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Current assets are assets that a company expects to convert to cash or use up
within one year (Kimmel, Weygandt, & Kieso, 2007, p. 49). Supplies or accounts
receivable are current assets since supplies are expected to be used within one
year, and accounts receivable are expected to be collected within one year.
Cash
Short-term investments
Receivables
Inventories
Prepaid expenses
The opposite of a current asset, a non-current asset is an asset that is not easily
converted to cash or not expected to become cash within one year.
As the definition of each indicates, current assets are assets that are expected to
be used or converted to cash within one year, whereas, noncurrent assets are not
expected to be used or converted to cash within one year.
The current and noncurrent assets are found within the Balance Sheet and are
usually listed in the order in which they are expected to convert to cash (or, order of
liquidity).
Reference
Kimmel, P., Weygandt, J., & Kieso, D. (2007). Financial Accounting: Tools for
Business Decision Making (4th ed.). Hoboken, NJ: Wiley.
DQ2
What is an example of a significant accounting estimate? What is the
importance of these estimates? How do ethics play into the decision-making
process? Which financial statements include significant accounting
estimates? Why?
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According to Kimmel et al. (2006), when bad debts are material, companies must
use the allowance method for financial reporting purposes. The three essential
features are:
The decisions an individual makes are based upon their ethics. Without good ethics,
the decision-making process is hampered. Any individual or organization must have
a good ethics base in order to make sound and ethics decisions.
depreciation; this allows deduction from the cost figure of the asset on the balance
sheet.
Reference
Kimmel, P., Weygandt, J., & Kieso, D. (2007). Financial Accounting: Tools for
Business Decision Making (4th ed.). Hoboken, NJ: Wiley.
DQ3
What are internal controls? Why do companies need them? What are some
examples of internal controls? Who is responsible for developing internal
controls? What are some limitations of internal controls?
Internal controls are policies and procedures set in place in order to safeguard the
company. To safeguard assets and enhance the accuracy and reliability of
accounting records, companies follow internal control principles (Kimmel,
Weygandt, & Kieso, 2007, p. 317).
Not every person or employee is honest, and occasionally honest mistakes will
occur. Companies need internal controls to assure mistakes or dishonest employees
are not stealing from the company. In addition, internal controls assure the accuracy
of the accounting records.
One major limitation of internal controls is the human element. Any system can
become ineffective and vulnerable when the human element is involved. As the text
points out, employees can become fatigued, careless, or indifferent.
Reference
Kimmel, P., Weygandt, J., & Kieso, D. (2007). Financial Accounting: Tools for
Business Decision Making (4th ed.). Hoboken, NJ: Wiley.
DQ4
What are intangible assets? How does a business obtain intangible assets?
What is goodwill? Why would a business have an account for goodwill?
Intangible assets are assets that are valuable but have no physical substance.
Intangible assets are rights, privileges, and competitive advantages that result
from ownership of long-lived assets that do not possess physical substance
(Kimmel, Weygandt, & Kieso, 2007, p. 444). Intangible assets include patents,
copyrights, trademarks, and trade names.
What is goodwill?
Goodwill is an intangible asset and commonly the largest upon the company
balance sheet. Goodwill represents the value of all favorable attributes that relate
to a business enterprise (Kimmel, Weygandt, & Kieso, 2007, p. 444). Goodwill
includes exceptional management, location, customer relations, skill of employees,
quality product, and pricing policies. Essentially, goodwill is a portion of the
company value that is not directly attributable to assets and liabilities.
A business would have an account for goodwill when purchased for more than the
fair value of the identifiable assets. A company with a higher goodwill will attract a
higher selling price because customers are more likely to stay and the business is
more likely to remain profitable.
Reference
Kimmel, P., Weygandt, J., & Kieso, D. (2007). Financial Accounting: Tools for
Business Decision Making (4th ed.). Hoboken, NJ: Wiley.