Flashcards in Current Assets & Liabilities Deck (49):
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
Recording legally restricted or segregated cash
As long term asset - Investment
Treatment of unmarked check
Not deducted from cash balance
Treatment of overdrawn bank balance
Presented as current liability unless other accounts at same bank have sufficient cash
Examples of credits to AR
Sales returns, write-offs, collections
Treatment of interest from note receivable
Included as current asset in interest receivable
Calculate interest receivable
Face value x stated rate x time
Calculate interest revenue
Carrying amount x effective rate x time
Treatment of accounting loss
Cannot exceed the amount of AR recognized as an asset
Basis of aging receivables method of I collectible accounts
Theory that bad debts are function of AR collections during the period
Treatment of previously written of bad debts
1. DR - AR ; CR - allowance for doubtful accounts
2. DR - Cash ; CR - AR
What is an assignment
Owner obtains loan by pledging receivable
What is factoring
Sale of receivables
Treatment of factored receivables and control surrendered
Treat as sale, risk of uncollectible accounts not retained by seller without recourse
Calculate cash for factoring
Ar - holdback - fee - interest expense ( AR x rate x avg days / 365
What is financial component approach
Seller has continued involvement, reduce AR, recog asset obtained and liabilities incurred, record g/l
DR - cash , holdback , loss
CR - AR , recourse liability at FV
What is due from factor (holdback)
Account for probable sales discounts, returns, allowances.
What is recourse liability
Recorded to indicate probable uncollectibles
When is sale of receivables recognized?
1. Receivables beyond reach of transferor and transferors creditors
2. Transferor has no repurchase agreement
3. Tranferee can resell or pledge receivables
How should serving assets and liabilities be amortized?
In proportion to and over period of estimated net servicing income or net servicing loss
Treatment of transfer of financial asset but continuing interest in serving asset
Held at difference between carrying value and amount de-recognized
What is a pledge
An arrangement of having collateral transferred to secured party
Calculate net proceeds and gain of loan sold with swaps and options
Net proceeds = cash received + call options + interest rate swaps - recourse obligation
Gain = net proceeds - carrying value of loan sold
How are financial assets subject to prepay measured
As investments in debt securities classified as AFS or trading
Calculate effective interest rate
Effective interest rate = interest paid / cash received
Calculate contributions (like a bonus) based on percentage of income after bonus
C = C% x (income - C)
C = C%xIncome - C%xC
C + C%x C = C%xIncome
C%xIncome / (C + C%xC)
Disclosure of aggregate amount of payments for unconditional purchase obligations
Disclose for each year for 5 years after balance sheet date
Estimate to use when contingent liability is probable
Best estimate or lower range of estimate
When are remote contingencies disclosed
Guarantee of others debts, standby letter of credit by bank, agreement to repurchase receivables, related party transactions
When to accrue vacation time?
1. Obligation arises from prior services
2. Arises from rights that vest or accumulate
3. Payment probable
4. Amount estimateable
When can warranty obligation be recorded at FV?
Only if contract can be settled by 3rd party
How is asset retirement obligation (ARO) recorded and adjusted
Recorded at FV and adjusted for estimates using discounted cash flows and accretion expense (increase in expense due to time)
Treatment of land held for resale
Included in current assets
Examples of current liabilities
AP, dividends payable, bonds payable in next year (less discounts)
Calculate operating cycle
# days sales in inventory + # days sales in AR
IFRS disclosure of contingent assets
Not accrued, disclose if probable
Under IFRS, treatment of debt if covenant missed
Debt reclassified as current
What are IFRS provisions
Accounts that are uncertain to amounts or timing