Financial 4 (Working Capital and Fixed Assets)

WORKING CAPITAL AND ITS COMPNENTS Ratios: Cash and Cash Equivalents Short-term, highly liquid investments that are readily convertible to cash Original maturity date 90 days or less o Ex: Checking Acct, Savings Accounts, & Money Market Funds Deposits held as compensating balances against borrowing arrangements with lending institutions that are not legally restricted Not cash equivalent o Time certificate deposits (if original maturity is over 90 days) o Legally restricted deposits held as compensating balance against borrowing arrangements w/ lending institutions Bank Reconciliations Deposit in Transit add (+) to bank Outstanding Checks subtract (-) from bank Service Charges subtract (-) from books Bank Collections add (+) to books NSF subtract (-) from books Interest Income add (+) to books Accounts Receivable T-acct o Net Realizable Value (NRV) AR adj for allowance receivables that may be uncollectible, sales discounts, and sales returns & allowances Discounts on A/R (gross method) o Record a sale w/o regards to the available discount If payment received within disc period, reflect the disc in J/E o Example: $100,000 2/10, n/30

Discounts on A/R (net method) o Record sales and A/R net of available discount If received after discount period, reverse entity o Example: $100,000 2/10, n/30

Trade Discounts o Quantity discounts, quoted in %, record net of trade discount o Example:

Sales Returns & Allowances o Sales , A/R

Estimating Uncollectible A/R 1) Direct Method (not GAAP) o A/R always overstated, doesnt match bad debt expense with revenue properly 2) Allowance Method (GAAP) o Estimated baded on past experience 1) % of sales (I/S) 2) % of A/R (B/S) 3) Aging AR *Note: put into allowance for uncollectible accounts, then move to W/Os % of sales I/S approach (straight forward) % of A/R B/S approach o (Plug in bad debt exp) o Start w/ ending balance

Pledging (Assignment) Pledging is the process whereby the company uses existing A/R as collateral for a loan o Note disclosure, company still has title Factoring of A/R 1) w/ recourse sale (assignee assumes all liability) Protects against sales returns

2) w/o recourse sale or loan

A/R collateral (requires footnote disclosure)

Notes Receivable (discount) 1) w/ recourse 2) w/o recourse o True sale

INVENTORIES Goods in Transit FOB Shipping Point o Buyer assumes responsibility when at shipping carrier (Freight-in COGS) FOB Destination o Seller assumes responsibility until destination (Freight-out Expense) Shipment non-conforming goods o Title reverts to seller upon rejection of buyer o Goods not included in buyer books, even when buyer possesses goods prior to return of goods Valuation of Inventory Lower of Cost or Market o Market Value = Median (Middle Value) 1) Replacement Cost 2) Market Ceiling = NRV (Selling Price Cost) 3) Market Floor = NRV Profit Margin *GAAP use middle figure as the market price o Cost IFRS o Lower of 1) Cost or 2) NRV (Selling Price Cost) Periodic Inventory System vs. Perpetual Inventory System Periodic o Based on physical count, done annually (end) Squeezing COGS

Perpetual o Update as each item is purchased or sold, continuously updated

First In, First Out (FIFO) Method o Periodic and Perpetual Ending and COGS are the same o Period of rising prices FIFO = Highest ending inventory Lowest COGS Highest Net Income Weight Average Method

Periodic at the end of the period, the avg cost of each in inventory would be the weighted average of the cost of all items in inventory

Moving Average Method o Perpetual Computes the weighted avg cost after each purchase by dividing total cost of inv. Available after each purchase by the total units available after each purchase Last In, First Out (LIFO) Method (LIFO = Lowest) o Periodic Perpetual In periods of rising prices, Lower Ending Inventory Highest COGS Lowest Net Income Dollar Value LIFO o Regular LIFO Inv. measured in units and is priced at unit $ o $ Value LIFO Inv. measured in dollars and is adjusted for change in $ levels o *When Price Index not supplied

*When Price Index is supplied Year-end Price Index is multiplied by the LIFO layer at the base year cost to calculate the LIFO layer Valuation of Fixed Assets GAAP o 1) Historical Cost (FMV) o 2) Donated Fixed Assets IFRS o 1) Cost Model Carrying Value = Historical Cost Accum Depr Impairment o 2) Revaluation Model Revaluation Model = FV @ revalue date subsequent accum depr subsequent impairment o Revalue Loss I/S o Revalue Gain OCI o Impairment 1) reduce revalue surplus gain to 0 2) leftover impairment, loss on I/S Repairs o

Cost of Land All cost incurred up to excavation (digging a hole) for a new building are considered land o *Note: excavation ends at leveling of the land

 Cost of Building excavation forward Capitalizable Interest Rule 1: only capitalize interest on money actually spent, not on the total amount borrowed Rule 2: the amount of interest capitalized is lower of: o 1) Actual interest cost incurred o 2) Computed capitalized interest (avoidable interest) Construction (capitalize or expense)

DEPRECIABLE ASSETS AND DEPRECIATION Composite Depreciation

Sum of Years Digits

Declining Balance

(ignore salvage value)