Define working capital.
Current assets - current libilities
How is the current ratio computed?
Current assets / Current liabilities
How is the quick ratio computed?
(Cash + Net receivables + short term investments) / Current liabilities
Current assets are defined as…
Those resources that are reasonably expected to be realized in cash, sold, or consumed (prepaid items) during the normal operating cycle of a business or one year whichever is longer
Current liabilities are defined as…
Obligations whose liquidation is reasonably expected to require the use of current assets or the creation of other current liabilities
When can a short-term obligation be included in noncurrent liabilities?
If the enterprise intends to refinance the debt on a long term basis and the intent is supported by the ability to do so as evidenced by:
- Actual refinancing prior to the issuance of the financial statements, or
- Existence of a noncancelable financing agreement from a lender having the financial resources to accomplish the refinancing.
Define cash and cash equivalents.
- Cash includes both currency and demand deposits with bank and/ or other financial institutions
- Cash equivalents included short-term, highly liquid investments that are both readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from date of purchase) that they represent insignificant risk of changes in value
Name two methods of accounting for the write-off of uncollectible accounts
Direct write-off:
DR Bad debt expense
CR Accounts receivable
Weakness: bad debts are not matched to sales and accounts receivable are overstated. Not GAAP.
Allowance method:
DR Allowance for uncollectible accounts
CR Accounts receivable
Strengths: matches bad debts with credit sales. Accounts receivable fairly stated. Required by GAAP.
Name three methods for estimating uncollectible accounts.
- percentage of credit sales
- percentage of accounts receivable at year-end
- aging of accounts receivable at year-end
Using the allowance method, give the two journal entries to provide for and then to write off an uncollectible account.
Provide for:
DR Bad debt expense
CR Allowance for uncollectible accounts
Write-off:
DR Allowance for uncollectible accounts
CR Accounts receivable
What is the difference between factoring with recourse and without recourse?
With Recourse:
The factor may return the account to the company if it proves to be uncollectible. Potential liability and risk of loss remains with the company
Without Recourse:
The factor assumes the risk of loss if the account is uncollectible
State the three conditions that must exist for control of a financial asset to be considered surrendered.
- The transferred assets have been isolated from the transferor;
- The transferee has the right to pledge or exchange the assets; and
- The transferor does not maintain control over transferred assets under a repurchase agreement
If control of a financial asset is surrendered, what is the accounting treatment of the transfer?
No Continuing Involvement:
Record as a sale with appropriate reduction in receivables and recognition of any gain or loss
Continuing Involvement:
- asset for which there is no retained interest is recorded as a sale using the financial-components approach
- Assets for which there is retained interest is carried on the books of transferor and allocated a book value based on relative value of all transferred assets at the date of transfer.
If control of a financial asset is not surrendered, what is the accounting treatment of the transfer?
- Account for transfer as a secured borrowing with pledged collateral.
- Recognize the appropriate asset/liability amounts and interest revenue/expense amounts.
At what value should non-interest bearing promissory notes be recorded?
At present value of all future payments required by the not. The payments should be discounted at the market interest rate.
Notes receivable may be discounted “with” or “without” recourse. What is the difference?
Discounting with recourse:
The holder remains contingently liable
Discounting without recourse:
The holder assumes no further liability after discounting
Describe the computational steps required in “discounting a note”
- Compute maturity value (remember to include interest to maturity)
- Compute the “discount” (remember to use maturity value)
- Get proceeds by subtracting discount from maturity value
- Compute interest income as difference between proceeds and face of note.
When does the title to goods pass for each of the following? FOB destination FOB shipping point COD Consigned goods
- FOB destination - When received by buyer
- FOB shipping point - When given to a common carrier
- COD - When received and paid for by buyer
- Consigned goods - When sold to a third party by consignee
How is market calculated in the US GAAP lower-of-cost-or-market method?
Market generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor.
- ceiling - net realizable value (estimated net selling price less completion and disposal costs.)
- Floor - net realizable value minus normal profit margin.
How is net realizable value calculated in the IFRS lower-of-cost-or-net-realizable value method?
Net realizable value is the net selling price less completion and disposal costs.
Explain the difference between periodic and perpetual inventory methods
Periodic:
- the quantity of inventory is determined only by physical count.
- ending inventory is physically counted and priced
Perpetual:
- inventory is undated for each purchase and for each sale
- keeps a running total of inventory balances
Name several cost flow methods for inventory
Specific identification
FIFO
LIFO (unit and dollar value)
Average - weighted average (associated with periodic)
moving average (associated with perpetual)
Gross profit
Retail - conventional retail
cost retail
FIFO/ Cost
LIFO/ Cost
Dollar value LIFO/ CostName several retail inventory methods
- conventional retail
- cost retail
- FIFO/ Cost
- LIFO/ Cost
- Dollar value LIFO/ Cost
When are losses on firm purchase commitments recognized?
Losses are recognized in the period when the price declines
DR. Estimated loss on purchase commitment
CR. Estimated liability on purchase commitment
