CURRENT ASSETS EMBA - 2005. 2 Economic Consequences of Accounting ► on wealth or behavior of ...

CURRENT ASSETSCURRENT ASSETS

EMBA - 2005EMBA - 2005

2

Economic Consequences of Economic Consequences of AccountingAccounting

► on wealth or behavior ofon wealth or behavior of lenders and investorslenders and investors reporting entities, their management and users reporting entities, their management and users

of financial statementsof financial statements reporting entities and standard settersreporting entities and standard setters

► Sources of impactSources of impact Effect of financial results reported in the financial Effect of financial results reported in the financial

statementsstatements Effect of firm’s choice of accounting principlesEffect of firm’s choice of accounting principles Effect on reporting entities of standard setters’ Effect on reporting entities of standard setters’

decisionsdecisions Effect on standard setters of their decisionsEffect on standard setters of their decisions

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Quality of EarningsQuality of Earnings► Business: having stable and recurring basic Business: having stable and recurring basic

revenue generating activitiesrevenue generating activities► Accounting: 1) using consistent estimates and Accounting: 1) using consistent estimates and

rulesrules High: same methods of estimation and rules High: same methods of estimation and rules

2) proximity of revenue recognition and 2) proximity of revenue recognition and cash collectioncash collection

High: when revenue recognition and cash High: when revenue recognition and cash collection are closecollection are close

► High quality earnings are presumed to be fair High quality earnings are presumed to be fair representations of the economic performance of representations of the economic performance of the firmthe firm

► Low quality earnings overstate fair earningsLow quality earnings overstate fair earnings

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What will affect Quality of What will affect Quality of Earnings?Earnings?

►Managers’ discretion in measuring Managers’ discretion in measuring and reporting earnings in:and reporting earnings in: Choosing among alternative Choosing among alternative

accounting principlesaccounting principles Making estimatesMaking estimates Timing transactions in order to Timing transactions in order to

control recognitioncontrol recognition

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Current assetsCurrent assets

►assets that are expected to be assets that are expected to be converted into cash within one year or converted into cash within one year or within the operating cycle of an entity within the operating cycle of an entity

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Why is Current Asset Why is Current Asset Management Important?Management Important?

►solvency solvency ►profitability profitability ►profitable but insolvent profitable but insolvent ►quality of receivables quality of receivables ►credit policiescredit policies► idle cash idle cash

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Cash and Cash EquivalentsCash and Cash Equivalents

► CashCash Coins, banknotes deposits at banks, checks Coins, banknotes deposits at banks, checks

received from customersreceived from customers Restricted Restricted Cash Cash or or Blocked CashBlocked Cash and the and the

related amounts should not be included in the related amounts should not be included in the cash amount cash amount

Petty CashPetty Cash ► Cash EquivalentsCash Equivalents

Investments that are readily convertible to cash Investments that are readily convertible to cash with insignificant risk and with a maturity less with insignificant risk and with a maturity less than 90 days- e.g. Treasury Bills, term-deposits than 90 days- e.g. Treasury Bills, term-deposits with less than 90 days maturitywith less than 90 days maturity

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Checks Received From Checks Received From CustomersCustomers

► by law, checks are payable at sight, so they by law, checks are payable at sight, so they are deemed as liquid and should be included are deemed as liquid and should be included as cash in the balance sheets of the entitiesas cash in the balance sheets of the entities

► although the concept of post dated checks is although the concept of post dated checks is not within the context of the legislation, in not within the context of the legislation, in practice checks with future payment dates practice checks with future payment dates are issued in Turkeyare issued in Turkey

► due-dated checks should not be included as due-dated checks should not be included as cash but treated as notes receivable in the cash but treated as notes receivable in the balance sheet. balance sheet.

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Control Over CashControl Over Cash

► easily transportable easily transportable ► large number of transactions involving cash large number of transactions involving cash ► Establish ResponsibilitiesEstablish Responsibilities► Segregation of DutiesSegregation of Duties► Documentation ControlsDocumentation Controls► Physical ControlsPhysical Controls► Independent Internal VerificationIndependent Internal Verification► Use of Bank AccountsUse of Bank Accounts

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Bank ReconciliationBank ReconciliationWhy are there differences between the Cash (bank balance of Why are there differences between the Cash (bank balance of

checking account) per bank statement and ledger accounts checking account) per bank statement and ledger accounts ? ?

