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Flashcards in Current Assets & Liabilities Deck (42):
1

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

2

What is a current liability?

A liability expected to be paid within 12 months or less

3

How is the Quick Ratio calculated?

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

4

How is the Current Ratio calculated?

Currents Assets / Current Liabilities

5

How is Working Capital calculated?

Currents Assets - Current Liabilities

6

How is A/R Turnover calculated?

Credit Sales / Average A/R

7

How is Inventory Turnover calculated?

COGS / Average Inventory

8

How is Day Sales in Inventory calculated?

365 / Inventory Turnover

9

How is Days to Collect A/R calculated?

Average A/R / Average Sales per Day

10

How are gain contingencies recorded?

They are NOT accrued due to Conservatism

11

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

12

When can a certificate of deposit be treated as a cash equivalent?

CD's can be classified as a cash equivalent if the following are true:

1. No penalty for early withdrawal

2. Original maturity of 3 months or less from date of purchase

13

How do you record sales and A/R using the Sales at NET method?

(Anticipation of Sales Discounts)

A sale would be recorded as follows using the Sales at net method:

AR (net) xx
Sales (net) xx

14

How do you record sales and A/R using the Sales at GROSS method?

(Anticipation of Sales Discounts)

A sale would be recorded as follows using the Sales at gross method:

AR (gross) xx
Sales (gross) xx

15

How do you record cash receipt WITHIN discount period using the Sales at NET method?

(Anticipation of Sales Discounts)

Cash receipt within discount period would be recorded as follows:

Cash (net) xx
AR (net) xx

16

How do you record cash receipt WITHIN discount period using the Sales at GROSS method?

(Anticipation of Sales Discounts)

Cash receipt within discount period would be recorded as follows:

Sales discount (disc.) xx
Cash (net) xx
AR xx

17

How do you record cash receipt AFTER discount period using the Sales at NET method?

(Anticipation of Sales Discounts)

Cash receipt after discount period would be recorded as follows:

Cash (gross) xx
AR (net) xx
Disc. not taken xx

18

How do you record receipt AFTER discount period using the Sales at GROSS method?

(Anticipation of Sales Discounts)

Cash receipt after discount period would be recorded as follows:

Cash (gross) xx
AR (gross) xx

19

What is the J/E to record bad debt expense using the Direct write-off method?

The following is the journal entry to record bad debt expense using the direct write-off method:

Bad debt xx
AR xx

Note: Bad debt expense is written off DIRECTLY against the receivable. This method is ONLY allowed per GAAP if bad debt expense is immaterial

20

What is the J/E to record the recovery of an AR account?

The following is the journal entry to record the recovery of an AR account

AR xx
Allowance xx

Note: Just reverse the original write-off J/E

Cash xx
AR xx

Note: Only record a recovery when you get the cash

21

In using the Allowance method for estimating uncollectible accounts, how is bad debt expense used?

In using the allowance method, Bad debt expense is the adjusting entry for the income statement:

Bad debt expense xx
Allowance xx

Note: You make this AJE at the end-of-the-year or period. The bad debt expense gets matched against the sales revenue for the period. This does PROPER matching

22

In using the Allowance method for estimating uncollectible accounts, how is the ending balance used?

In using the allowance method, you calculate the ending balance of the allowance account using the Balance sheet method and you have to PLUG the bad debt expense

23

What is the J/E to write-off a receivable using the Allowance method?

The following journal entry is done to write-off a receivable:

Allowance account (uncollectible AR) xx
AR (uncollectible AR) xx

24

How is the Percentage of sales used for the Allowance method?

The percentage-of-sales method is also known as the income statement method - you are taking a percentage of sales and calling this bad debt expense on credit sales, net sales or total sales

Note: The income statement method does a better job at matching the bad debt expense better to the revenues on the I/S

25

How is the Balance sheet used for the Allowance method?

The balance-sheet method multiplying the Aging % x AR balance - you split up AR into aging buckets and apply a % to each to determine what % will go bad. Older receivables should have a higher % than newer or current receivables

Note: This calculates the ENDING balance of the allowance. The balance sheet method has a more accurate ending balance for the allowance; which results in a more accurate AR, net

Remember, AR should be presented at its net realizable value and the balance sheet method does a better job at this that the I/S method

With this method, you are calculating the ending balance for the allowance account and you have to PLUG the bad debt expense adjustment, which is your bad debt expense

26

What is the J/E to set up the Allowance?

The adjusting entry to set the allowance is:

Bad debts expense (estimated) xx
Allowance for bad debts (estimated) xx

27

How do you determine the ending balance in the Allowance account?

Beginning balance
+ Bad debt expense
+ Recoveries
- Write-offs

= Ending balance

28

What are the typical J/E's to record factoring of receivables WITHOUT recourse?

The following is a summary of J/E's that Yaeger prefers to record the accounting by transferor for the transfer of receivables WITHOUT recourse:

1. J/E to record recourse obligation BDX:

Bad debt expense xx
Recourse obligation - @ fair value xx

2. J/E to record AR factoring transaction

Cash (PLUG) xx
Holdback xx
Fee expense xx
Interest expense xx
Account receivable xx

3. J/E to record bad debt expense due to sale of receivable with Recourse:

Bad debt expense xx
Recourse Liability @ fair value xx

29

In a factoring of receivables transaction, how is the fee effected?

