FINANCIAL STATEMENT ANALYSIS CASE 1 (Continued)
(e) Occidental would record a loss of $30,000,000 as revealed in the
following entry to record the transaction:
FINANCIAL STATEMENT ANALYSIS CASE 2
Part 1
(a) Cash equivalents are short-term, highly liquid investments that can be
converted into specific amounts of cash. They include money market
(b)
(in millions)
Microsoft
(1) Current ratio
$74,918
= 2.60
$39,174
= 2.76
$28,774
$14,192
FINANCIAL STATEMENT ANALYSIS CASE 2 (Continued)
Part 2
2011
(a)
Receivables Turnover
$69,943
=
$69,943
= 5.0 times
($14,987 + $13,014)/2
$14,001
(c) Accounts receivable is reduced by the amount of bad debts in the
allowance account. This makes the denominator of the turnover ratio
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ACCOUNTING
(a) Accounts Receivable:
Beginning balance
$46,000
Credit sales during 2014
Collections during 2014
(228,000)
Charge-offs
Factored receivables
Ending balance
Allowance for Doubtful Accounts:
Beginning balance
$550
Charge-offs
(1,600)
Ending balance
(b) Current assets section of December 31, 2014 The Flatiron Pub’s
balance sheet:
Cash
$ 5,575
Accounts receivable (net of $1,535
allowance for uncollectibles)
59,865
Interest receivable
Due from factor
Note receivable
Postage stamps
ACCOUNTING, ANALYSIS, AND PRINCIPLES (continued)
Calculations:
ANALYSIS
(a) 2013 current ratio = ($2,000 + $46,000 – $550 + $8,500) ÷ $37,000 = 1.51
(b) With a secured borrowing, the receivables would stay on The Flatiron
Pub’s books and a note payable would be recorded. This would
reduce both the current ratio and accounts receivable turnover ratio.
PRINCIPLES
The expense recognition principle requires that bad debt expense be
recorded in the period of the sale. Otherwise, income will be overstated by
PROFESSIONAL RESEARCH: FASB CODIFICATION
(a) Transfer of receivables is addressed in FASB ASC 860-10: Codification
String: Broad Transactions > 860 Transfers and Servicing > 10 Overall >
05 Background >
(b) The objectives associated with transfers: (FASB ASC 860–10–10)
10–1 An objective in accounting for transfers of financial assets is for
each entity that is a party to the transaction to recognize only
assets it controls and liabilities it has incurred, to derecognize
assets only when control has been surrendered, and to
PROFESSIONAL RESEARCH: FASB CODIFICATION (Continued)
(c) 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
A transfer excludes the following:
a. The origination of a receivable
Recourse
The right of a transferee of receivables to receive payment from the
transferor of those receivables for any of the following:
Collateral
Personal or real property in which a security interest has been given.
PROFESSIONAL RESEARCH: FASB CODIFICATION (Continued)
(d) Other examples (besides recourse and collateral) that qualify as
continuing involvement:
05–4 The following are examples of continuing involvement discussed
in this Topic: (Codification String: Broad Transactions > 860
Transfers and Servicing > 10 Overall > 05 Background)
a. Recourse
for sales and secured borrowings. This Topic establishes standards
for resolving those issues.
PROFESSIONAL SIMULATION
Measurement
Trade Accounts Receivable
Allowance for Doubtful Accounts
Beginning balance
$ 40,000
Beginning balance
$ 5,500
Credit sales during 2014
550,000
Charge-offs
(2,300)
Collections during 2014
Change-offs
Factored receivables
Ending balance
$ 7,600
Ending balance
Financial Statements
Current assets
Cash*…………………………………………………………..
$ 12,900
Trade accounts receivable …………………………...
$40,000
Allowance for doubtful accounts ……………….
(7,600)
32,400
Customer receivable (post-dated checks) ……..
Interest receivable** ……………………………………..
Due from factor*** ………………………………………..
Notes receivable ………………………………………….
50,000
Inventory ……………………………………………………..
80,000
Prepaid postage …………………………………………..
Total current assets ………………………………….
$183,012
*($15,000 – $2,000 – $100)
**($50,000 X 11% X 1/2)
***($47,700 X 6%)
Analysis
2013
2014
Current ratio = ($139,500* ÷ $80,000)
= 1.74
($183,012 ÷ $86,000)
= 2.13
PROFESSIONAL SIMULATION (Continued)
Explanation
With a secured borrowing, the receivables would stay on Horn’s books and
IFRS CONCEPTS AND APPLICATION
IFRS7-1
A receivable is considered impaired when a loss event indicates a negative
impact on the estimated future cash flows to be received from the
customer. The IASB requires that the impairment assessment should be
performed as follows.
1. Receivables that are individually significant are considered for impair-
2. Any receivable individually assessed that is not considered impaired
3. Any receivables not individually assessed are collectively assessed
for impairment
IFRS7-2
Both the IASB and the FASB have indicated that they believe that financial
statements would be more transparent and understandable if companies
recorded and reported all financial instruments at fair value. That said, in
IFRS7-3
(a)
Note Amortization Schedule
(Before Impairment)
Date
Cash
Received
(0%)
Interest
Revenue
(10%)
Increase in
Carrying
Amount
Carrying
Amount of
Note
12/31/14
$62,092
12/31/16
Computation of impairment loss:
Carrying amount of investment (12/31/16) $75,131
(a)
December 31, 2016
Bad Debt Expense …………………………..………………..
18,782
Allowance for Doubtful Accounts ………………
18,782
Allowance for Doubtful Accounts ………………………
18,782
Bad Debt Expense …………………………..
18,782
IFRS7-4
(a) IAS 39, paragraphs 18-28 addresses derecognition of financial assets.
(b) According to paragraph 19, “An entity transfers a financial asset if, and
only if, it either:
a. transfers the contractual rights to receive the cash flows of the
(c) The amortised cost of a financial asset or financial liability is the
amount at which the financial asset or financial liability is measured
IFRS7-5
(a) M&S’s cash and cash equivalents include short-term deposits with
banks and other financial institutions, with an initial maturity of three
months or less and credit card payment received within 48 hours.
(b) As of March 31, 2012, M&S had 196.1 million pounds in cash and cash