Module 12: Monetary Current Assets & Current Liabilities Flashcards
Secured Borrowings
In a secured borrowing arrangement, receivables are pledged as collateral for a loan. The customers who’s accounts have been pledged are not aware of this event, and their payments are still remitted to the borrower. The pledge accounts merely serve as security to the lender, giving comfort that sufficient assets exist which will generate cash flows adequate in the amount and timing to repay the debt.
Bad Debts Expense - Allowance Method
The allowance method seeks to estimate the amount of uncollectible receivables, and establishes a contra valuation account (allowance for bad debts) for the amount estimated to be uncollectible.
1) Adjusting entry to set up allowance is:
Dr. Bad Debts Expense (estimated)
Cr. Allowance for bad debts.
2) The entry to write off bad debts is:
Dr. Allowance for bad debts (uncollectible AR)
Cr. AR
Ratios: Receivable Turnover
Measures how rapidly cash is collected from credit sales.
Net Credit Sales divided by Average Net Receivables
Ratios: Number of days’ in average receivables
Average length of time receivables are outstanding which reflects credit and collection policies.
365 divided by Receivable Turnover
Working Capital
Current Assets - Current Liabilities
*Any transaction which affects either current assets or current liabilities but not both, will affect working capital.
Ratios: Current Ratio
Measures ability to pay current liabilities from cash, near-cash, and cash flow items.
Current assets divided by Current liabilities
How do you handle an allowance for uncollectible that has been previously written off?
An entry is made to reinstate the accounts receivable by debiting accounts receivable and crediting allowance for uncollectible accounts. A second entry is made for cash collection which involves debiting cash and crediting accounts receivable.
IFRS Provision vs US GAAP Contingency
Under US GAAP, the accounting for a contingency depends on whether the outcome is probable, reasonably possible,or remote, and whether the contingency is measurable. In contrast under IFRS, if the outcome is probable and measurable, it is considered a contingency and classified as a provision.
Accretion Expense
Calculated by multiplying the adjusted interest rate by the fair value of the liability.
Servicing Assets or Servicing Liabilities are to be accounted for separately as follows:
a) Assets are reported separately from liabilities. They are NOT netted.
b) Initially measure servicing assets that are retained by the transferor by allocating the carrying amount based on relative fair values at the date of transfer.
c) Initially measure at fair value all purchased assets, assumed liabilities, and liabilities undertaken in a sale or securitization.
d) Account separately for interest-only strips (future interest income from serviced assets that exceed servicing fees).
e) Measure servicing assets and servicing liabilities using one of two methods: amortization method, or fair value method. An election must be made to use the fair value method for each class of servicing assets and servicing liabilities. Once the election is made to value using the fair value method, the election cannot be reversed.
f) Report servicing assets and servicing liabilities on the balance sheet in one of two ways:
1) Display separate line items for amounts valued at fair value and amounts measured by amortization method, or
2) Display aggregate amounts for servicing assets and servicing liabilities, and disclose parenthetically the amount that is measured at fair value that is included in the aggregate amount.
Gain Contingencies
Contingencies that might result in gains usually are not reflected in the accounts since to do so might be to recognize revenue prior to its realization. This means that any gains that result from gain contingencies should be recorded and reported in the period during which the contingency is resolved.
Acid-test (quick) Ratio
Measures ability to pay current liabilities from cash and near-cash items.
Cash, Net Receivables, Marketable Securities (Quick Assets) divided by Current Liabilities
Average Number of Days in the Operating Cycle
Average days’ sales in inventory + Average days’ sales in accounts receivable
Fair Value Option
ASC Topic 825 provides that a company can elect the fair value option for reporting financial assets and financial liabilities. The fair value option also applies to firm commitments that would otherwise not be recognized at inception that only involve financial instruments. Non-financial insurance contracts and warranties may only be reported at fair value if the obligation can be settled by paying a third party to provide the goods and services
Effective Interest Rate
The effective interest rate on a borrowing is the net annual interest cost divided by the net available proceeds from the borrowing. The interest revenue from any excess compensating balance is subtracted from annual interest cost on the borrowing to arrive at net annual interest cost. Similarly, the amount of excess compensating balance is subtracted from the available proceeds to arrive at net available proceeds.