► Unknown items or forgotten items: Unknown items or forgotten items: - direct debits; - direct debits; - standing orders; - standing orders; - credit transfers; - credit transfers;

► Bank charges or bank interest: Bank charges or bank interest:

► Errors - calculations: Errors - calculations: - overs; - overs; - unders; - unders;

► Timing differences: Timing differences: - unpresented checks; - unpresented checks; - outstanding checks - outstanding checks

All reconciling items on the book side require an adjusting entry to the cash account.

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BANK RECONCILIATIONBANK RECONCILIATIONHere are step-by-step instructions for preparing a bank reconciliation.Here are step-by-step instructions for preparing a bank reconciliation.

► Prepare a list of deposits in transit.Prepare a list of deposits in transit. Compare the deposits listed Compare the deposits listed on your bank statement with the bank deposits shown in your on your bank statement with the bank deposits shown in your cash receipts journalcash receipts journal. On your bank reconciliation, list any deposits . On your bank reconciliation, list any deposits that have not yet cleared the bank statement. Also, take a look at the that have not yet cleared the bank statement. Also, take a look at the bank reconciliation you prepared last month. Did all of last month's bank reconciliation you prepared last month. Did all of last month's deposits in transit clear on this month's bank statement? If not, you deposits in transit clear on this month's bank statement? If not, you should find out what happened to them. should find out what happened to them.

► Prepare a list of outstanding checks.Prepare a list of outstanding checks. In your In your cash disbursements journalcash disbursements journal, mark each check that cleared the bank , mark each check that cleared the bank statement this month. On your bank reconciliation, list all the checks statement this month. On your bank reconciliation, list all the checks from the cash disbursements journal that did not clear. Also, take a from the cash disbursements journal that did not clear. Also, take a look at the bank reconciliation you prepared last month. Are there any look at the bank reconciliation you prepared last month. Are there any checks that were outstanding last month that still have not cleared checks that were outstanding last month that still have not cleared the bank? If so, be sure they are on your list of outstanding checks the bank? If so, be sure they are on your list of outstanding checks this month. If a check is several months old and still has not cleared this month. If a check is several months old and still has not cleared the bank, you may want to investigate further. the bank, you may want to investigate further.

► Record any bank charges or credits.Record any bank charges or credits. Take a close look at your Take a close look at your bank statement. Are there any special charges made by the bank that bank statement. Are there any special charges made by the bank that you have not recorded in your books? If so, record them now just as you have not recorded in your books? If so, record them now just as you would have if you had written a check for that amount. By the you would have if you had written a check for that amount. By the same token, if there are any credits made to your account by the same token, if there are any credits made to your account by the bank, those should be recorded as well. bank, those should be recorded as well. PostPost the entries to your the entries to your general ledgergeneral ledger. .

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BANK RECONCILIATIONBANK RECONCILIATION► Compute the cash balance per your books.Compute the cash balance per your books. FootFoot the the

general ledger cash account to arrive at your ending cash general ledger cash account to arrive at your ending cash balance. balance.

► Enter bank balance on the reconciliation.Enter bank balance on the reconciliation. At the top of At the top of the bank reconciliation, enter the ending balance from the the bank reconciliation, enter the ending balance from the bank statement. bank statement.

► Total the deposits in transit.Total the deposits in transit. Add up the deposits in Add up the deposits in transit, and enter the total on the reconciliation. Add the transit, and enter the total on the reconciliation. Add the total deposits in transit to the bank balance to arrive at a total deposits in transit to the bank balance to arrive at a subtotal. subtotal.

► Total the outstanding checks.Total the outstanding checks. Add up the outstanding Add up the outstanding checks, and enter the total on the reconciliation. checks, and enter the total on the reconciliation.