When you factor your receivables with recourse, you are effectively guaranteeing a debt to the factor. Incase they are unable to collect on the receivables, you essentially agree to guarantee that customer debt. As such, we would expect the fee to be smaller

If this was a factoring arrangement, WITHOUT recourse; then the fee would be larger, which would mean that we will need to increase bad debt expense

30

How is the sale of receivables with recourse recorded?

A sale of receivables with recourse is recorded using a financial components approach because the seller has a continuing involvement

Under this approach, the seller would reduce receivables, recognize assets obtained and liabilities incurred and record gain or loss

Note: Transfers of receivables with recourse involve selling receivables at a discount to obtain immediate cash but retaining the risk of loss if the customer does not pay the amount owed

31

What are the conditions that need to be met in order for a transfer of financial assets to be accounted for as a sale?

A transfer may be accounted for as a sale ONLY when the transferor surrender control of the financial asset and ALL of the following conditions are met:

1. The transferred financial asset is isolated and beyond the reach of the transferor and its creditors (even in bankruptcy or receivership)

2. The transferee can pledge or exchange the asset without unreasonable constraints or conditions

3. The transferor does NOT maintain effective control over the transferred financial asset or a 3rd party beneficial interest in the asset

32

How do you determine Salaries payable or Accrued salaries payable balance?

Beginning balance

+ Salaries expense
- Payment of salary payable (salaries paid)

= Ending balance

Note: EE advances do NOT affect the accrued salaries payable account. When advances are made to EE's, they are a cash payment separate from the payroll function - EE advance is like a receivable due to the company from the EE

33

What is the journal entry to record a reduction of Unearned revenue?

The following is the journal entry for reducing Unearned revenue (and increasing revenue when portion of unearned revenue is recognized as revenue):

Unearned revenue xx
Revenue xx

34

What is the journal entry to record Unearned revenue when cash is received upfront?

The following is the journal entry for recoding unearned revenue when cash is received upfront:

Cash xx
Unearned revenue xx

35

How would you record a Loss Contingency if the probability was remote?

(0% to 49% probability)

Generally, you would NOT have to disclose anything; EXCEPT for the following cases:

These items MUST be disclosed in the financial statement footnotes; even if they are remote:

1. Guarantees of Indebtedness of others

2. Obligations of commercial banks under "standby letters of credit"

3. Agreements to repurchase receivables (or the related property that has been sold)

4. Other agreements that in substance have the same guarantee characteristics

36

When would you record a Gain contingency?

Remember, you can ONLY record this when you actually won a lawsuit and IF and ONLY IF the losing party isn't going to appeal

Generally, we usually don't recognize gain contingencies until they actually occur due to conservatism

Note: Winning is NOT the same as collecting, so you would need to set up an allowance account to "allow" for uncollectible winnings

37

How would you record a Loss Contingency if the probability was reasonably?

(50% probability)

When a contingency is deemed reasonably possible, you would only be required to DISCLOSE it

Note: If a contingency is remote, you can do a JE. The rules only state the minimum reporting requirements

38

How you record a Loss Contingency if the probability was probable?

(51% - 100% probability)

When a contingency is deemed probable, you would need to do the following:

1. Make a journal entry (accrued for it)
2. Disclosure

39

How do you determine Estimated warranty liability balance?

Beginning balance

+ Adjustment for Warranty expense
- Repairs + warranty expenditures

= Ending balance

Note: Warranty expenditures are expenses incurred when a company honors a warranty (i.e. replace something, exchange, etc.). This is different from the warranty expense

40

When should you record warrant expense?

You should record warranty expense in the same period as the sale. Warranty expense is a selling expense

Also, in the period you made the sale, you must recognize the ENTIRE warranty expense (i.e. if the warranty is for 10 years, you should recognize the total expense for those 10 years in the period that the sale was made). This is done because of the matching principle

The journal entry to record warranty expense would be as follows:

Warranty expense xx
Estimated warranty liability xx

The journal entry to make when the a company honors the warranty would be as follows:

Estimated warranty liability xx
Cash or Inventory xx

41

What conditions must be met in order for an Accrual of a liability for vacation pay to be booked?

An accrual of a liability for future vacation pay is REQUIRED if all the following conditions are met:

1. Obligation arises from employee services already performed

2. Obligation arises from rights that vest or accumulate

3. Payment is probable

4. Amount can be reasonably estimated

Note: The bare minimum for what a company has to pay for compensated absences as a liability is what VESTS

42

What conditions must be met in order for an Accrual of a liability for sick pay to be booked?

An accrual of a liability for future sick pay is REQUIRED if all the following conditions are met:

1. Obligation arises from employee services already performed

2. Obligation arises from rights that vest or accumulate

3. Payment is probable

4. Amount can be reasonably estimated

Note: If sick pay benefits accumulate, but DO NOT VEST, accrual is PERMITTED but NOT required because payment is contingent upon future employee sickness