Accounting Chapter 7 However Maturities Differ Only The Party With

FINANCIAL STATEMENT ANALYSIS CASE 2

Part 1

(a) Cash equivalents are short-term, highly liquid investments that are

both (a) readily convertible to known amounts of cash and (b) so near

(b)

(in millions)

Microsoft

Oracle

(1) Current ratio

$114,246

= 2.50

$48,138

= 3.35

$45,625

$14,389

FINANCIAL STATEMENT ANALYSIS CASE 2 (Continued)

Part 2

Current Year

(a)

Receivables Turnover

$69,943

=

$69,943

= 3.78 times

($19,544 + $17,486)/2

$18,515

Or a collection period of 97 days (365 ÷ 3.78).

(a) Accounts Receivable:

Beginning balance

$ 46,000

Charge-offs

(1,600)

Allowance for Doubtful Accounts:

Beginning balance

$ 550

Ending balance

$1,535

$2,585.

(b) Current assets section of December 31, 2020, The Flatiron Pub’s

balance sheet:

Cash

$ 5,575

Accounts receivable (net of $1,535

allowance for uncollectibles)

59,865

Due from factor

ACCOUNTING, ANALYSIS, AND PRINCIPLES (continued)

Calculations:

ANALYSIS

(a) 2020 current ratio = $74,725 ÷ ($44,600 + $400) = 1.66

PRINCIPLES

The expense recognition principle requires that bad debt expense should

be recorded in the period of the sale. Otherwise, income will be overstated

by the amount of bad debt expense. In addition, reporting the receivables

CE7.1

From the Master Glossary

(a) Consistent with common usage, cash includes not only currency on hand but demand deposits

with banks or other financial institutions. Cash also includes other kinds of accounts that have the

general characteristics of demand deposits in that the customer may deposit additional funds at

CE7.2

According to the FASB ASC Subtopic 825-15 – Financial Instruments—Credit Losses:

Recognition

825–15–25–1 At each reporting date, an entity shall recognize an allowance for expected credit losses

on financial assets within the scope of this Subtopic. Expected credit losses are a current estimate of all

CE7.3

According to FASB ASC 860-10-05 (Overview and Background)

> Types of Transfers

05–6 Transfers of financial assets take many forms. This guidance provides an overview of the fol-

lowing types of transfers discussed in this Topic:

a. Securitizations

05–14 Factoring arrangements are a means of discounting accounts receivable on a nonrecourse,

notification basis. Accounts receivable are sold outright, usually to a transferee (the factor) that

05–15 In a transfer of receivables with recourse, the transferor provides the transferee with full or

limited recourse. The transferor is obligated under the terms of the recourse provision to make

05–16 Securities lending transactions are initiated by broker-dealers and other financial institutions

that need specific securities to cover a short sale or a customer’s failure to deliver securities

05–19 Government securities dealers, banks, other financial institutions, and corporate investors com–

monly use repurchase agreements to obtain or use short-term funds. Under those agreements,

05–22 In certain industries, a typical customer’s borrowing needs often exceed its bank’s legal lending

CE7.3 (Continued)

>> Banker’s Acceptances

05–24 Banker’s acceptances provide a way for a bank to finance a customer’s purchase of goods

from a vendor for periods usually not exceeding six months. Under an agreement between the

bank, the customer, and the vendor, the bank agrees to pay the customer’s liability to the

CE7.4

According to FASB ASC 210-20–45

> Right of Setoff Criteria

45-1 A right of setoff exists when all of the following conditions are met:

a. Each of two parties owes the other determinable amounts.

45-2 A debtor having a valid right of setoff may offset the related asset and liability and report the

net amount.

45-3 If the parties meet the criteria specified in paragraph 210-20–45-1, specifying currency or interest

45-4 If a party does not intend to set off even though the ability to set off exists, an offsetting presen-

tation in the statement of financial position is not representationally faithful.

CODIFICATION RESEARCH CASE

(a) Transfer of receivables is addressed in FASB ASC 860-10: Codification

String: Broad Transactions > 860 Transfers and Servicing > 10 Overall >

05 Background >

(b) Definitions: (Codification String: Broad Transaction > 860 Transfers

and Servicing > 10 Overall > 20 Glossary)

Transfer

The conveyance of a noncash financial asset by and to someone other

than the issuer of that financial asset.

A transfer includes the following:

a. Selling a receivable

Recourse

The right of a transferee of receivables to receive payment from the

transferor of those receivables for any of the following:

CODIFICATION RESEARCH CASE (Continued)

Collateral

Personal or real property in which a security interest has been given.

IFRS CONCEPTS AND APPLICATION

IFRS7.1

The fair value option is similar under GAAP and IFRS but not identical. The

international standard related to the fair value option is subject to certain

qualifying criteria not in the U.S. standard. In addition, there are some

differences in the financial instruments covered.

The question of recording fair values for financial instruments will continue

to be an important issue to resolve as the Boards work toward

convergence. Both the IASB and the FASB have indicated that they believe

IFRS7.2

(a)

Note Amortization Schedule

(Before Impairment)

Date

Cash

Received

(0%)

Interest

Revenue

(10%)

Increase in

Carrying

Amount

Carrying

Amount of

Note

12/31/20

$62,092

(a)

December 31, 2022

Bad Debt Expense …………………………………………….

18,782

Allowance for Doubtful Accounts ………………

18,782*

Allowance for Doubtful Accounts ………………………

Bad Debt Expense …………………………..

IFRS7.3

(a) IFRS 9 Financial Instruments (Chapter 3) addresses derecognition of

financial assets.

(b) Transfers that qualify for derecognition

3.2.10 If an entity transfers a financial asset in a transfer that qualifies for

derecognition in its entirety and retains the right to service the financial

asset for a fee, it shall recognise either a servicing asset or a servicing

3.2.11 If, as a result of a transfer, a financial asset is derecognised in its

entirety but the transfer results in the entity obtaining a new financial asset

3.2.12 On derecognition of a financial asset in its entirety, the difference

between:

3.2.13 If the transferred asset is part of a larger financial asset (eg when an

entity transfers interest cash flows that are part of a debt instrument, see

paragraph 3.2.2(a)) and the part transferred qualifies for derecognition in its

entirety, the previous carrying amount of the larger financial asset shall be

The difference between:

(a) the carrying amount (measured at the date of derecognition)

3.2.14 When an entity allocates the previous carrying amount of a larger

financial asset between the part that continues to be recognised and the

part that is derecognised, the fair value of the part that continues to be

recognised needs to be measured. When the entity has a history of selling

(c) According to Appendix A (Defined Terms) of IFRS 9, amortised cost of a

financial asset or financial liability is defined as: The amount at which the

IFRS7.4

(a) M&S’s cash and cash equivalents include short-term deposits with

banks and other financial institutions, with an initial maturity of three