► Compute book balance per the reconciliation. Subtract the total outstanding checks from the subtotal in step 6 above. The result should equal the balance shown in your general ledger.

http://www.itssimple.biz/biz_tools/text/P06_1424.html

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Bank Reconciliation ExampleBank Reconciliation Example

►Prepare a 31 July 2005 bank reconciliation Prepare a 31 July 2005 bank reconciliation statement for Sinan Astatement for Sinan A.S.S. The 31July bank . The 31July bank statement indicated a cash balance of TL statement indicated a cash balance of TL 9,610, while the cash ledger account on that 9,610, while the cash ledger account on that date shows a balance of TL 7,430date shows a balance of TL 7,430

Adapted from Williams, etal, 2003

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► Outstanding checks totaled TL 2,417.Outstanding checks totaled TL 2,417.► A TL 500 check mailed to the bank for A TL 500 check mailed to the bank for

deposit had not reached the bank at the deposit had not reached the bank at the statement date.statement date.

► The bank returned a customer’s NSF check The bank returned a customer’s NSF check for TL 225 received as payment of an for TL 225 received as payment of an account receivable.account receivable.

► The bank statement showed TL30 interest The bank statement showed TL30 interest earned on the bank balance for the month of earned on the bank balance for the month of July.July.

► Check #781 for supplies cleared the bank for Check #781 for supplies cleared the bank for TL 268 but was erroneously recorded in our TL 268 but was erroneously recorded in our books as TL 240.books as TL 240.

► A $486 deposit by X A.S. was erroneously A $486 deposit by X A.S. was erroneously credited to our account by the bank.credited to our account by the bank.

► Outstanding checks totaled TL 2,417.Outstanding checks totaled TL 2,417.► A TL 500 check mailed to the bank for A TL 500 check mailed to the bank for

deposit had not reached the bank at the deposit had not reached the bank at the statement date.statement date.

► The bank returned a customer’s NSF check The bank returned a customer’s NSF check for TL 225 received as payment of an for TL 225 received as payment of an account receivable.account receivable.

► The bank statement showed TL30 interest The bank statement showed TL30 interest earned on the bank balance for the month of earned on the bank balance for the month of July.July.

► Check #781 for supplies cleared the bank for Check #781 for supplies cleared the bank for TL 268 but was erroneously recorded in our TL 268 but was erroneously recorded in our books as TL 240.books as TL 240.

► A $486 deposit by X A.S. was erroneously A $486 deposit by X A.S. was erroneously credited to our account by the bank.credited to our account by the bank.

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Balance per bank statement,31 July 2005 9,610 TL

Add: NSF check 225 TL

Recording error 28

Deposit in transit 500

Additions 753 TL

Deduct Outstanding checks 2,417

Interest 30

Bank error 486

Deductions 2,933 TL

Balance per company's records,31 July 2005 7,430 TL

Reconciling the Bank StatementReconciling the Bank StatementExampleExample


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Reconciling the Bank Statement Example

Reconciling the Bank Statement Example



Balance per bank statement, 31 July 9,610 TLAdditions: Deposit in transit 500 Deductions: Bank error 486 TL Outstanding checks 2,417 2,903 Adjusted cash balance 7,207 TL

Balance per company's records, 31 July 7,430 TLAdditions: Interest 30 Deductions: Recording error 28 TL NSF check 225 253 Adjusted cash balance in the balance sheet 7,207 TL

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ReceivablesReceivables

►Accounts ReceivableAccounts Receivable►Notes ReceivableNotes Receivable

►Other ReceivablesOther Receivables

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ARCELIK 2004ARCELIK 2004

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Recognition of Accounts Recognition of Accounts ReceivableReceivable

►accrual basis of accounting- sales accrual basis of accounting- sales revenue is recognized at the time a revenue is recognized at the time a sale is made and the title of ownership sale is made and the title of ownership of the items under the sale passes to of the items under the sale passes to the buyer regardless of the cash the buyer regardless of the cash payment datepayment date

►when sales are made on credit the when sales are made on credit the accounts receivable is recognized and accounts receivable is recognized and recorded at the invoice amount when recorded at the invoice amount when a sale is realized a sale is realized

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Valuation of Receivables-IFRSValuation of Receivables-IFRS

► a risk that a customer will not pay or will not be able to pay its a risk that a customer will not pay or will not be able to pay its debt debt

► IFRS -accounts receivable should be valued at their net IFRS -accounts receivable should be valued at their net realizable value (or net recoverable amount) realizable value (or net recoverable amount)

► Net Realizable Value Net Realizable Value represents the amount of cash expected represents the amount of cash expected to be collected from the receivables to be collected from the receivables

