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FAR - 4 > Working capital and its compnents > Flashcards

Working capital and its compnents Flashcards

1
Q

Purpose of measuring wc

A

solvency

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2
Q

goal

A

assess ability to pay debts as they become due, short term financial obligations

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3
Q

working capital

A

current assets-current liabilities

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4
Q

current ratio

A

current assets/current liabilities

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5
Q

quick ratio

A

cas_net receivables+mkt securities / current liab

backed out inventory

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6
Q

the bigger spread between current assets adn current liab

A

less risk

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7
Q

current assets

A

converted to cash, sold or consumed its its a prepaid item during next operating cycle or 1 year whichever is longer

examples: cash, trading sec, afs if liquidation or expected to sell it within the oeprating cycle or year, a/r, trade installment receivable, prepaid expenses,

cash surrender value of life insurance can be current or non current: if the policy owner INTENDS to surrender within the next operating cycle will be current otherwise normal is non current. Any portion of the premium payment that does not add to the cash surrender value is expensed

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8
Q

current liab

A

liquidation is reasonable expected to require the use of current assets or the creation of current liab.

DEF: estimates or accrued amounts and expected amounts: when the amount can be determined approximately, specific person to whom payment is made can be ascertained

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9
Q

sources of current liab

A

operations: regular business operations like accounts payable
financing: bank borrowings to meet cash needs and these have interests

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10
Q

current liabilities examples

A

current portion of long term debt; dividends declared not paid (but is subtracted from RE), accrued expenses: book expenses not paid bill yet due to matching principle

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11
Q

short term obligation want to refinance

A

1) UNDER GAAP:
you can exclude this from current and put it in long term only if the company INTENDS AND HAS ABILITY to refinance (will qualify for loan)

can reclassify only if :

1) you have refinanced it prior to the issuance of fin statement even if its after year end OR
2) you have a noncancelable financing agreement from a lender who has the financial resources to go through with the refinancing

amount and description of the financing agreement should be disclosed in the notes or in the financial statements

dr. st liability
cr. long term liability/ stock Paid in capital if you refinance it by issuing stock instead

IFRS: leave it as a current liability till you actually refinance

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12
Q

demand deposits

A

can add or withdraw money without penalty

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13
Q

cash and cash equivalents

A

1) cash-> coin, checking savings accounts, money market funds, commercial paper, treasury bills, cd’s with original maturity over 90 days
2) demand deposits and deposits that are similar
3) short term highly liquid investments (readily convertible to cash adn near maturity when acquired by the entity (90 days or less from the date of purchase ))–> insignificant risk of change in value

4) deposits held as compensating balances against borrowing arrangements with a lending institution that is NOT legally restricted

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14
Q

NOT cash or cash eq.

A

time certificates of deposit if maturity over 90 days

*legally restricted compensation balances

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15
Q

restricted cash

A

cash set aside for a specific purpose

if restriction si associated with a current asset or current liab- leave it as a current asset

if restriction associated with non current asset/liab-> non current asset

could include contractually restricted cash or compensating balance-> not included in cash or cash eq if legal restrictions

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16
Q

unrestricted cash

A

can be used for all current operations

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17
Q

Example on page 6

A

NOTE DATES
*
unadjusted balance
*important when checks are dated

+ dated before jan 1

  • if its was returned bounced back due to nsf remove it
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18
Q

bank reconciliations

A

simple and reconcilation of cash receipts and disburesements

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19
Q

simple reconiliation

A

goal-> calculate the true balance between banks and books

despoits in transit or received after the bank’s cutoff date–> add to bank havent been added to bank yet

o/s check we mailed check but the receiver hasnt deposit it yet so we subtract it from the bank

service charge-> subtract from books

bank collection-> in bank balance not in books so add to book

fix errors

nfs-> subtract from book–> got check from customer and included it in our bank balance on books but not really there so subtract from books

interest income- banks aware bookkeeper isnt so add to books

credit and debit memos adjust balance sheet credit memos-> interest earned

check issued means meant to pay

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20
Q

simple bank recon

A

need to reconcile both amounts to a true balance and this balance needs to be the balance on the b/s

steps:

1) books balances adjusted
2) adjusted book balance = true balance
3) bank balances adjusted

1 and 3 should equal

*problem on 8

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21
Q

recon of cash receipts and disbursements

A

four column reconciliation or proof of cash

need reconciliation information for the present month and that of the prior month

balance -> receipt -> payment -> balance next month

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22
Q

A/R

A

t-account:
a/r oral promise to pay back generally not written down; no interest;
notes receivable written down-> promissory notes interests

come from:
trade receivables (a/r from purchases of the company's goods/services)

non trade receivables
(a/r from people other than customers so like income tax receivable)

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23
Q

net a/r or net realizable value

A

gross a/r-allowance

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24
Q

valuation of a/r in case of discounts

A

discounts is about speed- encourages prompt payment so people will pay in a certain time frame

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25
Q

discounts

A

sales or cash; trade

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26
Q

sales or cash

A

generally based on % of sp

sp if 2/10,n/30 then a discount of 2% on the sale price if the payment is made within 10 days. if discount not taken then the entire payment is due within 30 days

gross method and net method

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27
Q

gross method

A

totally ignore 2% discount because i dont think they are going to take it

so book the entire receivable

adjust if they pay us within time frame-> book contra revenue and debit it

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28
Q

net method

A

fairly confident that they are going to take the discount so you record receivable now net of discount

now if they dont take the discount adjust so book sales discount not taken account so (additional revenue and it is a revenue account that is credited.)

