Working Capital (F4) Flashcards
What is a current asset?
Cash plus other assets that are expected to be sold or converted to cash during the current operating cycle
Includes: Demand deposits, cash equivalents, accounts receivable, inventory, pre-paids, and short-term investments
What is a current liability?
A liability expected to be paid within 12 months or less
How is the Quick Ratio calculated?
(Cash + A/R + Trading Securities) / Current Liabilities
How is the Current Ratio calculated?
Currents Assets / Current Liabilities
How is Working Capital calculated?
Currents Assets - Current Liabilities
How is A/R Turnover calculated?
Credit Sales / Average A/R
How is Inventory Turnover calculated?
COGS / Average Inventory
How is Day Sales in Inventory calculated?
365 / Inventory Turnover
How is Days to Collect A/R calculated?
Average A/R / Average Sales per Day
How are gain contingencies recorded?
They are NOT accrued due to Conservatism
When are loss contingencies recorded?
If Probable - they are accrued (if estimable) and disclosed
If Reasonably Possible - they are disclosed
If Remote - don’t accrue or disclose
Cash Equivalents
Short Term, highly liquid investments. (90 days or LESS from date of purchase)
Method # 1 of Accounting for Uncollectible Accounts
Allowance Method:
DR: Allowance for Uncollectible Accounts
CR: Accounts Receivable
Strengths:
Matches bad debts with credit sales. Accounts Receivable fairly stated. (GAAP)
Method # 2 of Accounting for Uncollectible Accounts
Direct Write Off Method:
DR: Bad Debt Expense
CR: Accounts Receivable
Weakness:
Bad Debts are not matched to sales and Accounts Receivable are OVERSTATED. (Not GAAP)
3 Methods for estimating Uncollectible Accounts
- Percentage of Credit Sales
- Percentage of Accounts Receivable at YE
- Aging of Accounts Receivable at YE
Factoring with Recourse
Factor may return the account to company if it proves uncollectible.
Liability and risk of loss remains with company.
Factoring without Recourse
Factor assumes the risk of loss if the account is uncollectible.
At what value should Non-Interest bearing promissory notes be recorded?
Present Value of all future payments required by the note.
The payments should be discounted at the Market Interest Rate.
Notes Receivable may be discounted “With” or “Without” recourse, what is the difference?
With:
The holder remains contingently liable.
Without:
The holder assumes no further liability after discounting.
Accounts Receivable are classified as…..
Current Assets
AR NRV is….
Balance of AR adjusted for Allowances
2 types of AR Discounts
- Sales or Cash Discounts
2. Trade Discounts
2 Methods of Sales or Cash Discounts
- Gross Method
2. Net Method
Gross Method
Record full sale amount regardless of terms.
If discount taken must DR: Sales Discount (Contra Revenue)
Net Method
Assume discount will be taken and record at discounted amount.
If discount not taken adjust CR: Sales Discounts not Taken (Revenue Account)
