F4-Working Capital

Question 1

When are discounts recorded under the gross method?

Answer 1

Under the gross method, discounts are recorded only when used.

Question 2

Under the net method, when are discounts recorded?

Answer 2

Under the net method, discounts are recorded whether used or not.Unused discounts are allocated to financing expense.

Question 3

Working Capital

Answer 3

• Current Assets Minus Current Liabilities

- Measure of the Solvency of a company

Question 4

Short-term obligation

[US GAAP]

Answer 4

• May be excluded from Current Liabilities & included in Non-current debt

Question 5

Cash & Cash Equivalents

Answer 5

• 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• Similar to demand deposits~ can be withdrawn at any time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

Question 6

Restricted or Unrestricted Cash

Answer 6

Restricted- Cash that has been set aside for a specific use or purpose

UnRestricted- - Used for all current operations

Question 7

Current Asset/Liability-Cash Restrictions

Answer 7

• Classify as current asset but separately from unrestricted cash.

Question 8

NON-Current Asset/Liability- Cash Restrictions

Answer 8

• Classify as a Non-current asset but separate from either the Investment or Other Assets Section

Question 9

Valuation of A/R

Answer 9

• 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.

Question 10

Estimating Uncollectible A/R Methods [I/S& GAAP]

Answer 10

• Percentage of Sales Method ( I.S. Approach)
• Allowance Method (GAAP)
• Direct Write-off Method (NOT GAAP)

Question 11

Charged to Earnings for Bad Debt Expense of the period usually includes:

Answer 11

• Provision made during the period

- Adjustment made at year end to increase/decrease the balance in the allowance for uncollectible accts.

Question 12

Pledging (Assignment)

Answer 12

• 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.

Question 13

Factoring of A/R with Recourse

Answer 13

• Factor has an option to resell any uncollectible receivables back to the seller.
• Considered a Sale or a Loan

Question 14

Factoring of A/R WITHOUT Recourse

Answer 14

• Sale is final
• Assumes the risk of any losses on collections
• If buyer can’t collect then no recourse against the seller.

Question 15

Notes Receivable

Answer 15

• 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

Question 16

Notes Receivable: Unearned interest & Finance Charges are?

Answer 16

Deducted from the face amount of related promissory note.

Question 17

Discounting Notes Receivable

Answer 17

• 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.

Question 18

If the company intends to refinance Short-term obligation on a Long-term basis:
[US GAAP]

Answer 18

• 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.

Question 19

Notes Receivable: Non-interest bearing or interest rate is Below Market, Value of note determined by?

Answer 19

• Imputing Market Rate & Effective Interest Method.

Question 20

B/S Approach for Estimating Uncollectible A/R Methods

Answer 20

• % of A/R at Year-end Method

- Aging of Receivables Method

Question 21

How is the Quick Ratio calculated?

Answer 21

(Cash + A/R + Trading Securities) / Current Liabilities

Question 22

How is A/R Turnover calculated?

Answer 22

Credit Sales / Average A/R

Question 23

How is Days to Collect A/R calculated?

Answer 23

Average A/R / Average Sales per Day

Question 24

How are gain contingencies recorded?

Answer 24

They are NOT accrued due to Conservatism

Question 25

When are loss contingencies recorded?

Answer 25

If Probable - they are accrued (if estimable) and disclosed

• If Reasonably Possible - they are disclosed
• If Remote - don’t accrue or disclose