► net recoverable amount of accounts receivable net recoverable amount of accounts receivable (or trade (or trade receivables)receivables) is equal to their original values unless there is an is equal to their original values unless there is an indication of impairment indication of impairment

► Entities should assess at each balance sheet date Entities should assess at each balance sheet date whether there is objective evidence that an account whether there is objective evidence that an account receivable may be impaired, and determine the amount receivable may be impaired, and determine the amount of allowance that should be estimated based on the net of allowance that should be estimated based on the net realizable value or the discounted cash flow from such realizable value or the discounted cash flow from such receivable receivable

► TAX- when it is certain that a customer is not going to TAX- when it is certain that a customer is not going to pay write-off the account *i.e. erase from the accounts pay write-off the account *i.e. erase from the accounts and record it as a lossand record it as a loss

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Impairment of Accounts Impairment of Accounts Receivable-IFRSReceivable-IFRS

► Matching principle and losses estimated from selling on Matching principle and losses estimated from selling on credit credit

► Some possible indications of impairment are as follows: Some possible indications of impairment are as follows: If there is a sign that the customer has financial difficulty,If there is a sign that the customer has financial difficulty, If there is a high probability of bankruptcy of the customer,If there is a high probability of bankruptcy of the customer, If the customer delays its payments,If the customer delays its payments, If the customer asks for extension of the payment period, andIf the customer asks for extension of the payment period, and If the economy in general or the industry the customer If the economy in general or the industry the customer

operates in suffers from financial difficultiesoperates in suffers from financial difficulties► under IAS 39, general provisions are not permitted and under IAS 39, general provisions are not permitted and

all impairment of trade receivables must be measured all impairment of trade receivables must be measured using a discounted cash flow methodology using a discounted cash flow methodology

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Impairment LossImpairment Loss

► measured as the difference between the original or measured as the difference between the original or the carrying value of the receivable and the present the carrying value of the receivable and the present value of estimated cash flows discounted at the value of estimated cash flows discounted at the original effective interest rate of the receivable original effective interest rate of the receivable

► effective interest rate is the rate that exactly effective interest rate is the rate that exactly discounts estimated future cash receipts through discounts estimated future cash receipts through the expected collection date of the receivable to the expected collection date of the receivable to the net carrying amount of the receivablethe net carrying amount of the receivable

► Allowance for UncollectibleAllowance for Uncollectible Accounts Accounts account account accumulates the estimated losses accumulates the estimated losses a contra-asset account a contra-asset account deducted from Accounts Receivable in order to determine deducted from Accounts Receivable in order to determine

the net realizable value of receivables the net realizable value of receivables

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Adjusting Entry-IFRSAdjusting Entry-IFRS

Date Account Title and Description Debit Credit

Impairment Loss on Accounts Receivable

Allowance for Uncollectible Accounts 10.000To record impairment loss on accounts receivable

31-Dec-03 10.000

Dekorasyon A.Ş. has outstanding receivables of TL120.000 as of 31 December 2003, and its management estimated that

there is impairment of TL10.000

Cash and Cash Equivalents TL 11.000

Accounts Receivable TL 120.000

Less: Allowance for Uncollectible Accounts

-10.000 110.000

Inventories 129.000

Total Current Assets TL 250.000

Dekorasyon A.Ş.

Partial Balance Sheet

31-Dec-03

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Determining the Impairment Determining the Impairment LossLoss

►examine each receivable or customer examine each receivable or customer carefully and assess whether there is carefully and assess whether there is an indication of impairment an indication of impairment

►prepare a chart showing all trade prepare a chart showing all trade receivables and whether there is an receivables and whether there is an indication of impairment indication of impairment

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Illustration of Impairment-IFRSIllustration of Impairment-IFRSSaSağlam Yapı Market is in the process of prepağlam Yapı Market is in the process of preparing the financial ring the financial

statements for the year 2004. The credit department examined all statements for the year 2004. The credit department examined all outstanding receivables and determined that the following accounts outstanding receivables and determined that the following accounts may be impaired as of 31 December 2004. Total accounts receivable may be impaired as of 31 December 2004. Total accounts receivable as of 31 December 2004 is TL 59.750as of 31 December 2004 is TL 59.750

Invoice Net

Recoverable Amount Amount

Altay A.Ş. TL 5.000 TL 4.800

Güçlü A.Ş. 4.000 3.820

Mir A.Ş. 9.800 9.322

Risk A.Ş. 5.450 2.905

OTM A.Ş. 9.000 8.220

TL 33.250 TL 29.067

Customer

Difference= impairment loss of TL 4.183

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How much is the expense?How much is the expense?

