Working Capital (F4)

Question 1

What is a current asset?

Answer 1

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

Question 2

What is a current liability?

Answer 2

A liability expected to be paid within 12 months or less

Question 3

How is the Quick Ratio calculated?

Answer 3

(Cash + A/R + Trading Securities) / Current Liabilities

Question 4

How is the Current Ratio calculated?

Answer 4

Currents Assets / Current Liabilities

Question 5

How is Working Capital calculated?

Answer 5

Currents Assets - Current Liabilities

Question 6

How is A/R Turnover calculated?

Answer 6

Credit Sales / Average A/R

Question 7

How is Inventory Turnover calculated?

Answer 7

COGS / Average Inventory

Question 8

How is Day Sales in Inventory calculated?

Answer 8

365 / Inventory Turnover

Question 9

How is Days to Collect A/R calculated?

Answer 9

Average A/R / Average Sales per Day

Question 10

How are gain contingencies recorded?

Answer 10

They are NOT accrued due to Conservatism

Question 11

When are loss contingencies recorded?

Answer 11

If Probable - they are accrued (if estimable) and disclosed

If Reasonably Possible - they are disclosed

If Remote - don’t accrue or disclose

Question 12

Cash Equivalents

Answer 12

Short Term, highly liquid investments. (90 days or LESS from date of purchase)

Question 13

Method # 1 of Accounting for Uncollectible Accounts

Answer 13

Allowance Method:
DR: Allowance for Uncollectible Accounts
CR: Accounts Receivable

Strengths:
Matches bad debts with credit sales. Accounts Receivable fairly stated. (GAAP)

Question 14

Method # 2 of Accounting for Uncollectible Accounts

Answer 14

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)

Question 15

3 Methods for estimating Uncollectible Accounts

Answer 15

1. Percentage of Credit Sales
2. Percentage of Accounts Receivable at YE
3. Aging of Accounts Receivable at YE

Question 16

Factoring with Recourse

Answer 16

Factor may return the account to company if it proves uncollectible.

Liability and risk of loss remains with company.

Question 17

Factoring without Recourse

Answer 17

Factor assumes the risk of loss if the account is uncollectible.

Question 18

At what value should Non-Interest bearing promissory notes be recorded?

Answer 18

Present Value of all future payments required by the note.

The payments should be discounted at the Market Interest Rate.

Question 19

Notes Receivable may be discounted “With” or “Without” recourse, what is the difference?

Answer 19

With:
The holder remains contingently liable.

Without:
The holder assumes no further liability after discounting.

Question 20

Accounts Receivable are classified as…..

Answer 20

Current Assets

Question 21

AR NRV is….

Answer 21

Balance of AR adjusted for Allowances

Question 22

2 types of AR Discounts

Answer 22

1. Sales or Cash Discounts

2. Trade Discounts

Question 23

2 Methods of Sales or Cash Discounts

Answer 23

1. Gross Method

2. Net Method

Question 24

Gross Method

Answer 24

Record full sale amount regardless of terms.

If discount taken must DR: Sales Discount (Contra Revenue)

Question 25

Net Method

Answer 25

Assume discount will be taken and record at discounted amount.
If discount not taken adjust CR: Sales Discounts not Taken (Revenue Account)