The Current Asset Classification, Cash, and Accounts Receivable Presentations for Chapter 6 by Glenn Owen

Key Points Current assets, working capital, current ratio, and quick ratio, and how these measures are used to asses the solvency position of a company. “Window dressing” and the reporting of current assets, working capital, and the current ratio. Techniques used to account for and control cash. Accounts receivable and how they are valued on the balance sheet. The allowance method for uncollected receivables. Major concerns of financial statement users in the area of receivables reporting.

The Operating Cycle Cash

Cash Manufacture or purchase inventory Inventory

The Operating Cycle Cash Sales to customers Manufacture or purchase inventory Inventory AccountsReceivable

The Operating Cycle Cash Sales to customers Receive payment Manufacture or purchase inventory Inventory AccountsReceivable

由購料開始，經過生產－銷售－收款，稱為一 個營業循環。如從現金流量觀點，自現金流出購料 付現，到應收款項收現獲得現金流入，此一循環稱 為現金循環。 圖4-2 現金循環圖

Current Asset Classification Current assets are those intended to be converted into cash (liquidated) in the near future. The distinction is useful because it provides an easy-to-determine, low-cost measure of a company’s ability to produce cash in the short-run. The relative size of current assets varies by industry as shown in the following tables.

Current Assets/Total Assets

Current Ratio Current assets are often compared to current liabilities as an indicator of a company’s solvency. Average current ratios also vary across industries as shown in the following tables.

Current Ratios

Cash The cash account is the first asset listed in the current asset section of the balance sheet. It consists of coin, checks, and bank drafts received by the company. The only reporting issues for cash is whether there are restrictions on its use. The amount of cash maintained by companies also varies by industry as shown in the following tables.

Cash as a % of Total Assets

Cash as a % of Current Assets

Proper Management and Control of Cash Proper cash management requires that enough cash be available to meet the needs of the company’s operations. Too much cash is undesirable as it loses purchasing power in periods of inflation. Control of cash – Record control – Physical control

Accounts Receivable Accounts receivable arise from selling goods or services to customers on account. Table of accounts receivable as a percentage of total assets by industry. Table of average accounts receivable collection periods by industry. Allowance for Uncollectible Accounts – T-accounts – Percentage of Sales – Aging

A/R as a % of Total Assets

A/R as a % of Current Assets

Allowance for Uncollectibles (T-account) Allowance for Uncollectibles Beginning Balance The allowance established in the prior period remains for current period write-offs.

Allowance for Uncollectibles (T-account) Allowance for Uncollectibles Beginning Balance Accounts Receivable Write-off of accounts receivable Write-off of accounts receivable As receivable accounts are determined uncollectible, they are written-off to the allowance account as shown.

Allowance for Uncollectibles (T-account) Allowance for Uncollectibles Beginning Balance Accounts Receivable Write-off of accounts receivable Write-off of accounts receivable Recognition of bad debt expense Bad Debts Expense Recognition of bad debt expense At the end of each accounting period an estimate of the current period bad debt expense is recorded, increasing the allowance.

Allowance for Uncollectibles (T-account) Allowance for Uncollectibles Beginning Balance Recognition of bad debt expense Bad Debts Expense Recognition of bad debt expense Accounts Receivable Write-off of accounts receivable Ending Balance Write-off of accounts receivable The ending balance in the allowance account remains as an estimate for future period write- offs.