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Flashcards in Monetary Current Assets and Current Liabilities Deck (33):
1

Type A Reconciling Entries

Reconciling items not requiring journal entries on the books:
1. Outstanding checks
2. Deposits in transit
3. Bank errors

2

Type B Reconciling Entries

Reconciling items that do require JEs on the books:
1.Unrecorded returned nonsufficient funds (NSF) checks
2. Unrecorded bank charges
3. Errors in the cash account
4. Unrecorded bank collections of notes receivable

3

Direc Write Off Method

Bad debts are considered expensed in the period in which they are written off.
-not acceptable in US GAAP, unless the amount is immaterial (bc of matching)
JE:
Dr. Bad Debt Expense
Cr. Accounts Receivable

4

Allowance Method

Estimates the amount of uncollectible receivables and establishes a contra valuation account (allowance for bad debts) for the amount estimated to be uncollectible.

5

Allowance for doubtful accounts (bad debts)

Allowance for doubtful accounts CR. balance
CR. Beginning balance (from PY)
CR. Bad debt Expense JE (done at the end of the accounting period)
CR. Recoveries
DR. Write Offs
=Ending Balance

Bad debt expense JE:
Dr. Bad debt Expense
Cr. Allowance for doubtful accts

Write off JE:
Dr. Allowance for doubtful accts
Cr. Accounts Receivable

Recovery JE: reverse Write off
Dr. AR
Cr. Allowance

Dr. Cash
Cr AR

6

Annual Sales method - I/S method for bad debt expense estimate

One of two methods to determine the annual charge to bad debts expense
Income Statement -
% x Sales = bad debt expense JE amount

(better matching to revenues)

7

Year-end AR - Balance Sheet method for bad debt expense estimate

One of two methods to determine the annual charge to bad debts expense
Aging method -
% x AR = Ending balance of the allowance account.
Plug the bad debt expense adjusting entry.

(more accurate AR, net on BS)

8

Net Accounts receivable

Disclosed at Net realizable value

AR at gross
less: Allowance for doubtful accts (bad debts)
AR, net

Under the allowance method:
Net receivables do not change when a specific account is written off since both the AR and the allowance account are reduced by the same amount.

9

Securitization

Purchasing and selling securities that are collaterized by a pool of assets, such as a group of receivables. (all receivables are put into a pool and shares are sold)

10

Transfer of receivables with recourse

Selling receivables at a discount to obtain immediate cash but retaining the risk of loss if the customer does not pay the amount owed.

without recourse - do not retain the risk but the selling fee for selling AR will be higher.

11

Repurchase Agreement

An agreement to sell the an asset to a lender and later repurchase the asset. These agreements are in effect using the asset (AR) as collateral for a loan.

12

Loan Participations

A situation where a group of financial institutions (called participating interest holders) puchase a share of financial instruments (e.g. a loan)

13

Banker's Acceptances

An order from a customer of a bank for the payment of a specified sum of money (like a post date check) that may be bought and sold.

14

Requirements to record a transfer of receivables as a sale

Transfer may be accounted for as a sale only when it meets all 3 criteria:
1. Transferred financial assets are 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(s) without unreasonable constraints or condtions.
3. The transferor does not maintain effective control over the transferred financial asset(s) or a third-party beneficial interest in the asset(s) ex. buy back option in contract.

15

Factoring with/without recourse

Factoring with recourse - Seller retains the risk of bad debt. Must set up a recourse liability
Dr. Bad debt expense
Cr. Recourse liability

Factoring without recourse: selling fee will be higher, the debt of the bad debt is transferred to the factor.

16

Current liabilities

"obligations" whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities.