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29
Q

gross method and net method je page 11

A

*
gross if discount taken:

dr. cash
dr. sales discount taken
cr. a/r

net if not received within the discount period:

dr. cash
cr. a/r
cr. sales discount not taken

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30
Q

trade discounts

A

quantity discounts are quoted in %

sales rev and a/r and recorded NET of trade discounts

trade discounts are applied sequentially

** example

Total ar= list price- % disc 1 because they are a buying a certain number= subtotal 1 - %disc 2 = subtotal 2 or total

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31
Q

Sales returns and allowances

A

1) *EXPECTED EXCHANGES: do not affect sales, inv, cogs

if it actually occurs (wait for it to occur) and then are deducted from a/r and sales

EXCHANGE: shirt for shirt wrong size, difficult to estimate

Even return same story unless past history + reasonably estimate and material

RETURN:
Here expected is okay:
2) if returns are normal and “ material and can be reasonable estimated” establish an allowance

dr. sales returns and allowance (contra rev)
cr. a/r

32
Q

uncollectible

A

contra asset; allowance; want to reduce the account to net realizable assets

direct write off method -> not for gaap usually for tax purposes

allowance method -> gaap

33
Q

direct write off

A

account is written off and bad debt is recognized when it actually becomes uncollectible

a/r in this case is always overstated because we assume that we are actually going to collect everything unless we actually dont collect it

dr. bad debt expense
cr. allowance

NOT ALLOWED:
because non accrual; not matching

34
Q

allowance

A

our favorite

based on past experience:
% sale (direct- i/s)
% a/r (indirect- b/s)
aging (indirect - b/s )

b/s gives you ending balance of allowance

goal: matching principle
book it when you record rev

35
Q

aging method

A

emphasizes asset valuation

older receivable less likely to collect it

36
Q

Bad Debt exp

A

includes: provision made during the period; possibly adjustment at year end to increase or decrease the allowance account

37
Q

write off under allowance

A

write off is when a receivable is formally determined to be uncollectible

direct write off is not allowed under gaap

b/s only affected in form and not in value

38
Q

Subsequent reversal of write off

A

direct write off:

dr. cash
cr. uncollectible account recovered (revenue account)

allowance:
dr. cash
cr. a/r
no change in current assets in total just in form

reverse write off

dr. a/r
cr. allowance

39
Q

problem on f4-15

A

if you need a lower desired balance you have to adjust bad debt exp

40
Q

pledging - pnly FN

A

i am in desperate need for cash and the lender is going to need some collateral so

the company retains title to the receivable but pledges that it will use the proceeds to pay the loan

  • only needs note disclosure

a/r is not adjusted

dr. cash
cr. note payable

could be long term or short term and can be interest bearing

41
Q

factoring of a/r

A

process by which a company can convert its receivables into cash by assigning them to a factor

1) without recourse-> true sale. once you sell it to the factor it is upto them to collect thet cant bother you; the factor assumes the risk

JE:
Dr. cash
Dr. loss on sale of receivable
Dr. due from factor (factor's margin)
Cr. A/R

Due from factor is the proceeds retained by the factor

my total a/r is 100,000

I will get 94,000 in cash; 1,000 is held by the factor as security (thats receivable and we may receive it or not)

2) with recourse- could either be a sale or a loan
recourse: sale (Same journal entry)

or loan (if you pledge it as collateral just footnote and same journal entry as pledging)

With recourse if the factor has the option to resell any uncollectible receivables back to the seller

42
Q

when is with recourse a sale - JE

A

all met:

1) seller’s obligation for uncollectible accounts can be reasonably estimated -> post some security, and come up with a number for due from
2) transferor surrenders control of future economic benefits
3) transferor cannot be required to repurchase receivables BUT may be required to replace receivables with some other similar receivables

big one is the first one

if any of these not met then LOAN-> Footnote

43
Q

Summary

A

Pledging-> loan just FN

without recourse -> true sale

with recourse -> just FN if loan or true sale

44
Q

Transfer and servicing of financial assets

A

question: should the transaction be considered a sale or a secured borrowing

objective:
recognize only the assets it has control over and the related liabilities it has incurred in the process

derecognize only when the control has been surrendered and the liab have been extinguished

