tailieunhanh - Lecture Financial accounting in an economic context (9th edition): Chapter 6 – Jamie Pratt

Chapter 6 - The current asset classification, cash, and accounts receivable. In this chapter students will be able to: Describe the current asset classification and its role in financial analysis and control; explain the techniques used to manage, account for, and control cash; define accounts receivable and indicate how the allowance method is used to value accounts receivable on the financial statements. | 1 Chapter 6: The Current Asset Classification, Cash, and Accounts Receivable 2 2 Current Asset Classification 3 A current asset is defined as any asset that is intended to be converted into cash within one year or the company’s operating cycle, whichever is longer. Figure 6-1 The operating cycle 3 4 Relative Size of Current Assets Figure 6-2 Current assets as a percentage of total assets 4 5 Measures Using Current Assets – Current Ratio Figure 6-3 Current assets as a percentage of current liabilities 5 6 As noted by Leopold A. Bernstein: “The current ratio is not fully up to the task [of assessing short-term liquidity] because it is a static or “stock” concept of what resources are available at a given moment to meet the obligations at that moment.” Limitations of the Current Assets Classification 6 7 Cash *Cash flows are increasingly popular in assessing solvency Figure 6-5 Cash as a percentage of total assets and current assets 7 8 Restrictions placed on a company’s access to its cash are typically imposed by creditors to help ensure future interest and principal payments. Compensating balances are sometimes required Record Control over cash Physical Control over cash Proper Management of Cash 8 Accounts Receivable Accounts receivable arise from selling goods or services to customers on account. Recorded at face amount to be collected. However, we must also reflect the fact that a portion of A/R may not be collected. We adjust to Net Realizable Value Reasons for lack of/partial collection: sales discounts (cash discounts) sales returns sales allowances uncollectible A/R (bad debts) 9 9 Cash Discounts Offered to encourage early payment Examples: 2/10, net 30 2/10, EOM Accounting approaches Gross Method - records discounts when taken by customers, this is more common and is discussed in more detail Net Method – records discounts not taken by customers Quantity and Trade discounts are a reduction of price/revenue and aren’t recorded separately in the financials | 1 Chapter 6: The Current Asset Classification, Cash, and Accounts Receivable 2 2 Current Asset Classification 3 A current asset is defined as any asset that is intended to be converted into cash within one year or the company’s operating cycle, whichever is longer. Figure 6-1 The operating cycle 3 4 Relative Size of Current Assets Figure 6-2 Current assets as a percentage of total assets 4 5 Measures Using Current Assets – Current Ratio Figure 6-3 Current assets as a percentage of current liabilities 5 6 As noted by Leopold A. Bernstein: “The current ratio is not fully up to the task [of assessing short-term liquidity] because it is a static or “stock” concept of what resources are available at a given moment to meet the obligations at that moment.” Limitations of the Current Assets Classification 6 7 Cash *Cash flows are increasingly popular in assessing solvency Figure 6-5 Cash as a percentage of total assets and current assets 7 8 Restrictions placed on a company’s access to .

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