12.

Monetary Current Assets and Liabilities

CURRENT ASSETS

Cash equivalent Financial instrument with an original maturity of 3 months or less.

Includes Excludes

Certificate of deposit, no penalty or immaterial penalty. Certificate of deposit, material penalty.

Compensating balance, unrestricted or immaterial restriction. Compensating balance, material restriction.
Commercial paper. Restricted cash (e.g. sinking fund, dividend fund, payroll fund).
Money market fund.
Treasury bill.

----- Compensating balance Money that must stay on deposit with bank as condition of loan. ex. If borrower must keep $2,000 compensating
balance as condition of $10,000 loan at 6%, then only $8,000 borrowed and interest payment of $600 has 7.5% effective interest rate. ----- Disclose
all compensating balances. ----- Restricted cash Cash set aside to comply with agreement or for future use. ----- Cash equivalent includes treasury
bill, but NOT treasury note nor treasury bond.

Bank reconciliation

Balance per bank Balance per books

+ Outstanding checks - Unrecorded customer NSF check

- Outstanding deposits - Unrecorded bank charges

+ - Error on bank statement + Unrecorded note collected by bank directly

+ - Error on books

Corrected cash balance Corrected cash balance

Accounts receivable is reported at net realizable value (NRV) using the allowance method.

Assets

X X
X X
Accounts receivable 1000
(Allowance for uncollectible accounts) (200) 800
X X
X X

Event GAAP Allowance method Tax rules Direct write-off method

Direct write-off is not acceptable GAAP because bad

debt expense is not recorded in same period as
revenue.

Co. records revenue. dr. AR cr. Revenue dr. AR cr. Revenue

Co. estimates uncollectible accounts. dr. Bad debt expense cr. Allowance

Co. writes off uncollectible account. dr. Allowance cr. AR dr. Bad debt expense cr. AR

Co. collects a previously written-off dr. AR cr. Allowance dr. AR cr. Bad debt expense
account. dr. Cash cr. AR dr. Cash cr. AR

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Approaches to estimate allowance for uncollectible accounts

Income statement approach Balance sheet approach

First calculate bad debt expense, then solve for ending balance First calculate ending balance, then solve for bad debt expense
CALC = sales * bad debt % CALC = agegroup1 * % uncollectible + agegroup2 * % uncollectible + ...

Allowance T-account (normal cr.) Allowance T-account (normal cr.)

Beginning balance Beginning balance

+ Bad debt expense (CALC) + Bad debt expense (PLUG)
Write-offs - Write-offs -
+ Recoveries + Recoveries
= Ending balance (PLUG) = Ending balance (CALC)

Financing with receivables

Sale of receivables Defined as all of the following: Secured borrowing Fails one of the sales criteria.
Transfer cannot be avoided in bankruptcy.
Transferee has the right to sell or borrow against assets.
No agreement in place to repurchase or return assets.

Factoring Company sells
receivables for cash. Receives
most cash up front, then the
balance once receivables
collected. Minus fee to factor. And
minus uncollectible receivables if
sold with recourse.
Securitization Company sells
pool of receivables and loans from
the company to special purpose
entity. Entity then issues bonds or
other securities that are secured
by this pool.
Assigning Company borrows Pledging Company borrows from
from bank with specific receivables bank with receivables in general
as security. as security. Same accounting
treatment as assigning.

Factoring ex. Assigning ex.

Co. has total AR of $145,000. Factors $100,000 to bank with recourse. Co. has total AR of $145,000. On 1/1/1, assigns $120,000 to bank. Bank
Bank charges 2% fee. Bank pays Co. $90,000 up front and agrees to charges 12% interest on loan of $100,000, and charges fee equal to 2%
pay $8,000 (thats $10,000 balance - 2% fee) once collected. of AR assigned. By 12/31/1, $50,000 of AR collected.

Factoring with recourse, internally
estimated at 5% of AR
dr. Cash 90,000
dr. Loss on sale 2,000 + 5,000
dr. Receivable from factor 8,000
cr. Liability 5,000
cr. AR 100,000
Factoring without recourse 1/1/1 Co. records assignment. dr. Cash 97,600
dr. Assignment expense 2,400
cr. Liability 100,000
dr. Cash 90,000
dr. Loss on sale 2,000 12/31/1 Co. collects AR. dr. Cash 50,000
dr. Receivable from factor 8,000 cr. AR 50,000
cr. Liability
cr. AR 100,000
12/31/1 Co. pays interest and pay dr. Liability 50,000
down assignment. dr. Interest expense 12,000
cr. Cash 62,000

ankers acceptance On behalf of retailer, retailers bank issues a

----- Loan participation Several banks might join in to fund one large loan. ----- B
promise to pay to wholesale supplier. At some future date, bank will pay holder (in this case, wholesale supplier) and will recoup directly from
retailers bank account. This instrument is potentially useful to retailer, who couldnt have bought on credit. Retailer may even be able to resell the
goods before instrument comes due.

