Current assets

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Current assets

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

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Current Asset Section of a Balance Sheet
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Economic Consequences of Accounting

• on wealth or behavior of
• lenders and investors
• reporting entities, their management and users of
  financial statements
• reporting entities and standard setters
• Sources of impact
• Effect of financial results reported in the
  financial statements
• Effect of firms choice of accounting principles
• Effect on reporting entities of standard setters
  decisions
• Effect on standard setters of their decisions

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Quality of Earnings

• Business having stable and recurring basic
  revenue generating activities
• Accounting 1) using consistent estimates and
  rules High same methods of estimation and
  rules
• 2) proximity of revenue recognition and cash
  collection
• High when revenue recognition and cash
  collection are close
• High quality earnings are presumed to be fair
  representations of the economic performance of
  the firm
• Low quality earnings overstate fair earnings

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What will affect Quality of Earnings?

• Managers discretion in measuring and reporting
  earnings in
• Choosing among alternative accounting principles
• Making estimates
• Timing transactions in order to control
  recognition

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Why is Current Asset Management Important?

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

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Cash and Cash Equivalents

• Cash
• Coins, banknotes deposits at banks, checks
  received from customers
• Restricted Cash or Blocked Cash and the related
  amounts should not be included in the cash amount
  
• Petty Cash
• Cash Equivalents
• Investments that are readily convertible to cash
  with insignificant risk and with a maturity less
  than 90 days- e.g. Treasury Bills, term-deposits
  with less than 90 days maturity

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Checks Received From Customers

• by law, checks are payable at sight, so they are
  deemed as liquid and should be included as cash
  in the balance sheets of the entities
• although the concept of post dated checks is not
  within the context of the legislation, in
  practice checks with future payment dates are
  issued in Turkey
• due-dated checks should not be included as cash
  but treated as notes receivable in the balance
  sheet.

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Control Over Cash

• easily transportable
• large number of transactions involving cash
• Establish Responsibilities
• Segregation of Duties
• Documentation Controls
• Physical Controls
• Independent Internal Verification
• Use of Bank Accounts

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Receivables

• Accounts Receivable
• Notes Receivable
• Other Receivables

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Recognition of Accounts Receivable

• accrual basis of accounting- sales revenue is
  recognized at the time a sale is made and the
  title of ownership of the items under the sale
  passes to the buyer regardless of the cash
  payment date
• when sales are made on credit the accounts
  receivable is recognized and recorded at the
  invoice amount when a sale is realized

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Valuation of Receivables-IFRS

• a risk that a customer will not pay or will not
  be able to pay its debt
• IFRS -accounts receivable should be valued at
  their net realizable value (or net recoverable
  amount)
• Net Realizable Value represents the amount of
  cash expected to be collected from the
  receivables
• net recoverable amount of accounts receivable (or
  trade receivables) is equal to their original
  values unless there is an indication of
  impairment
• Entities should assess at each balance sheet date
  whether there is objective evidence that an
  account receivable may be impaired, and determine
  the amount of allowance that should be estimated
  based on the net realizable value or the
  discounted cash flow from such receivable
• TAX- when it is certain that a customer is not
  going to pay write-off the account i.e. erase
  from the accounts and record it as a loss

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Impairment of Accounts Receivable-IFRS

• Matching principle and losses estimated from
  selling on credit
• Some possible indications of impairment are as
  follows
• If there is a sign that the customer has
  financial difficulty,
• If there is a high probability of bankruptcy of
  the customer,
• If the customer delays its payments,
• If the customer asks for extension of the payment
  period, and
• If the economy in general or the industry the
  customer operates in suffers from financial
  difficulties
• under IAS 39, general provisions are not
  permitted and all impairment of trade receivables
  must be measured using a discounted cash flow
  methodology

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Impairment Loss

• measured as the difference between the original
  or the carrying value of the receivable and the
  present value of estimated cash flows discounted
  at the original effective interest rate of the
  receivable
• effective interest rate is the rate that exactly
  discounts estimated future cash receipts through
  the expected collection date of the receivable to
  the net carrying amount of the receivable
• Allowance for Uncollectible Accounts account
• accumulates the estimated losses
• contra-asset account
• deducted from Accounts Receivable in order to
  determine the net realizable value of receivables
• replenished every period
• decreases by the realization of loss due to
  customer default through the write off process

