds
• Negotiable paper
• Compensating balances that are NOT legally restricted

Question 9

Items NOT cash or cash equivalents:

Answer 9

• CDs with maturity over 90 days

- Legally restricted deposits held as compensating balances

Question 10

Definition of Restricted Cash

Answer 10

Cash that has been set aside for specific use

Question 11

Definition of Unrestricted Cash

Answer 11

Cash used for all current operations

Question 12

If cash restriction is associated with a CA or CL:

Answer 12

Classify as current asset by separate from unrestricted cash

Question 13

If cash restriction is associated with a noncurrent A or L:

Answer 13

Classify as a noncurrent asset but separate from either Investments or Other Assets section

Question 14

2 Types of Bank Reconciliations

Answer 14

1- Simple Reconciliation

2- Reconciliation of cash receipts and disbursements

Question 15

Goal of simple bank reconciliation:

Answer 15

To calculate the true balance

Question 16

How to treat items in a simple reconciliation:

Answer 16

• 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

Question 17

Accounts Receivable definition:

Answer 17

• Oral promises to pay debts

- Classified as trade receivables or non-trade receivables

Question 18

NRV of AR definition:

Answer 18

The balance of the AR account adjusted for allowances and sales returns

Question 19

Discounts

Answer 19

• For speedy payments

- Can be net or gross

Question 20

Gross Method of Discounts

Answer 20

Ignores discount during booking. If discount taken, book adjustment later

Question 21

Net Method of Discounts

Answer 21

• 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

Question 22

Trade Discounts

Answer 22

• Emphasis on quantity, not speed

- Applied sequentially, not added together

Question 23

General Rule of recognizing sales returns and allowances

Answer 23

• Wait until actual
• Only if past experience shows material percentage, then you estimate and accrue
• Estimated exchanges do not affect anything

Question 24

2 method of recognizing uncollectible accounts receivable

Answer 24

1- Direct Write-off Method

2- Allowance Method

Question 25

Direct Write-Off Method

Answer 25

• 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

Question 26

Allowance Method

Answer 26

• GAAP

- Estimate and book it now

Question 27

3 Methods under the Allowance Method

Answer 27

1- % Sales Method (I/S approach)
2- % AR Method (B/S approach)
3- Aging AR Method (B/S approach)

Question 28

Allowance Method for Subsequent Collection of an AR balance already written off (2 steps)

Answer 28

Step 1: Reverse the write-off entry

Step 2: Record the cash collection on the account

Question 29

Definition and accounting treatment for Pledging:

Answer 29

• Uses existing AR as collateral for a loan
• Dr. Cash; Cr. NP
• Requires footnote

Question 30

2 Ways to Factor AR:

Answer 30

1- Without Recourse

2- With Recourse

Question 31

Without Recourse

Answer 31

“True Sale”

-sale is final; assumes risk of any loss

Question 32

With Recourse

Answer 32

• Can be a sale or loan

- Factor has option to re-sell any uncollectible AR back to the seller

Question 33

In order for a “with recourse” item to be a sale, ALL must apply:

Answer 33

• Obligation for uncollectible accounts can be reasonably estimated
• Surrenders control of future benefits
• Cannot be required to repurchase

Question 34

Due from Factor

Answer 34

Security- reflects proceeds retained by factor

Question 35

Notes Receivable definition

Answer 35

• Written promises to pay debt

- Current asset or LT asset

Question 36

Discounting Notes Receivable

Answer 36

Selling notes to get cash now

Question 37

Discounting NR with recourse

Answer 37

Holder remains liable

Question 38

Discounting NR without recourse

Answer 38

True sale- no further liability