Working Capital and Its Components Flashcards
What is the formula for working capital?
Current assets - current liabilities
What does working capital measure and used for?
A measure of the solvency of a company and is used in many financial ratios for analysis purposes
Under US GAAP, a short-term obligation may be excluded from current liabilities and included in noncurrent debt if?
The company intends to refinance it on a long-term bsis and the intent is supported by the ability to do so
What is the evidence to of short-term obligations expected to be refinanced?
The actual refinancing prior to the issuance of the financial statements or the existence of a noncancelable financing agreement from a lender
What is the journal entry to record the reclassification from short-term obligations to long-term obligations?
Dr. Short-term obligations, Cr. Long-term obligations
Under IFRS, can short-term obligations be reclassified to long-term?
No
One example of cash and cash equivalents
Deposits held as compensating arrangements against borrowing arrangements with a lending institution that are not legally restricted
What is restricted cash?
Cash that has been set aside for a specific use or purpose
What is unrestricted cash?
Used for all current operations
How should a restriction be classified as if it is associated with a current asset or current liability?
Classify as a current asset but separate from unrestricted cash
How should a restriction be classified as if it is associated with a noncurrent asset or noncurrent liability?
Classify as a noncurrent asset but separate from either the Investments or Other Assets section
What are the two forms of bank reconciliations?
Simple reconciliation and reconciliation of cash receipts and disbursements
What are examples of bank adjustments?
Deposits in transit and outstanding checks
What are examples of book adjustments?
Service charges, bank collections, nonsufficient funds, and interest income
What is the most common procedure for bank reconciliations?
To reconcile both book and bank balances to a common “true” balance
What is the net realizeable value of accounts receivable?
The balance of the accounts receivable account adjusted for allowance for receivable that may be uncollectible, sales discounts, and sales returns and allowances
How is a discount recorded in the gross method?
If the payment is received within the discount period, a sales discount account is debited to reflect the sales discount
How is a discount recorded in the net method?
AR is recorded as if the discount was taken.
What happens if the payment isn’t made within the discount period for the net method?
A sales discount not taken must be credited
How are sales revenues and accounts receivable recorded in regard to trade discounts?
Net of trade discounts and trade discounts are applied sequentially
Journal entry to record sales return
Dr. Sales returns and allowance, Cr. Accounts receivable
What method for estimating uncollectible accounts receivable is consistent with GAAP?
Allowance method
What is the direct write-off method used for?
Tax purposes
What are the 3 methods of estimating uncollectible or doubtful accounts under the allowance method?
Percentage of sales method, percentage of AR at Year-end method, and aging of receivables method
What is done during the percentage of sales method?
A percentage of each sale is debited to the account “bad debt expense” and credited to the account “allowance for doubtful accounts”
What is done during the percentage of AR at year-end method?
Uncollectible accounts are estimated as a certain percentage of AR at year end
What is the entry to write-off a specific AR?
Dr. Allowance for doubtful accounts, Cr. AR
What is the entry for a subsequent collection of AR written off under the direct write-off method?
Dr. Cash, Cr. Uncollectible accounts recovered
What is the entry for a subsequent collection of AR written off under the allowance method?
Dr. AR, Cr. Allowance for uncollectible accounts, Dr. Cash, Cr. AR
What is pledging?
The process whereby the company using existing AR as collateral for a loan
What does it mean if a sale is non-recourse?
Sale is final and that the assignee assumes the risk of any losses on collections
Journal entry to factor AR without recourse?
Dr. Cash, Dr. Due from factor, Dr. Loss on sale of receivable, Cr. AR
What does it mean if a sale is with recourse?
Factor has an option to re-sell any uncollectible receivables back to the seller
For financial statement purposes, how are unearned interest and finance charges treated?
Deducted from the face amount of the related promissory note
Journal entry to record discounting notes receivable with recourse?
Dr. Cash, Cr. Notes Rec. discounted, Cr. Note receivable
What are the steps to discounting a note at a bank?
Step 1: Compute the maturity value of the note by adding the interest to the face amount of the note, Step 2: Compute the bank discount on the payoff value at maturity, and Step 3: Determine the amount paid by the bank for the note