► difference between total of net recoverable difference between total of net recoverable amount of accounts receivable and the total amount of accounts receivable and the total invoice amount represents the targeted invoice amount represents the targeted balance for the Allowance for Uncollectible balance for the Allowance for Uncollectible Accounts Accounts

► adjusting entry to record the impairment adjusting entry to record the impairment loss on accounts receivable should bring the loss on accounts receivable should bring the balance of the Allowance for Uncollectible balance of the Allowance for Uncollectible Accounts to the amount estimated from the Accounts to the amount estimated from the impairment of accounts receivable impairment of accounts receivable

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Adjusting Entries – target Adjusting Entries – target impairment loss known- Case 1impairment loss known- Case 1

Allowance for Uncollectible Account Balance is a credit of TL 2.950Allowance for Uncollectible Account Balance is a credit of TL 2.950Estimated (target) Allowance for Uncollectible AccountsEstimated (target) Allowance for Uncollectible Accounts TL 4.183CR TL 4.183CR

Balance of Allowance for Uncollectible Accounts Before Adjustment Balance of Allowance for Uncollectible Accounts Before Adjustment 2.950CR 2.950CR

Estimated Impairment LossEstimated Impairment Loss TL 1.233 TL 1.233


Impairment Loss on Accounts Receivable Allowance for Uncollectible Accounts 1.233To record impairment loss of accounts receivable

31-Dec-04 1.233

Balance Sheet RepresentationAccounts Receivable TL 59.750Allowance for Uncollectible Accounts 4.183Net Realizable Value of Accounts Receivable TL 55.567

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Adjusting Entries – target Adjusting Entries – target impairment loss known- Case 2impairment loss known- Case 2

Allowance for Uncollectible Account Balance is credit of TL 6.283Allowance for Uncollectible Account Balance is credit of TL 6.283 Balance of Allowance for Uncollectible Account Before Adjustment TL 6.283CRBalance of Allowance for Uncollectible Account Before Adjustment TL 6.283CREstimated Allowance for Uncollectible AccountsEstimated Allowance for Uncollectible Accounts 4.183CR 4.183CRRecovery of Impairment LossRecovery of Impairment Loss TL 2.100 TL 2.100


Allowance for Uncollectible Accounts 2.100 Recovery of Impairment Loss 2.100To record the recovery of impairment loss

31-Dec-04

Balance Sheet RepresentationAccounts Receivable TL 59.750Allowance for Uncollectible Accounts 4.183Net Realizable Value of Accounts Receivable TL 55.567

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Write Off of Accounts ReceivableWrite Off of Accounts Receivable

►a specific customer is not able to pay a specific customer is not able to pay its debtits debt

Risk A.Ş. Risk A.Ş. declared bankruptcy on 20 March 2005declared bankruptcy on 20 March 2005 Date Account Title and Description Debit Credit

Bad Debt Expense Accounts Receivable-Risk A. Ş 5.450To write off the receivable from Risk A.Ş.

20-Mar-05 5.450

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Recovery of Receivables Written OffRecovery of Receivables Written Off

Risk A.Ş.Risk A.Ş. informed informed Sağlam Yapı Market that Sağlam Yapı Market that itit will pay TL 3.000 of will pay TL 3.000 of

itsits total debt on 3 April 2005 and the remaining amount later total debt on 3 April 2005 and the remaining amount later


Accounts Receivable- Risk A.Ş. Other Income 5.450To recover the written off receivable from Risk A.Ş.Cash 3.000 Accounts Receivable- Risk A.Ş. 3.000To record collection from Risk A.Ş.

3-Apr-05 5.450

3-Apr-05

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Direct Write-offDirect Write-off Dekorasyon A.Ş. sold furniture at TL1.000 to Mr. Aksoy in December Dekorasyon A.Ş. sold furniture at TL1.000 to Mr. Aksoy in December

2004 with terms n/60. However, Mr. Aksoy was in financial difficulty 2004 with terms n/60. However, Mr. Aksoy was in financial difficulty and informed Dekorasyon A.Ş. that he bankrupted in May 2005. and informed Dekorasyon A.Ş. that he bankrupted in May 2005. Since it became evident that this receivable cannot be collected, Since it became evident that this receivable cannot be collected, Dekorasyon A.Ş. decided to write off the receivable.Dekorasyon A.Ş. decided to write off the receivable.

