Critical Issues-Current
Assets
• Sufficient liquidity to meet obligations
• Sufficient liquidity to take advantage
• Speed of liquidity
• Long-term liquidity
• Meeting investment objectives
• Source of financial assets
• Sufficient liquidity for distribution
Accounting Fundamentals--Fall 2002 1
Valuation
Asset Basis
• Cash • Stated amount
• Accounts Receivable • Net Realizable Value
• Notes Rec.-L/T • Present Value
• Invest-Held to • Adjusted Cost
Maturity • Market Value (P/L)
• Trading Securities • Market Value (Equity)
• Available for Sale Sec.
Accounting Fundamentals--Fall 2002 2
Cash
• Cash
• Investments with 90 days or less to
maturity at time of acquisition
• Restricted Cash
• Foreign Cash---->translate to US
$
Accounting Fundamentals--Fall 2002 3
Accounts Receivable
• Amounts due from customers
• Recognition
• Process complete
• Amount measurable
• Costs identifiable
• Balance is collectible
Accounting Fundamentals--Fall 2002 4
A/R Valuation
• Net Realizable Value
• Frequent Monitoring
• A/R Turnover and DSO (Days Sales
Outstanding)
• Older A/R are usually less
collectible
Accounting Fundamentals--Fall 2002 5
Bad Debt Expense
• Recognition based on past experience
• Follows the matching principle
• Basis of estimates
• % of sales
• Aging of A/R
Accounting Fundamentals--Fall 2002 6
Accounting for Bad Debts
• Recording the Allowance for Bad
Debts
• Dr. Bad Debt Expense; Cr. Allowance
• Writing off Bad Debts
• Dr. Allowance; Cr. Specific A/R
• Adjusting Prior Write-offs
• Dr. Cash; Cr. Allowance
Accounting Fundamentals--Fall 2002 7
F/S Presentation
• Allowance for Bad Debts--Contra
Account on the Balance Sheet
• Potential for subjective interpretation
• Current asset if collectible w/in a
year
• Financing opportunities
• Pledging-borrowings on all
• Assigning-borrowings on specific acct.
• Factoring-sale of specific acct.
• With or without recourse
Accounting Fundamentals--Fall 2002 8
Inventory Acquisition
• What units
• What costs
Accounting Fundamentals--Fall 2002 9
Cost Basis
• Sacrifice to put into use
• Components
• Net price
• Freight
• Production
• Preparation
• Fees
• N.B.....future benefit
Accounting Fundamentals--Fall 2002 10
Inventory Methods
• Perpetual
• B + I - O = E
• Periodic
• B + I - E = O
Accounting Fundamentals--Fall 2002 11
Cost Flow Assumption
• Specific ID
• Averaging
• FIFO…first in; first out
• LIFO…last in; first out
• Applies to costs only, NOT physical
movement
• Disclose both values
• Use same method for book and tax
Accounting Fundamentals--Fall 2002 12
Inventory Valuation
• Lower of Cost or Market
Accounting Fundamentals--Fall 2002 13
Lower of Cost or Market
• Determine historical cost
• Chose appropriate market value
• Replacement cost...current price to
replace
• Net realizable value…ceiling
• NRV less normal profit…floor
Accounting Fundamentals--Fall 2002 14
Critical Cost Terms
• Fixed vs. Variable
• Product vs. Period
• Manufacturing vs. Non-manufacturing
• Direct vs. Indirect
• Controllable vs. Uncontrollable
• Opportunity and Sunk Costs
• Cost Driver
• Differential Cost and Revenue
Accounting Fundamentals--Fall 2002 15
Manufacturing Cost Flows
RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS
BOH
B O/H R/M B O/H WIP B O/H F/G
R/M TRANSFERS
I R/M PURCHASES DIR. LABOR COGM
MFG OVERHEAD
MANUFACTURING
COSTS
O TRANSFERS TO COST OF GOODS COST OF GOODS
WIP MANUFACTURED SOLD
(COGM) (COGS)
EOH E O/H WIP E O/H F/G
E O/H R/M
P&L
Accounting Fundamentals--Fall 2002 16