17

Short-term obligations should be classified as current liabilities unless

1. Enterprise intends to refinance the obligation on a Long-term basis AND
2. the intent is supported by ability to refinance ASC Topic 210-10 and 470

18

Contingent Liabilities

Such obligations may exist but are dependent on uncertain future events.
Loss contingency should be accrued if it is PROBABLE that an asset has been inpaired or a liability has been incurred AT THE BALANCE SHEET DATE AND the amount of the loss is REASONABLY ESTIMABLE.
Dr. Expense or loss
Cr. contingent liability
and a disclosure is made

Probable= greater than 50% chance of it happening

If contingency is reasonably possible- Disclosure is made
If contingency is remote- No JE or disclosure needed (there are exceptions) - see loss contingencies that may be accrued card.

If contingent event happened after the BS date only a disclosure is needed- only accrue when the event happens before the BS

19

Warranty Expenses

Have to recognize the entire amount of warranty expense in the year in which you make the sale. (for matching)

20

Environmental Liabilities - Asset Retirement Obligations ARO

The cost associated with the ARO is initially measured at fair value (typically Discounted Future CFs) and is included in the Carrying amount of the associated asset, a related liability is also recorded.

Dr. Landfill
Cr. Asset Retirement Obligation (discounted Future CFs)

Cost of ARO is allocated over the assets life through higher depreciation
Dr. Depreciation Exp
Cr. Accum Dep

Interest is accrued (accretion expense)
Dr. Interest Exp
Cr. Asset Retirement Obligation

Entry to record retirement of asset
Dr. Asset Retirement Obligation
Dr. Loss (plug)
Cr. Cash
Cr. Gain (plug)

21

Loss contingencies that may be accrued

Depending on the two conditions of PROBABLE and REASONABLY ESTIMABLE are met:
Threat of expropriation of assets
Pending or threatened litigation
Actual or possible claims and assessments
*Guarantees of indebtness of others
*Obligations of commercial banks under "Standby letters of credit" .
*Agreement to repurchase receivables (or the related property) that have been sold.
*Other agreements that in substance have the same gurantee characteristics

*Items that must be disclosed even if remote chance of loss.

22

Compensated Absences

An employee shall accrue a liability for employees compensation for future absences if all of the following are met:
1. Employer's obligation is attributable to employee's services already rendered.
2. Obligation relates to rights that vest or accumulate
3. Payment of compensation is probable
4. the amount can be reasonably estimated.

note: the bare minimum that they are required to report is the amount that is vested (will be paid out bc employee has the option of pay out instead of using days)

23

Gain Contingencies

If you sue and win the case (winning is not the same as collecting)
When to record a gain
1. If you win the case AND
2. If they're not going to appeal the case

Dr. receivable
Cr. gain
would also
Dr. bad debt expense
Cr. allowance on this receivable

Recorded in the period in which the contingency is resolved.

24

Fair value option for recording financial liabilities (warranties)

Warranties can assume a fair value option if the company offering the warranty pays a thrid party to assume that liability for them.

warranties would then be reported " at the fair value of the contract to settle the warranty services"

25

Acid Test (quick) ratio

Cash, Net receivables, Marketable Securities/Current liabilities

(All current assets except inventory)

26

Current Ratio

Measures ability to pay current liabilities from cash, near cash, and cash flow items.

Current Assets/Current Liabilities

27

Receivable Turnover

Measures how rapidly cash is collected from credit sales

Net Credit Sales/Average Net Receivables

net receivables: AR-Allowance=AR, net

28

Number of days' sales in average receivables

Avg length of time receivables are outstanding, which reflects credit and collection policies

365/Receivable Turnover

29

Inventory Turnover

How rapidly inventory is sold

COGS/Avg. Inventory

30

Number of days' supply in average inventory

Number of days inventory is held before sale and therefore reflects the efficiency of an entities inventory policies

365/Inventory Turnover

31

Contingency IFRS

An event which is not recognized because it is not probable that an outflow will be required or the amount can not be measured reliably. No JE is required, disclosure only. (under GAAP a contingency must be probable and have a reasonable estimate) This would be what a reasonably possible event would be for GAAP.

32

Provision IFRS

(what a contingency would be for GAAP)
If the outcome of the event is probable and measureable

33

Assignment of AR

occurs when the owner of the receivables (assignor) obtains a loan from the lender (assignee) by pledging the AR as collateral.