FAR 4 - Working Capital and Its Components Flashcards
What is working capital formula? Current ratio formula? Quick ratio?
Working Capital = Current Assets - Current Liabilities
Current Ratio = Current Assets / Current Liabilities
Quick ratio = (Cash + Net receivables + Marketable securities) / Current Liabilities
The bigger the ratio = the less financial risk
What are examples of current assets?
1) Cash
2) Trading securities
3) Other short investments (available for sale securities if liquidation is anticipate within the operating cycle or one year, whichever is longer)
4) Accounts and notes receivable
5) Trade installment receivables
6) Inventories
7) Other short term receivables
8) Prepaid expenses
9) Cash surrender value of life insurance (If intent on receiving cash surrender value during operating cycle it is CURRENT, if no intent on receiving cash surrender value until later NONCURRENT
What are examples of current liabilities?
1) Trade accounts and notes payable
2) Current portions of long-term debt
3) Cash dividends payable
4) Accrued liabilities
5) Payroll liabilities
6) Taxes payable
7) Advances from customers (deferred revenues)
Difference between U.S. GAAP and IFRS for refinancing of short-term liability?
Under U.S. GAAP you can include short-term debt in noncurrent liability.
The company INTENDS to refinance short-term debt with long-term debt:
1) The actual refinancing is prior to the issuance of financial statements OR
2) The existence of noncanceable financing agreement from a lender having the financial resources to accomplish the refinance
Under IFRS, you can NOT include short-term debt refinanced with long-term debt in noncurrent liability.
What is the journal entry for refinancing short term debt with long term debt?
Dr: Short-term liability
Cr: Long-term liability
What are examples of cash and cash equivalents?
1) Coin and currency on hand (petty cash)
2) Checking accounts
3) Savings accounts
4) Money Market Funds
5) Deposits held as compensating balances against borrowing arrangements with lending institution that are NOT legally restricted
6) Certificate of deposit (having original maturities of 90 days or less) - it has to retire within 90 days
What are examples that are NOT cash and cash equivalents?
1) Time certificate of deposit (if original maturity is over 90 days - it will retire longer than 90 days
2) Legally restricted deposits held as compensating balances against borrowing arrangements with a lending institution.
Difference between restricted and unrestricted cash?
Restricted cash is set aside for purpose of buying property, plant, and equipment etc.
Unrestricted cash is used for all current operations
1) If restriction is associated with current asset or current liability classify as current asset but separate from unrestricted cash
2) If restriction is associated with noncurrent asset or noncurrent liability, classify as noncurrent asset but separate from either the Investment or Other Assets section
Simple reconciliation - what are adjustments to bank balance?
Deposits in transit - Add to bank
Outstanding checks - Subtract from bank
Simple reconciliation - what are adjustments to book balance?
Service charges - Subtract from book
Bank collections - Add to book
Errors - Fix errors per book balance
Non-sufficient funds - Subtract from book
Interest income - Add to book
What is goal of simple reconciliation?
To calculate TRUE balance between bank statement and books
What is accounts receivable? What is trade receivable and non-trade receivable?
Accounts receivable are oral promises to pay debt and are classified as current assets.
Trade receivable - customers who money
Non-trade receivables - anyone other than customers who owe money
T - ACCOUNT for accounts receivable
Left + Right -
(+ Beg.) (- Write offs)
(+ Credit (- Convert to Note
Sales) If customer gives Note)
(- Cash Collected)
(End)
What is net realizable value of accounts receivable?
The gross is full amount. There is no way you will collect full amount of accounts receivable.
The net realizable value of accounts receivable is the balance of accounts receivable account adjusted for allowances for receivables that may be uncollectible, sales discounts, and sales returns and allowances.
What does 2/10, n/30 mean?
A discount of 2% of the sales price if the payment is made within 10 days. If payment not made in 10 days, pay entire gross amount in 30 days.
The net is 2% discount included. The gross is no discount included.
