L5

Question 1

What is the working capital

Answer 1

The capital that is actively working for you in the short term

Question 2

What does the working capital focus on

Answer 2

Current assets- trade receivables, inventory, cash etc.
All the short term
These generate revenue

Question 3

Working capital

Answer 3

Current assets - current liabilities

Question 4

What happens if working capital is low

Answer 4

Cannot meet the demand- cannot generate revenue because you don’t have enough

Question 5

What happens if working capital is high

Answer 5

Inventory holding cost having

too much inventory — reduces the working capital available for other types of current assets.

Insurance costs

Question 6

Prudence

Answer 6

the concept of being cautious and conservative when making judgments and estimates.

Underestimate assets and overestimate liabilities

Question 7

How should hiya measure finished goods according to prudence

Answer 7

At the cost of manufacture or at the cost of purchase

Question 8

Amounts Receivables (debtors) and Prepayments

Answer 8

Recognition
•Trade receivables (debtors) meet the recognition conditions because there is an expectation of benefit when the customer pays. Trade receivables (debtors) are measured at the selling price of the goods.
•Profit is recognised in the income statement (profit and loss account) when the goods or services have been supplied to the customer.

Question 9

Doubtful debts

Answer 9

There is a risk that the customer will not pay. •Estimate for doubtful debts.
•The risk of non-payment is dealt with by reducing the reported value of the asset by an estimate for doubtful debts.

Question 10

Prepayments and examples

Answer 10

Amounts of expenses paid in advance.
For example: Rent
Insurance premiums

Question 11

Investments

Answer 11

Held as current assets are usually highly marketable and readily convertible into cash. Expectation of future economic benefit is therefore usually clear.
The general principle is that investments held as current assets are measured at fair value
•Fair value= selling price (called marking to market) NOTE:
The change in fair value is reported in the income statement

Question 12

Cash

Answer 12

Cash at bank (e.g. current account and instant access deposit account) or cash in hand.
• The amount is known either by counting cash in hand or by looking at a statement from the bank that is holding the business bank account.

Question 13

Inventories- Meaning of cost

Answer 13

The cost of any item of inventory (stock) or work in progress is specified as the expenditure, which has to be incurred in the normal course of business in bringing the product or service to its present location and condition.
Purchase price + transport and handling + import duties – discounts – subsidies.

Question 14

Costs when input prices are changing

Same goods purchased at different unit prices. •What unit price to be charged when item goes into work in progress?
•What unit price to charge when identifying “cost of goods sold”?

Answer 14

Same goods purchased at different unit prices. •What unit price to be charged when item goes into work in progress?
•What unit price to charge when identifying “cost of goods sold”?

Question 15

Bad and doubtful debts (trade receivables)

Answer 15

Where there is doubt about the value of an asset the directors should be invited to consider making provision against the loss of the asset.
Where it is known that the debt is bad (because the customer has declared himself/herself bankrupt) the debtor should be removed from the record as a bad debt (trade receivable valued as £Nil).

Question 16

Liability definition

Answer 16

A liability is defined as a present obligation of the entity to transfer an economic resource as a result of past events.

Question 17

Current liability

Answer 17

A current liability is a liability, which satisfies any of the following criteria:
it is expected to be settled in the entity’s normal operating cycle;
it is held primarily for the purpose of being traded;
it is due to be settled within 12 months after the financial statement date.

Question 18

Types of short term (current) liabilities

Answer 18

For example:
Bank finance
Trade payables (creditors) (suppliers) Taxation
Unpaid expenses (accruals)

Question 19

Overdraft

Answer 19

negative bank balance Limit set by agreement
of particular use in seasonal trades
repayment on demand, variable rates of interest.

Question 20

Risk of understatement

Answer 20

Understatement of liabilities will result in overstatement of the ownership interest.

Question 21

What is an accrual

Answer 21

An expense incurred but not paid for

Question 22

Accruals and the matching concept.

Answer 22

Need to recognise the cost of all goods and services received before the balance sheet date. Even if the supplier has not invoiced the reporting company with the amount of the obligation, it must be estimated and recorded.
Accrual of a liability.
•Allows the reporting entity to match the costs incurred with the revenue that have been generated in the accounting period.