Date Account Title and Description Debit CreditUncollectible Account Expense Accounts Receivable-Mr. Aksoy 1.000To record receivable from Mr. Aksoy as Uncollectible Account Expense

May 31 2005 1.000

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Financing with Accounts Financing with Accounts ReceivableReceivable

► Pledge of Accounts ReceivablePledge of Accounts Receivable - used as a - used as a guarantee in credit arrangements with guarantee in credit arrangements with financial institutions to receive loans-IFRS financial institutions to receive loans-IFRS requires that pledge agreements should be requires that pledge agreements should be disclosed in the notes to the financial disclosed in the notes to the financial statements statements

► Factoring Accounts Receivable-Factoring Accounts Receivable- selling selling receivables to get cash before the maturity receivables to get cash before the maturity (due date) of the receivables(due date) of the receivables

► Credit Card SalesCredit Card Sales

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Factoring Accounts Factoring Accounts ReceivableReceivable

► With recourse - factor can collect the With recourse - factor can collect the receivable from the seller if the customer receivable from the seller if the customer does not pay the receivable – risk with lies does not pay the receivable – risk with lies with the companywith the company

► Without recourse -risk of non-payment of Without recourse -risk of non-payment of the customer lies with the factor the customer lies with the factor

► Based on the risks involved rates differBased on the risks involved rates differ► In the case of with recourse factoring the In the case of with recourse factoring the

entity may become liable to the factor - this entity may become liable to the factor - this contingent liability should be disclosed in contingent liability should be disclosed in the notes to the financial statements the notes to the financial statements

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Factoring Example-without Factoring Example-without recourserecourse

Fashion Giyim Sanayi sold its receivables of TL 3.500 to Firm Fashion Giyim Sanayi sold its receivables of TL 3.500 to Firm Factoring on 3 March 2005 without recourse and agreed to Factoring on 3 March 2005 without recourse and agreed to pay 5% factoring expense- financing expense plus TL 150 for pay 5% factoring expense- financing expense plus TL 150 for recourse liabilities and TL 50 for possible sales discounts recourse liabilities and TL 50 for possible sales discounts


Cash 3.125Financing Expense* 325Due from Firm Factoring 50 Accounts Receivable 3.500To record the sale of accounts receivable to Firm Factoring

3-Mar-05

* TL 3.500 x 5% = TL 175 plus TL 150 for recourse liability

Fashion Giyim Sanayi –without recourse

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Factoring Example-with recourseFactoring Example-with recourseIf Fashion Giyim Sanayi had sold its accounts receivable with recourse; If Fashion Giyim Sanayi had sold its accounts receivable with recourse;

Firm Factoring keeps TL 50 for possible sales discounts and TL 150 for Firm Factoring keeps TL 50 for possible sales discounts and TL 150 for recourse liabilities. recourse liabilities.

Fashion Giyim Sanayi –with recourse: Date Account Title and Description Debit Credit

Cash 3.125Financing Expense 175Due from Firm Factoring 200 Accounts Receivable 3.500To record the sale of accounts receivable to Firm Factoring

3-Mar-05

Yagmur Mensucat defaulted its payment of TL 100 on 5 September 2005 to Firm Factoring


Accounts Receivable- Yagmur Men.Due from Firm Factoring 100

To record the default of an accounts receivable

5-Sep-05 100

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Factoring-without recourse-Factoring-without recourse-Factor company entriesFactor company entries

Firm Factoring–without recourse:


Accounts Receivable 3.500 Financing Revenue 325 Due to Fashion Giyim Sanayi 50 Cash 3.125To record the sale of accounts receivable to Firm Factoring

3-Mar-05

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Factoring-with recourse-Factor entriesFactoring-with recourse-Factor entries

Date Account Title and Description Debit CreditAccounts Receivable 3.500 Financing Revenue 175 Due to Fashion Giyim Sanayi 200 Cash 3.125To record the sale of accounts receivable to Firm Factoring

3-Mar-05

Firm Factoring-a customer defaulted:


Due to Fashion Giyim Sanayi Accounts Receivable- Yagmur Men. 100

To record the default of an accounts receivable

5-Sep-05 100

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Factoring with recourse-payment dateFactoring with recourse-payment date► Assume none of the customers take sales discount and by 15 December 2005 Firm Assume none of the customers take sales discount and by 15 December 2005 Firm

Factoring collects all accounts receivable and pays Fashion Giyim Sanayi the remaining Factoring collects all accounts receivable and pays Fashion Giyim Sanayi the remaining amount. amount.

