470 test 2-1 - Chapter 4 Analysis of Cash and Cash...

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Unformatted text preview: Chapter 4 Analysis of Cash and Cash Equivalents o Companies risk a reduction in liquidity should the market value of short term investments decline o Cash and cash equivalents are sometimes required to be maintained as compensating balances to support existing borrowing arrangements or as collateral indebtedness Receivables: amounts due from others that arise from the sale of goods or services to others, or from the loaning of money o Accounts Receivable: refer to oral promises o Refer to formal written promises Receivables are recorded at their net realizable value total amount of receivables less an allowance for uncollectable accounts Analysis questions for analyzing receivables: o Collection Risk Review allowance for uncollectibles in light of industry conditions o Authenticity of Receivables Review credit policy for changes Review return policy for changes Review any contingencies on receivables Securitization of Receivables when a company sells all or a portion of its receivables to a third party o Can be sold with or without recourse Sales with recourse seller must record both an asset and a compensating liability for the amount factored Without recourse seller removes the receivables from the balance sheet o Sales without recourse does not effectively transfer risk of ownership Prepaid Expenses advanced payments for goods or services not yet received that extend beyond the current accounting period o Sometimes included in current expenses o Any substantial changes warrants scrutiny Expensing Treating inventory costs like period costs costs are reported in the period incurred Capitalizing treats inventory costs like product costs costs are capitalized as an asset and subsequently charged against future periods revenues benefitting from their sale FIFO o Oldest costs - - -> Costs of Goods Sold o Recent costs - - - > Ending Inventory LIFO o Recent costs - - - > Costs of Goods Sold o Oldest costs - - - > Ending Inventory In periods of rising prices, FIFO produces higher gross profit than LIFO because lower cost inventories are matched against sales at current market prices. Can be called FIFOs phantom profit FIFO gross profit is actually the sum of economic profit and holding gain LIFO liquidations...
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This note was uploaded on 07/02/2011 for the course FINA 470 taught by Professor Austin during the Spring '11 term at South Carolina.

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470 test 2-1 - Chapter 4 Analysis of Cash and Cash...

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