F4-Working Capital Flashcards
When are discounts recorded under the gross method?
Under the gross method, discounts are recorded only when used.
Under the net method, when are discounts recorded?
Under the net method, discounts are recorded whether used or not.Unused discounts are allocated to financing expense.
Working Capital
- Current Assets Minus Current Liabilities
- Measure of the Solvency of a company
Short-term obligation
[US GAAP]
- May be excluded from Current Liabilities & included in Non-current debt
Cash & Cash Equivalents
- Both currency & demand deposits with banks &/or other financial institutions
- Similar to demand deposits~ can be withdrawn at any time
- Highly liquid investments readily convertible to cash near maturity date.
- Insignificant risk of changes in value
Restricted or Unrestricted Cash
Restricted- Cash that has been set aside for a specific use or purpose
UnRestricted- - Used for all current operations
Current Asset/Liability-Cash Restrictions
- Classify as current asset but separately from unrestricted cash.
NON-Current Asset/Liability- Cash Restrictions
- Classify as a Non-current asset but separate from either the Investment or Other Assets Section
Valuation of A/R
- NRV
- Should be initially valued at the original transaction amount (historical cost)
- But that amount may be adjusted for items of sales or cash discounts & sales returns.
Estimating Uncollectible A/R Methods [I/S& GAAP]
- Percentage of Sales Method ( I.S. Approach)
- Allowance Method (GAAP)
- Direct Write-off Method (NOT GAAP)
Charged to Earnings for Bad Debt Expense of the period usually includes:
- Provision made during the period
- Adjustment made at year end to increase/decrease the balance in the allowance for uncollectible accts.
Pledging (Assignment)
- Company uses existing accounts receivable as collateral for a loan.
- Retains title to the receivable but ‘Pledges’ that it will use the proceeds to pay the loan
- Requires Note disclosures
- A/R not adjusted.
Factoring of A/R with Recourse
- Factor has an option to resell any uncollectible receivables back to the seller.
- Considered a Sale or a Loan
Factoring of A/R WITHOUT Recourse
- Sale is final
- Assumes the risk of any losses on collections
- If buyer can’t collect then no recourse against the seller.
Notes Receivable
- Written promise to pay a debt called Promissory Note
- Classified same as A/R
- Either Current or Long-term Asset depending when collection will occur
Notes Receivable: Unearned interest & Finance Charges are?
Deducted from the face amount of related promissory note.
Discounting Notes Receivable
- Endorse the note to 3rd party & receives a sum of cash.
- Received by holder- applying a ‘discount rate’ to the maturity value of the note.
If the company intends to refinance Short-term obligation on a Long-term basis:
[US GAAP]
- Intent Supported by either:
~ Actual refinancing prior to issuance of F.S.
OR
~ Existence of a non-cancelable financing agreement from a lender having the Fin. resources to accomplish it.
Notes Receivable: Non-interest bearing or interest rate is Below Market, Value of note determined by?
- Imputing Market Rate & Effective Interest Method.
B/S Approach for Estimating Uncollectible A/R Methods
- % of A/R at Year-end Method
- Aging of Receivables Method
How is the Quick Ratio calculated?
(Cash + A/R + Trading Securities) / Current Liabilities
How is A/R Turnover calculated?
Credit Sales / Average A/R
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