Fashion Giyim Sanayi will make the following entry Fashion Giyim Sanayi will make the following entry


Cash Due from Firm Factoring 100To record receipt of amount withheld by the factor.

15-Dec-05 100

Firm Factoring


Due to Fashion Giyim Sanayi Cash 100To record payment of the amount withheld by the factor.

15-Dec-05 100

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Credit Card SalesCredit Card SalesGourmet Restaurant served dinner to various customers on 11 May Gourmet Restaurant served dinner to various customers on 11 May

2005 and collected TL 750 with the credit cards. Gourmet 2005 and collected TL 750 with the credit cards. Gourmet Restaurant’s agreement with INVO Bank to collect the credit card Restaurant’s agreement with INVO Bank to collect the credit card slips is 21 days with 5% interest rate slips is 21 days with 5% interest rate


Receivable from INVO Bank 712,5Commission Expense 37,5 Revenues 750To record the dinner served on 11 May 2005Cash Receivable from INVO Bank 712,5To record the collection from INVO Bank

11-May-05

1-Jun-05 712,5

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Notes ReceivableNotes Receivable

►A promissory note is an unconditional A promissory note is an unconditional promise to pay a certain amount of promise to pay a certain amount of money in the future. money in the future. To borrow money To borrow money To settle an accounts receivable To settle an accounts receivable

►notes with maturity dates less than or notes with maturity dates less than or equal to 12 months are classified as equal to 12 months are classified as short-termshort-term

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Amount Date

OnPlus

Animal Co. Ankara Turkey

the amount of Eight thousand three hundred Turkish Lira

120 days after dateinterest at an annual rate of 25%.

For value received, I promise to pay to the order of Health Pharmacy Ankara Turkey

PROMISSORY NOTETL 8.300 2-Jun-05

Promissory Note-(IOU)Promissory Note-(IOU)

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Accounting Entries Illustrated for Notes Receivable-1Accounting Entries Illustrated for Notes Receivable-1

When the Note Received


Notes Receivable 8.300 Accounts Receivable 8.300To record the notes received from Animal Co.

2-Jun-05

At the end of the Fiscal Year


Interest Receivable 518,75 Interest Income(*) 518,75To accrue for the interest on notes receivable

31-Aug-05

(*) Interest: 8.300*25%*90 days/360 days = TL 518,75)

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Accounting Entries Illustrated for Notes Receivable-2Accounting Entries Illustrated for Notes Receivable-2

When the Note is Paid


Cash 8.991,67 Notes Receivable 8.300,00 Interest Income 172,92 Interest Receivable 518,75To record the collection of the note

30 Sept. 2005

If the Note is Dishonored


Accounts Receivables 8.991,67 Notes Receivable 8.300,00 Interest Income 172,92 Interest Receivable 518,75To record the dishonored note

30 Sept. 2005

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Other Current AssetsOther Current Assets

• Value Added Taxes Deductible and Value Added Taxes Deductible and Carried ForwardCarried Forward

• Advances Given

• Prepaid Taxes

• Prepaid Expenses

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Common Financial Ratios Used Common Financial Ratios Used in Management of Current in Management of Current

AssetsAssetsCurrent Assets

Current Ratio =Current Liabilities

sLiabilitieCurrent

sInvestmentSecurity Short term Rec. Notes and Accounts Eqvt Cash and(Cash RatioQuick

Net SalesAccounts Receivable Turnover =

Average Accounts Receivable

365Collection Period=

Accounts Receivable Turnover

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BREAK- How about coffee?

CURRENT ASSETS EMBA - 2005. 2 Economic Consequences of Accounting ► on wealth or behavior of ...

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