FAR Ch 4 - FAR Notes Chapter 4 http/cpacfa.blogspot.com...

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FAR - Notes Chapter 4 http://cpacfa.blogspot.com Working Capital and its Components Working capital = current assets – current liabilities Current ratio = Current assets ÷ current liabilities Quick ratio (acid test ratio) = (cash + net receivables + marketable securities) ÷ Current liabilities Current assets = assets to be consumed during the normal operating cycle or 1 year, which ever is longer Current liabilities = obligations due within 1 yr that requires the use of current assets or the creation of other current liabilities A short-term obligation may be classified as long term is it meets of the criteria - The actual refinancing prior to the issuance of the F/S - The existence of noncancelable financing agreement from a lender Cash equivalents = readily convertible to cash within 90 days or less of purchase date - Deposits held that are legally restricted are not considered cash equivalents If restricted cash is associated with a current asset of liability, classify as a current asset but separate from unrestricted cash 2/10 n/30 = get discount of 2% if paid within 10 days, or the entire amount is due in 30 days Gross method = records a sale without regard of discount A/R 100 Sales 100 If discount taken Cash 98 Sales disc 2 A/R 100 Net method = record including the discount A/R 98 Sales 98 If discount not taken Cash 100 Sales disc lost 2 A/R 98 Direct write-off method (Not GAAP) – account is written off and the bad debt is recognized when the account becomes uncollectible. (not GAAP because does not properly match the bad debt exp with revenue) GAAP allows two methods; % of sales method and aging of receivables method Bed debt expense – the amount that allowance for uncollectible account (B/S) is increased When a receivable is formally determined to be uncollectible Allowance for doubtful accounts xx A/R xx Subsequent collection of previously written off A/R A/R xx Allowance for Uncollectible accounts xx Cash xx 1
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FAR - Notes Chapter 4 http://cpacfa.blogspot.com A/R xx Pledging – company uses existing A/R as collateral for a loan Factoring of A/R – company can convert A/R to cash by assigning them to a factor with or without recourse Without recourse – the assignee (the factor) assumes the risk of loss of collections Cash xx Due from Factor xx (built in return for factor) Loss on sale of A/R xx A/R xx With recourse – factor has the option to re-sell any uncollectible receivables back to the seller. Can be considered either a transfer (treated as a loan) or a sale To be considered a sale: 1. Transferor’s (seller’s) obligation for uncollectible amounts can be reasonably estimated 2. Transferor surrenders control of the future economic benefits of the A/R to the buyer 3. Transferor is not required to repurchase A/R; but may be required to replace the A/R with similar
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FAR Ch 4 - FAR Notes Chapter 4 http/cpacfa.blogspot.com...

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