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Accounting And Finance For Managers - Accounting For And Presentation Of Current Assets

Accounting for and Presentation of Current Assets



Current Assets

Current assets are cash and other assets that will be converted     to cash or used up during a relatively short period of time, usually a     year or less. Current assets are normally listed in the order of liquidity     (how readily they can be converted to cash).

Every entity has an operating cycle in which products and     services are purchased, services are performed on account, payment is     made to employees and suppliers, and finally cash is received from customers.

Accounts that Comprise Current Assets are:

         
  • Cash
  •      
  • Marketable (short-term) securities
  •      
  • Accounts Receivable
  •      
  • Notes Receivable
  •      
  • Inventories
  •      
  • Prepaid Expenses

Cash and Marketable Securities

The cash amount on the Balance Sheet is the amount of cash owned by the     entity on the Balance Sheet date.

Short-term marketable securities held until maturity is shown on the     Balance Sheet at cost, which is usually about the same as market value.

Securities expected to be held for several months after the Balance Sheet     date are shown at market value.

Interest income from marketable securities that has not been received     must be accrued.

Accounts Receivable

Account receivables are amounts owed to an entity by customers (debtors).    An account receivable arises when a service or product is sold and cash     is not received immediately.

Accounts receivables are reported on the Balance Sheet at their “Net     Realizable Value.” This amount is the amount of cash expected to     be collected from the accounts receivable.

When sales are made on account, a very high probability exists that some     accounts receivable will not be collected.

The matching of revenues and expenses concept requires that the cost     of uncollectible accounts receivable be reported in the same period as     the revenue that was recognized when the account receivable was created.

The amount of accounts receivable not expected to be collected is recorded     and reported in the account “Allowance for Bad Debts” which     is a “contra asset” account on the Balance Sheet.

Notes Receivable

A note is an unconditional written promise to pay a definite sum of money     at a certain date, usually with interest at a specified rate.

A note receivable is on the Balance Sheet of the entity to which the     note is given.

A note receivable arises when:

A sale is made and a note is taken from the customer.

A customer gives a note for an amount due on open account

Money is loaned and a note is received as evidence.

Inventories

The inventories asset account contains the cost of items that are being     held for sale.

When an item of inventory is sold, its cost is transferred from the inventory     asset account, a Balance Sheet account, to the cost of goods sold account,    an Income Statement account.

When the inventory includes the cost of several units of the same item     sold, determining the cost of the items sold is handled in different ways.

Alternative Inventory Cost Flow Assumptions

Specific Identification – an alternative cost flow assumption that     links cost and physical flow.

When an item is sold, the cost is determined from the entity’s     records. The cost of the item is then transferred from the Inventory account     to Cost of Goods Sold.

The amount of inventory at the end of the year is the cost of the items     held in inventory.

Weighted Average – an alternative cost flow assumption applied     to individual items of inventory.

The weighted average alternative involves calculating the average cost     of the items at the beginning inventory plus purchases made during the     year.

Once the average cost is calculated, it is used to determine the Cost     of Goods Sold and the carrying value of ending inventory.

First-in, First-out (FIFO) – an alternative cost flow assumption     that transfers out beginning inventory cost s a monetary amount computes     unit cost based only on current-period cost and output.

If item costs do not change from period to period, the FIFO method yields     the same results as the weighted average method

Under the FIFO method, the equivalent units and manufacturing costs in     the beginning work in process are excluded from the current-period unit     cost calculation as. This method recognizes that work and costs carried     over from the prior period legitimately belong to that period.

FIFO assumes that units in beginning work in process are completed first,    before any new units are started. Thus, one category of completed units     is that of beginning work-in-process units. The other category is for     those units started and completed during the current period.

The FIFO method produces a more accurate unit cost than the weighted     average method if changes occur in the prices of manufacturing inputs     from one period to the next.

Last-in, First-out (LIFO) – an alternative cost flow assumption     opposite to FIFO. Remember that FIFO and LIFO refer to cost flow, not     physical flow.

Under LIFO, the most recent costs incurred for merchandise purchased     or manufactured are transferred to the income statement as Cost of Goods     Sold when items are sold

The inventory on hand at the Balance Sheet date is costed at the oldest     costs, including those used to value the beginning inventory.

When costs are declining over time, LIFO results in higher profits than     FIFO.

Prepaid Expenses

A prepaid expense is an asset awaiting assignment to expense. Some expenditures     made in one period are not properly recognizable as expenses until a subsequent     period. Prepaid expenses result from the application of accrual accounting.

For prepaid expenses, expense recognition is deferred until the period     in which the expense applies. Prepaid expenses include insurance premiums and rent.

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