F4.1 Working Capital and Its Components Flashcards
Working Capital
Work in capital = Current assets – Current Liabilities
Current Assets
Current assets = resources that are expected to be realized or consumed within the business cycle or a year, which went whichever is longer
Includes – Cash – Trading securities - Other short-term investments – Accounts and notes receivable – Trade installment receivables – Inventories – Other short-term receivables – Prepaid expenses – Cash surrender value of life insurance
Current Liabilities
Current liabilities = obligations to be settled by the use of a current asset, or rolled over into another current liability.
Current liabilities arise from regular business operations or bank borrowings
Curent Liabilities Include: – Trade accounts and notes payable – Current portions of long-term debt – Dividends payable – Accrued liabilities – Payroll liabilities – Taxes payable – Advances from customers
Under US GAAP, a short-term obligation can be excluded from current liabilities if the company intends to refinance it on a LT-basis
– Not allowed under IFRS
Cash and Cash Equivalents
Cat = currency and demand deposits
Cash equivalents = short-term, highly liquid investments readily convertible to cash, maturity less than 90 days
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Cash and Cash Equivalents – Included in Cash and Cash Equivalents
Coin and currency on hand (including petty cash)
– Checking accounts
– Savings accounts
– Money market funds
– Deposit held as compensating balances against borrowing arrangements with a lending institute that are not legally restricted
– Negotiable paper
– Bank checks, money orders, traveler’s checks, bank drafts, and cashier’s checks
– Comercial paper and T-bills
– Certificate of deposits with ≤ 90 days maturity
Not cash or Cash Equivalents:
– Time certificates of deposit with original maturity > 90 days
– Legally restricted deposits held as compensating balances against borrowing arrangement with a lending institution
Cash and Cash Equivalents – Restricted vs Unrestricted Cash
Disclose nature, amount, and timing of restrictions in footnotes..
Restricted cash associated with current asset or current liability = current asset
– List separate from unrestricted cash
Restricted cash associated with concurrent asset or concurrent liability = noncurret asset
– Separate from Investments or Other Assets section.
Cash restricted by management = current or LT asset depending on anticipated date of disbursement
– Indicate that it is restricted cash
Cash and Cash Equivalents – Bank Reconciliation
Simple Reconciliation - explains differences between cash balance per bank and cash balance per depositors
Reconciliation of cash receipts and disbursements (4 column reconciliation) = proof of cash
– Need information of rthe present month and prior month
Cash and Cash Equivalents – Simple Reconciliations
Deposits in Transit = Bank balance understated
Outstanding Checks (not yet presented to bank) = Bank balance understated
Service charges (deducted by bank) = Book balance overstated
Bank collections (on behalf of depositor) = Book balance understated
Errors – depends on nature of error
Nonsufficient Funds (charged for dishonored check) = book balance overstated
Interest income = Book balance understated
Accounts Receivable
A/R = oral promises to pay
A/R - current assets
Trade receivables or non-trade receivables
– Non-trade receivables = A/R from persons other than customers
Accounts Receivable – Discounts
Discounts quoted as 2/10, n/30
– 2% discount if pay within 30 days, A/R due latest 30 days
Can record using the gross or net method
– Gross method = record sale without regard to available discount
– Net discount = record sale net of available discount
Trade discounts applied sequentially
Accounts Receivable – Discounts: Gross Method Journal Entries
To record Sale
A/R (Gross Amount)
Sales Revenue (Gross Amount)
If Discount Taken
Cash (Discounted Amount)
Sales Discount Taken
A/R (Gross Amount)
If discount not taken
Cash (Gross Amount
A/R (Gross Amount)
Accounts Receivable – Discounts: Net Method Journal Entries
To record Sales
A/R (Discounted Amount)
Sales Revenue (Gross Amount)
Discount Taken
Cash (Discounted Amount)
A/R (Discounted Amount)
Discount Not Taken
Cash (Gross Amount)
A/R (Discounted Amount)
Sales Discount not taken
Accounts Receivable – Sales Returns and Allowances
To record Sales:
A/R
Sales Revenue
To record a sales return
Sales return and allowances
A/R
Sales Return and Allowances is a contra Sales account.
– Charge returns to this account rather than deduct Sales Revenue. This way, can disclose amount of Returns.
Uncollectible Accounts Receivable
2 Methods: 1. Direct Write-Off Method – Not GAAP – Used for Tax purposes 2. Allowance Method = US GAAP
Uncollectible Accounts – Direct Write-Off Method
To record Sale
Accounts Receivable
Sale
To record account become uncollectible
Bad Debt Expenses
Accounts Receivables
Subsequent collection of account
Cash
Uncollectible Accounts Recovered