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Adjusting Entry-IFRS
Dekorasyon A.S. has outstanding receivables of
TL120.000 as of 31 December 2003, and its
management estimated that there is impairment of
TL10.000
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Determining the Impairment Loss

• examine each receivable or customer carefully and
  assess whether there is an indication of
  impairment
• prepare a chart showing all trade receivables and
  whether there is an indication of impairment

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Illustration of Impairment-IFRS

• Saglam Yapi Market is in the process of preparing
  the financial statements for the year 2008. The
  credit department examined all outstanding
  receivables and determined that the following
  accounts may be impaired as of 31 December 2008.
  Total accounts receivable as of 31 December 2008
  is TL 59.750

Difference impairment loss of TL 4.183
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How much is the expense?

• difference between total of net recoverable
  amount of accounts receivable and the total
  invoice amount represents the targeted balance
  for the Allowance for Uncollectible Accounts
• adjusting entry to record the impairment loss on
  accounts receivable should bring the balance of
  the Allowance for Uncollectible Accounts to the
  amount estimated from the impairment of accounts
  receivable

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Adjusting Entries target impairment loss known-
Case 1

• Allowance for Uncollectible Account Balance is a
  credit of TL 2.950
• Estimated (target) Allowance for Uncollectible
  Accounts TL 4.183CR
• Balance of Allowance for Uncollectible Accounts
  Before Adjustment 2.950CR
• Estimated Impairment Loss TL
  1.233

Balance Sheet Representation Accounts
Receivable TL 59.750 Allowance for
Uncollectible Accounts
4.183 Net Realizable Value of Accounts Receivable
TL 55.567
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Adjusting Entries target impairment loss known-
Case 2

• Allowance for Uncollectible Account Balance is
  credit of TL 6.283
• Balance of Allowance for Uncollectible Account
  Before Adjustment TL 6.283CR
• Estimated Allowance for Uncollectible Accounts
  4.183CR
• Recovery of Impairment Loss
  TL 2.100

Balance Sheet Representation Accounts
Receivable TL 59.750 Allowance for
Uncollectible Accounts
4.183 Net Realizable Value of Accounts Receivable
TL 55.567
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Write Off of Accounts Receivable

• a specific customer is not able to pay its debt
• Risk A.S. declared bankruptcy on 20 March 2009

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Recovery of Receivables Written Off

• Risk A.S. informed Saglam Yapi Market that it
  will pay TL 3.000 of its total debt on 3 April
  2009 and the remaining amount later

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Direct Write-off
Dekorasyon A.S. sold furniture at TL1.000 to
Mr. Aksoy in December 2004 with terms n/60.
However, Mr. Aksoy was in financial difficulty
and informed Dekorasyon A.S. that he bankrupted
in May 2005. Since it became evident that this
receivable cannot be collected, Dekorasyon A.S.
decided to write off the receivable.
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Accounting for Uncollectible Accounts-FASB
Uncollectible Accounts
Allowance Methods
Direct Write-off Method
Aging of Accounts Receivable
Percentage of Sales
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Financing with Accounts Receivable

• Pledge of Accounts Receivable - used as a
  guarantee in credit arrangements with financial
  institutions to receive loans-IFRS requires that
  pledge agreements should be disclosed in the
  notes to the financial statements
• Factoring Accounts Receivable- selling
  receivables to get cash before the maturity (due
  date) of the receivables
• Credit Card Sales

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Factoring Accounts Receivable

• With recourse - factor can collect the receivable
  from the seller if the customer does not pay the
  receivable risk with lies with the company
• Without recourse -risk of non-payment of the
  customer lies with the factor
• Based on the risks involved rates differ
• In the case of with recourse factoring the entity
  may become liable to the factor - this contingent
  liability should be disclosed in the notes to the
  financial statements

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Credit Card Sales

• Gourmet Restaurant served dinner to various
  customers on 11 May 2007 and collected TL 750
  with the credit cards. Gourmet Restaurants
  agreement with INVO Bank to collect the credit
  card slips is 21 days with 5 interest rate