CURRENT LIABILITIES

Payroll expense
ex. Minimum $6,735 expense to Co. for 1 employee earning $6,000 paycheck.

Payroll expense Components Payroll tax expense Components

dr. Payroll expense 6,000
cr. Federal income tax payable X
cr. State income tax payable X
cr. FICA tax payable 459
cr. 401K payable X
cr. Cash (PLUG)
dr. Payroll tax expense 735
cr. Employer FICA tax payable 459
cr. Federal unemployment tax
payable 36
cr. State unemployment tax
payable 240

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 Optional expense to employer... who pays fringe benefits... but no employer tax expense for these fringe benefits.

dr. 401K expense cr. 401k payable X

dr. Health insurance expense cr. Health insurance payable X

----- Employer must withhold the employees income tax and the employees share of FICA tax. Withholdings are liabilities to the employer until
employer deposits money to government (deadline for deposit depends on size of employer, large employer could have 3 days to pay, small one
could have the whole quarter). Note: Withholdings are expenses to employee. Withholdings are liabilities but NOT expenses to employer. -----
Employer must pay employer share of FICA tax and unemployment tax. These are liabilities AND expenses to the employer.

Loss contingency: Litigation

Amount is known. Amount is reasonably Amount is not reasonably

estimable. estimable.

Likelihood is probable (more likely than not). Recognize and disclose. Recognize and disclose. Disclose only.

Likelihood is reasonably possible. Disclose only. Disclose only. Disclose only.

Likelihood is remote. Do not report. Do not report. Do not report.

----- Recognize and disclose best estimate for range of loss. If no best estimate, recognize low end and disclose high end. ----- Recognize and
isclose only the following contingencies even if likelihood is
disclose contingency even if lawsuit not yet filed, but likelihood of filing is probable. ----- D
remote: guarantees of others debt, standby letters of credit by bank, agreements to repurchase receivables. ----- Disclose only if lose ruling, but
likelihood of loss on appeal is still believed to be reasonably possible or remote. ----- D o not report if cause of loss contingency does not occur before
statement date. ----- Do not report for risk of fire or catastrophe, and general business risks.

----- Disclose only all gain contingency. Disclosure should state likelihood of gain.

Loss contingency: Asset retirement obligations

1/1/1 Co. builds $300M gas facility to last 10 dr. Gas facility 309M cr. Cash 300M
years. Expects to pay $15M in Y10 to cr. ARO 9M
decommission. Lets assume present value of
decommission is $9M.

12/31/1 Co. records depreciation of facility. dr. Depreciation expense cr. Accumulated depreciation

12/31/1 Co. records accretion expense (i.e. dr. Accretion expense cr. ARO
interest expense) of ARO because one year
nearer to retirement.

Loss contingency: Warranty expense

Loss contingency: Premium expense

1/1/1 Co. records $100,000 sales. Sales come dr. Warranty expense 3,000 cr. Warranty liability 3,000
with two year warranty. Past experience
indicates 1% warranty costs during 1st year,
and 2% warranty costs during 2nd year.

12/31/1 Co. records $1,500 of actual payments. dr. Warranty liability 1,500 cr. Cash, inventory, etc 1,500

----- If probabilities are given, use weighted average to calculate warranty expense. ----- Premium expense calculation is substantially the same.

Loss contingency: Compensated absences

For liability to be accrued, all of the following are needed:
Services already performed.
Absences vest or accumulate.
Payment is probable.
Payment is reasonably estimated.

Ratios
Current ratio Current assets / current liabilities

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Quick ratio Cash and cash equivalents, net receivables, short term investments / current liabilities

----- Quick ratio excludes the following from numerator: inventory, prepaid items, and available for sale securities.

AP Inventory AR

Turnover Purchases / average AP COGS / average inventory Sales / average AR

Conversion period Average AP / (purchases / 365) Average inventory / (COGS / 365) Average AR / (sales / 365)

Days outstanding Ending AP / (purchases / 365) Ending inventory / (COGS / 365) Ending AR / (sales / 365)

------ Alternatively, turnover is calculated using ending AP (or inventory or AR) in denominator. ----- In practice, turnover is greater than 1: this means
turnover decreases when numerator and denominator increase by same amount (e.g. end of year sale causes AR turnover to decrease).

# Subtopic GAAP IFRS

12 Monetary current Short term obligation is reclassified as noncurrent if Short term obligation is reclassified as noncurrent only if
assets and company has intent and ability to refinance. company enters into agreement to refinance.
liabilities

Contingent liability refers to all uncertain future loss, no Contingent liability refers to uncertain future loss that is
matter accrued or not. not accrued.

Provision refers to uncertain future loss that is accrued.

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