F4 - Working Capital and Its Components.

Question 1

What is working capital?

Answer 1

Current asset minus current liabilities. It is a measure of the solvency(ability to pay debt and short term financial risk of a company and used in many financial ratios for analysis.

Question 2

wha are the formula of working capial, current rario, and quick ratio?

Answer 2

Working capital = current assets - current liabilities.
Current ratio = current assets/current liabilities.
Quick Ratio = CA - Inventory(cash+net receivables+marketable securities)/current liabilities.
The ratio is bigger, then the risk is lower.

Question 3

explain “cash surender value of life insuance”?

Answer 3

cash surrender value of life insuance can be a current asset or non-current asset depending on intent. if the policy owner intend to sell the policy for cash during the normal operating cycle, it is curent asset. if the policy owner does not intend to sell the policy, then it is non-current asset. if an insurance policy has a cash surender value, then any portion of the premium payment that does not add to that cash surrender value is expensed.

Question 4

what the concept of curent liabilities?

Answer 4

The estimates or accrued amounts that are expected to be required to cover expenditures within a year for known obligation.

Question 5

how to determine the current liability?

Answer 5

it is based on “matching principle”. does the payment due within the next-year?

Question 6

• Explain “classification of short-term obligation expected to be refinanced”?

Answer 6

a short-term obligation may be excluded from current liabilities and included in noncurrent debt if the company a. intends to refinance it on a long-term basis and the intent is supported by the b. ability to do so as evidenced either by:

1. the actual refinancing prior to the issuance of FS.
2. The noncancelable financing agreement from a lender having the financial resources to accomplish the financing.

Question 7

what is cash equivalent?

Answer 7

the definition of cash includes short-term, high liquid investment that are readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from date of purchase) that they present insignificant risk of changes in value.

Question 8

how to recognize “compensation balanace” as cash?

Answer 8

when compensating balance was not restricted by law, then it is cash.

Question 9

cash is classify as restricted and un restricted, how to recognize them?

Answer 9

restricted cash - set aside for specific use (purchase for PP&E).
nonrestricted cash - for all current operation. (CA or CL)

Question 10

what’s goal of “bank reconciliation”?

Answer 10

1. one form is called “simple reconciliation”

2. the other is widely used from is entitled reconciliation of cash receipt and disbursement.

Question 11

explain “simple reconciliation”?

Answer 11

the goal is calculate “true balance”
1. deposit in transit - add to bank balance.
2. outstanding check - subtract from bank balance.
those 2 items are belong to bank adjustment.

Question 12

explain what is account receivable?

Answer 12

A/R are oral promise to pay debts and classified as current assets. they are classified as trade receivable (A/R from purchasers of our goods and services).
or non-trade receivables (from person other then customers, such as tax refunds, advance to employee).

Question 13

what is “net realizable value”?

Answer 13

it is account receivable that is adjusted for allowances that may be uncollectable, sales discount, sales return, and allowances.

Question 14

in speed A/Rdiscount, there are 2 ways to calculate cash discount for A/R. what is gross method?

Answer 14

record sale without available discount, if they pay within a discount period, then we do contra revenue.

Question 15

explain the 2nd way of calculating speed A/R cash discount “net method”?

Answer 15

it records sales and A/R net of available discount. an adjustment is not needed if payment is received within discount period. if payment is not received within discount period, then revenue must be credited.

Question 16

explain what is “trade discount” in A/R?

Answer 16

trade discount is different then speed discount. trade discount is net quantity discount (sales revenue and accounts receivable are record as net quantity discount). trade discount is applied sequentially.

Question 17

what is the general rule of sales return and allowance?

Answer 17

wait to see actual what happen. if past experience shows material percentage of receivable are returned, then we estimate and accrued the allowance.

Question 18

• estimating uncollectable AR?

Answer 18

AR should be presented on the balance sheet at net realizable value. GROSS - ALLOW = NRV.
2 methods of recognizing uncollectable AR (write off and allowance). only the allowance method is consistent with accrual accounting. (GAAP).

Question 19

what is write-off method?

Answer 19

Not Gaap. no accrual. wait actual. not matching principle.

Question 20

** what is allowance method?

Answer 20

GAAP. the goal is estimating and booking now. it is matching principle. 3 ways of allowance methods.

1. % of sales method (income stmt approach) - emphasizing matching (bad debt expense)
2. % of AR at year-end method (balance sheet method) - focus on required ending balance rather than bad debt experience.
3. aging of receivable method. (emphasize asset valuation- NRV)

Question 21

explain write-off bad debts expense?

Answer 21

under GAAP, only allowance methods can be used.
DR - allowance for doubtful account.
CR - accounts receivable.

Question 22

explain “allowance” for uncollectable?

Answer 22

a percentage of each period of sales or ending AR is estimated to be uncollectable.
there are 3 methods of estimating uncollectable or doubtful accounts under the allowance method.

Question 23

how to treat allowance in T account?

Answer 23

allowance is contra assets = gain allowance in credit, loss allowance in debit side. which is opposite to assets T account.

Question 24

what is AR pledging?

Answer 24

the process of using AR as a collateral to a loan.

Question 25

explain factoring of AR?

Answer 25

without recourse - sale

with recourse - sale or loan(AR collateral).

Question 26

what is the journal entries of non recourse AR factoring - sale?

Answer 26

DR - cash 94
DR- due from factor (security) 1
DR - loss on sale of receivable. 5
CR - AR 100

Question 27

how to figure out non - recourse AR factoring?

Answer 27

the buyer can resell the AR to seller is that AR becomes uncollectable.

Question 28

with recourse, what are the 3 transfers need to consider as a sale?

Answer 28

1. the sellers’ obligation for uncollectable amount must be estimated.
2. the seller’s surrender control of future economic benefit of the AR to the buyer.
3. the seller cannot be require to buy back the receivable, but may be ask to use other receivable to replace the one.

If any of the above is not met, then it is loan - just footnote on FS.

Question 29

in AR, we focused on NRV(net realizable value). in notes receivable, we focus on what?

Answer 29

PVFCF (present value of future cash flow). note receivable is written as promise to pay debt instead of oral (A/R). NR is classified as the same as A/R, they all have short-term(within one year) and long-term.

Question 30

what to do with notes receivable with recourse?

Answer 30

DR - cash

CR - notes receivable discounted (contra asset) or note receivable (disclose contingent liability in the note).

Question 31

explain Note receivable without recourse?

Answer 31

it is true sale. no further liability.
DR - cash
DR - loss
CR - notes receivable.

Question 32

what is AR blank analysis format?

Answer 32

BASE. 
B - begin balance.
A - add (credit of sale).
S - subtract (write-off, cash receivable, convert to note)
E - ending balance.

Question 33

name the 2 ways of “estimating uncollectable A/R”?

Answer 33

1. write-off method(not GAAP).
2. Allowance Method(GAAP). It is accrual and uses matching principle. The allowance for uncollectable should be based on past experience.

Question 34

what are the 3 methods of estimating uncollectable or doubtful accounts under the allowance method?

Answer 34

1. Percentage of sales method (income stmt approach, emphasizing matching).
2. Percentage of A/R at year-end Method (balance sheet approach),
3. Aging of A/R method(balance sheet method).