Working Capital and Its components Flashcards
Net Realizable Value
Account Receivable - allowance for Account Receivable that may be uncollectible - sales discounts and sales return and allowances.
factoring account receivables with or without receourse
selling them to a factor or 3rd party for cash. Without recourse = the 3rd party factor is responsible for getting any losses on collection
Dr:Cash
Dr:Due from factor;
DR:Loss on Sale receivable
CR: Account receivableThe following information pertains to Grey Co. at December 31, Year 1:
Checkbook balance $12,000
Bank statement balance 16,000
Check drawn on Grey’s account, payable to a vendor, dated and recorded
12/31/Year 1 but not mailed until 1/10/Year 2
1,800
1 - Bank statement balance is not cash’
2- start with check book balance , add back the check that has been recorded not mailed yet.
Discounting a note a bank
Roth, Inc. received from a customer a one-year, $500,000 note bearing annual interest of 8%. After holding the note for six months, Roth discounted the note at Regional Bank at an effective interest rate of 10%. What amount of cash did Roth receive from the bank?
1- calculate full value due; 500.08=540
2- calculate bank discount: 540.10*(6/12)=27
3- Calculate amount paid by the bank for the note = total amount - bank discount.= 540-27 = 513
4= profit made by Roth; 513-500 (FV) = 13
what is the difference between sales returns and estimated allowance for sales returns
Sales returns is has already happened, should be substracted from the AR account.
Allowance for sales return is an estimation based on past experience.
Marr Co. had the following sales and accounts receivable balances, prior to any adjustments, at year-end:
Credit sales $ 10,000,000
Accounts receivable 3,000,000
Allowance for uncollectible accounts 50,000
Marr uses 3% of accounts receivable to determine its allowance for uncollectible accounts at year-end. By what amount should Marr adjust allowance for uncollectible accounts at year-end?
Under the percentage-of-receivables method the ending balance in the allowance account is equal to the total estimated uncollectible amount. Marr Co. would have a balance of $90,000 ($3,000,000 x 3%) in its allowance for uncollectible accounts at year end.
then use the base formula to figure out adjustments
how to perform a bank reconciliation
beg cash \+ deposit in transit - outstanding checks \+ Interest Income - Servicoes Charges - Non-Sufficient Funds \+ - Errors The result of this equation is the asjusted cash amount that you need
Unearned fees and cash treatment
to Find the cash amount, you have to remove unearned fees from the cash collection.
Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?
The credit is to the long-term liability rather than common stock because Footnote 2 of SFAS No 6, Classification of Short-Term Obligations Expected to Be Refinanced, states “if equity securities have been issued [after the balance sheet date but before the balance sheet is issued], the short-term obligation, although excluded from current liabilities, shall not be included in owners’ equity.”
On December 31, Year 1, Paxton Co. had a note payable due on August 1, Year 2. On January 20, Year 2, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, Year 2, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxton’s financial statements were issued on March 31, Year 2. How should Paxton classify the note on its balance sheet at December 31, Year 1?
hoice “b” is correct. A short-term obligation may be excluded from current liabilities and included in non-current debt if the company has both the intent and the ability to refinance the debt on a long-term basis, as evidenced by an actual refinancing before the issuance of the financial statements, or by the existence of a noncancelable financing agreement from a lender with the financial resources to accomplish the refinancing. Because Paxton’s lender does not have the financial resources to accomplish the refinancing, the note must be reported as a current liability on its December 31, Year 1 balance sheet.
A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year end. The loan was refinanced through issuance of long-term bonds after year end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?
hoice “a” is correct. The $30,000 account payable will be reported as a current liability. The $100,000 short-term construction loan will be reported as a long-term liability because the company refinanced the liability on a long-term basis prior to the issuance of the financial statements.
Treatment of deferred tax liability
Deferred taxes can be either ST or LT, depending on the asset or liability that are are related to. So if a deferred tx liability is not associated with any account and is expected to revert in ST, then classify as ST.
if related to depreciation, then must be related to a LT Asset, then classify as LT.
How to account for
1- Post-dated check from customer dated one month from balance sheet date
2- Commercial papers and certificate and deposit
1- If you receive the check and can’t cash it within right away, then can’t add it.
if you send the check, although recorded in he books and you won’t mail for a month or so so, you have to revert the transaction and subtracts from the check balance.
2- for cds and commercial papers make sure that the maturity date is 90 days or less
J/E for write-offs:
Dr: allowance for doubtful account
CR; Acct Receivable
j/E to recover account that were previouly written off
Dr: acct receivable
Cr; allowance for doubtful account
Cash:
Cr: acct Receivable