45
Q

Financial components approach

A

UNDER GAAP: financial assets and liab can be divided into many components based on control

46
Q

Surrender of control

A

when ALL conditions have been met:

1) transferred assets have been isolated from the transferor
2) transferee has the right to pledge or exchange the assets
3) transferor does not maintain control over the assets under repurchase agreement

47
Q

scenarios

A

1) control surrendered with no continuing involvement-> sale, with reduction in receivables and gain or loss

2) control is surrendered -> continuing involvement
components with interest are treated as not sold adn are still carried on the books

components with no interest are treated as sold and gain or loss recognized on those items

3) No control is surrendered -> pledging. Accounting for the collateral depends on whether the debtor has defaulted and the secured party has the ability to sell or repledge the collateral

48
Q

Notes receivable

A

PV of future cash flow

Written promise to pay debt; interest bearing

current or not based on the collection that will occur

49
Q

Valuation and presentation

A

unearned interest and finance charges are deducted from the face amount of the promissory note = pv

if the promissory note is non interest bearing or the interest rate is below market the value or PV is determined by using the market interest rate

interest bearing promissory notes are assumed to be issued at arms length transaction are assumed to be issued at the market rate of interest

50
Q

discounting notes receivable

A

need cash now, im going to sell it-> always at a loss

discount = cash received - value of the note at maturity

51
Q

notes receivable

A

can be with or without recourse

with recourse:

dr. cash
cr. note receivable discounted (contra receivable)

or

cr. note receivable and disclose a contingent liability in the note

with recourse: buyer can come after you

without recourse -> no further liability, its as if they were sold just remove it from the b/s

52
Q

with recourse

A

the holder is contingently liable, can come after you, second liable

53
Q

without recourse

A

no further liability

dr. cash
dr. loss
dr. due
cr. note receivable

54
Q

discount note at bank

A

example on 19**

1) calculate what you would have received = fv of note + interest

2) calculate discount
discount rate * days to maturity * amount in 1 = pv of that

3) remove that discount from 1 and that is the amount that the bank will pay you

4) difference between the face value of the receivable and the amount that the bank will pay you that
the interest income that you will receive

interest = face value * rate * total period/360 days diff interest rate

55
Q

current/non current

A

due AFTER a year

due within a year

56
Q

cash

A

imp ORIGINAL maturity has to be 90 DAYS or less

57
Q

cash on b/s

A

not bank statement balance

checkbook balance + check to be paid but not mailed so add back to balance sheet to reconcile with bank balance

58
Q

overdraft/ negative bank balance

A

positive and negative bank balance can be offset against each other

59
Q

adjustment to allowance for uncollectibles at year end

A

bad debt expense

60
Q

discounting

A

is for notes receivbale not a/r

a/r is factoring

61
Q

current liab

A

1) dont include deferred tax liab because all deferred tax liab are classified as non current (always? DBT)
2) Discount on bonds payable decrease that from the face value of the bond because a discount always reduces the carrying value of the bond

62
Q

short term debt refinanced with long term debt

A

if no more information given assume that the refinancing has gone through

63
Q

footnote disclosure of refinancing loan

A

required!!

64
Q

cash

A

original maturity 3 months or less
petty cash
checking account

NOT
bond sinking account - specific purpose so restricted
date of check imp- if post dated a month after b/s date not this time’s cash balance

65
Q

DBT: Overdraft in savings account

A

reported as current liab;

not offset against positive balance? if two diff accounts checking and savings

66
Q

exchange of equipment for non interest bearing receviable is like exchanging for cash

A

monetary transaction
recorded at fv of asset (equipment or note whatever is more easily available)

pv of face value
then int on that fv = carrying amount

then int on hat carrying amount for yr 2

67
Q

nsf check

A

not included in yr end bal

68
Q

if any amount is paid prior to refinancing

A

that is still included in current assets

example where prepaid part of the loan before refinancing went through

69
Q

A/P

A

Balance + checks written but not mailed

reduce a/p when checks are mailed beause till then the creditors will not cash the checks and we still owe them money

record a/p when purchase not when you record invoice

70
Q

pleding

A

retains title to receivables; will repay loan using proceeds from receivables

factoring is not the only way in which the title can be transferred

71
Q

factoring without recourse

A

commission can be similar to loss

72
Q

reconciling bank to books etc.

A

reconcile only the bank items to bank balance to get to adjusted

and book items to books balance

if only bank balance given and extra book items given dont use the extra book items

73
Q

credit

A

line of credit only the amount that is drawn is a liability

balloon payment- the whole payment is due at maturity

74
Q

tax that is refundable in the future

A

long term asset

get it beyond 5 years
and getting some benefit in the future

75
Q

current assets

A

merchandise inventory and investment in trading securities

unearned rent and deposits received from customers are liabilities

FAR - 4 (4 decks)

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