Working Capital and Its Components

Question 1

What is the formula for working capital?

Answer 1

Current assets - current liabilities

Question 2

What does working capital measure and used for?

Answer 2

A measure of the solvency of a company and is used in many financial ratios for analysis purposes

Question 3

Under US GAAP, a short-term obligation may be excluded from current liabilities and included in noncurrent debt if?

Answer 3

The company intends to refinance it on a long-term bsis and the intent is supported by the ability to do so

Question 4

What is the evidence to of short-term obligations expected to be refinanced?

Answer 4

The actual refinancing prior to the issuance of the financial statements or the existence of a noncancelable financing agreement from a lender

Question 5

What is the journal entry to record the reclassification from short-term obligations to long-term obligations?

Answer 5

Dr. Short-term obligations, Cr. Long-term obligations

Question 6

Under IFRS, can short-term obligations be reclassified to long-term?

Answer 6

No

Question 7

One example of cash and cash equivalents

Answer 7

Deposits held as compensating arrangements against borrowing arrangements with a lending institution that are not legally restricted

Question 8

What is restricted cash?

Answer 8

Cash that has been set aside for a specific use or purpose

Question 9

What is unrestricted cash?

Answer 9

Used for all current operations

Question 10

How should a restriction be classified as if it is associated with a current asset or current liability?

Answer 10

Classify as a current asset but separate from unrestricted cash

Question 11

How should a restriction be classified as if it is associated with a noncurrent asset or noncurrent liability?

Answer 11

Classify as a noncurrent asset but separate from either the Investments or Other Assets section

Question 12

What are the two forms of bank reconciliations?

Answer 12

Simple reconciliation and reconciliation of cash receipts and disbursements

Question 13

What are examples of bank adjustments?

Answer 13

Deposits in transit and outstanding checks

Question 14

What are examples of book adjustments?

Answer 14

Service charges, bank collections, nonsufficient funds, and interest income

Question 15

What is the most common procedure for bank reconciliations?

Answer 15

To reconcile both book and bank balances to a common “true” balance

Question 16

What is the net realizeable value of accounts receivable?

Answer 16

The balance of the accounts receivable account adjusted for allowance for receivable that may be uncollectible, sales discounts, and sales returns and allowances

Question 17

How is a discount recorded in the gross method?

Answer 17

If the payment is received within the discount period, a sales discount account is debited to reflect the sales discount

Question 18

How is a discount recorded in the net method?

Answer 18

AR is recorded as if the discount was taken.

Question 19

What happens if the payment isn’t made within the discount period for the net method?

Answer 19

A sales discount not taken must be credited

Question 20

How are sales revenues and accounts receivable recorded in regard to trade discounts?

Answer 20

Net of trade discounts and trade discounts are applied sequentially

Question 21

Journal entry to record sales return

Answer 21

Dr. Sales returns and allowance, Cr. Accounts receivable

Question 22

What method for estimating uncollectible accounts receivable is consistent with GAAP?

Answer 22

Allowance method

Question 23

What is the direct write-off method used for?

Answer 23

Tax purposes

Question 24

What are the 3 methods of estimating uncollectible or doubtful accounts under the allowance method?

Answer 24

Percentage of sales method, percentage of AR at Year-end method, and aging of receivables method

Question 25

What is done during the percentage of sales method?

Answer 25

A percentage of each sale is debited to the account “bad debt expense” and credited to the account “allowance for doubtful accounts”

Question 26

What is done during the percentage of AR at year-end method?

Answer 26

Uncollectible accounts are estimated as a certain percentage of AR at year end

Question 27

What is the entry to write-off a specific AR?

Answer 27

Dr. Allowance for doubtful accounts, Cr. AR

Question 28

What is the entry for a subsequent collection of AR written off under the direct write-off method?

Answer 28

Dr. Cash, Cr. Uncollectible accounts recovered

Question 29

What is the entry for a subsequent collection of AR written off under the allowance method?

Answer 29

Dr. AR, Cr. Allowance for uncollectible accounts, Dr. Cash, Cr. AR

Question 30

What is pledging?

Answer 30

The process whereby the company using existing AR as collateral for a loan

Question 31

What does it mean if a sale is non-recourse?

Answer 31

Sale is final and that the assignee assumes the risk of any losses on collections

Question 32

Journal entry to factor AR without recourse?

Answer 32

Dr. Cash, Dr. Due from factor, Dr. Loss on sale of receivable, Cr. AR

Question 33

What does it mean if a sale is with recourse?

Answer 33

Factor has an option to re-sell any uncollectible receivables back to the seller

Question 34

For financial statement purposes, how are unearned interest and finance charges treated?

Answer 34

Deducted from the face amount of the related promissory note

Question 35

Journal entry to record discounting notes receivable with recourse?

Answer 35

Dr. Cash, Cr. Notes Rec. discounted, Cr. Note receivable

Question 36

What are the steps to discounting a note at a bank?

Answer 36

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