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Notes Receivable

• A promissory note is an unconditional promise to
  pay a certain amount of money in the future.
• To borrow money
• To settle an accounts receivable
• notes with maturity dates less than or equal to
  12 months are classified as short-term

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Promissory Note-(IOU)
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Accounting Entries Illustrated for Notes
Receivable-1
When the Note Received
At the end of the Fiscal Year
() Interest 8.3002590 days/360 days TL
518,75)
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Accounting Entries Illustrated for Notes
Receivable-2
When the Note is Paid
If the Note is Dishonored
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Accounting for Debt and Equity Investments
usually classified as available for sale
investments
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Types of Investments-Stocks
The accounting for investments depends on the
purpose of the investment and the percentage of
voting stock held.
Investor Corporation
Minority, Passive Investments (less than 20
ownership)
Minority, Active Investments (typically between
20 and 50 ownership)
Majority, Active Investments (greater than 50
ownership)
held as current assets, marketable securities
held as long-term investments
united in pooling of interests
acquired in purchase
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Classification of Financial Instruments

• Financial assets at fair value through profit or
  loss has two subcategories
• Trading securities Marketable securities both
  equity and debt securities that are held for
  short-term profit purposes and
• Derivatives financial instruments that do not
  have a value by themselves but derive their value
  from the underlying security or asset such as
  shares, foreign exchange, commodities etc.-
  except for cash flow hedges that are accounted
  for similar to trading securities
• Held to Maturity Debt securities for which a
  firm has both the positive intent and ability to
  hold to maturity
• Available for Sale Securities Neither trading
  securities nor securities held to maturity-
  usually classified as long term investments.

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Short-Term Investments-Trading Securities

• usually consist of
• marketable equity securities (stocks of other
  companies)
• savings accounts (time deposits)
• investment funds
• precious metals like gold
• government bonds
• treasury bills
• asset securitized bonds
• private bonds
• Characterized by frequent and active buying and
  selling with the object of generating profit
• Typically only financial institutions hold
  trading securities
• Since trading securities are acquired for
  short-term profit, unrealized gains or losses
  that result from adjustments to market value pass
  through the income statement and increase or
  reduce net income before there is a sale of the
  securities.

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Accounting for Trading Securities

• Accounting for trading securities has the
  following key points
• Recording of purchase,
• Dividends or interest received,
• Valuation at the end of the accounting period,
  and
• Sale of securities.

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Accounting for Marketable Equity Securities

• record them at the acquisition cost that includes
  the price of the security plus any brokerage
  commissions and applicable taxes, and other costs
  incurred
• record dividend revenue when dividends declared
  and later when cash is received
• adjust to fair market value at the end of the
  accounting period-adjusting entry

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Other Current Assets

• Value Added Taxes Deductible and Carried Forward

• Advances Given

• Prepaid Taxes

• Prepaid Expenses

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Common Financial Ratios Used in Management of
Current Assets
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Liabilities

• obligations of an entity to make a future payment
  or to deliver goods or services to the third
  parties in the future in return for cash borrowed
  or service used or goods acquired
• provide cash via borrowing, or savings of cash
• classified according to their due dates
• due within one year or the operating cycle are
  classified as current liabilities
• loans or credits that mature in more than one
  year are classified as long-term liabilities

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Recognition of Liabilities

• recognized when the obligation occurs for an
  entity
• when a loan is not recorded, both the liabilities
  and the assets are understated
• to satisfy the matching and periodicity
  principles, adjustments are made at the end of
  the accounting periods

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Valuation of Liabilities

• valued at the cash amount necessary to pay back
  the liability or at the fair value of the goods
  or services to be provided
• may be estimated

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Current Liabilities

• Short Term Bank Loans
• Current Portion of Long-term Debt
• Accounts Payable
• Notes Payable
• Accruals
• Unearned Revenues
• Payroll Liabilities
• Corporate Income Taxes
• Value Added Taxes
• Product Warranty Liability

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Notes Payable

• arise as a result of written promissory note to
  pay a certain amount at a certain date to a third
  party
• notes are issued to borrow cash or to make
  purchases on credit or to settle an accounts
  payable
• accounting treatment of notes differs
• the interest is stated separately on the note
• included in the face value of the note

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Accounting for Notes Payable-A1

• Aycan Industries issued a TL18.000 note for
  short-term financing of the operations, maturing
  in 90 days with an interest rate of 22.

Case A Interest rate stated on the face of the
note
Kavaklidere/Ankara 31August
2007 Ninety days after the date of the note I
promise to pay UBZ Bank the sum of TL 18.000
plus the interest at the rate of 22. Aycan
Industries Incorporated
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Accounting for Notes Payable-A2
Case A Interest rate stated on the face of the
note
29 November 2007, when the note is repaid
TL18.000 x 22 x 90 /360 TL 990
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Accounting for Notes Payable-B1

• Case B Interest Included in the Face Value of
  the Note
• note is discounted

Kavaklidere/Ankara 31 August
2007 Ninety days after the date of the note I
promise to pay UBZ Bank the sum of TL
18.000 Aycan Industries Incorporated
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Accounting for Notes Payable-B2
29 November 2007, when the note is repaid
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Assume 30 Sept. end of fiscal year
Accruals by Aycan - payee

• Case A

• Case B

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Accruals by - lender
Case A
Case B
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Payroll Related Liabilities

• An employee usually receives a payment that is
  less than the gross pay of that employee- the net
  pay
• Deductions
• Required deductions that must be paid by the
  employee according to tax and social security
  regulations
• Optional deductions authorized by the employee
  for special purposes (such as private pension
  plans

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Payroll Liabilities

• Employee Income Taxes
• Stamp Duty
• Social Security Premiums
• Unemployment Insurance Premium

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Payroll Entry
cost of the employee to the employer is TL 2.450
- employee receives TL 1.444
SSK premiums Employer share TL
390 Unemployment insurance premium- Employer
share 60 SSK
premium-Employee share 280 Unemployment
insurance premium Employee share 40
Total payable to SSK TL 770
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Corporate Income Taxes

• Prepaid taxes
• Quarterly income tax amount for the current year
  income is calculated based on the quarterly
  income-as of March 31, June 30, September 30 and
  December 31
• annual corporate tax payment computed for the
  fiscal year and declared in April the following
  year and paid in installments

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Corporate Income Taxes-Example
During 2008 Mercan jewelry paid a total of TL
13.850 Net Income for 2008 TL 82.500 Assume
Tax rate 30 Income Tax expense TL 24.750.
The entry at the end of the fiscal year
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Value Added Taxes

• amount of VAT paid for goods and services
  purchased is deducted from the amount of VAT
  received on deliveries of goods and services
  provided
• if VAT on sales gt the VAT on purchases ?the
  entity is required to pay the difference to the
  Tax Office
• if VAT on purchases exceeds the VAT on sales ?
  the difference is carried forward to the next
  month

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Accounting for VAT transactions

• 14 April Purchased 10 items for TL17.110 on
  credit including 18 VAT
• 20 April Sold 22 items for TL 37.642 on credit
  including 18 VAT
• 20 May Filed the VAT return
• 26 May Paid the necessary amount

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VAT entries
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Product Warranty Liabilities-1

• matching principle - warranty expenses of sales
  in a period should be recorded in the same period

Strong Home Products, TVs one year warranty Past
experience 3 of products had defective
parts Average cost of replacement TL 750 Company
sold 15.000 units in 2008
The estimated defective parts from 2008 sales
15.0003 450 units The estimated cost of the
defective parts 450750
TL337.500
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Product Warranty Liabilities-2

• 4 January 2009, one of the customers brought back
  a TV set purchased in 2008, and the Company
  agreed to replace the part of the set that was
  defective. The cost of the replaced part was TL
  775 on 4 January 2009.

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Contingent Liabilities

• a potential liability arising from a past
  transaction and that depends on a future event
• could be disclosed in the body of the balance
  sheet with the liabilities
• could be disclosed within notes to financial
  statements
• certainty of the amount and the payment date
  determines where they will be disclosed

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Common Financial Ratios
Net Working Capital Current Assets - Current
Liabilities
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