the current asset classification, cash, and accounts receivable presentations for chapter 6 by glenn...

The Current Asset The Current Asset Classification, Cash, and Classification, Cash, and

Accounts ReceivableAccounts Receivable

Presentations for Chapter 6 by Glenn Owen

Key PointsKey Points Current assets, working capital, current ratio, and quick ratio,

and how these measures are used to asses the solvency position of a company.

“Window dressing” and the reporting of current assets, working capital, and the current ratio.

Techniques used to account for and control cash. Accounts receivable and how they are valued on the balance

sheet. The allowance method for uncollected receivables. Major concerns of financial statement users

in the area of receivables reporting.

The Operating CycleThe Operating Cycle

CashCash

The Operating CycleThe Operating Cycle

CashCash

Manufacture or purchase inventory

InventoryInventory

The Operating CycleThe Operating Cycle

CashCash

Sales to customers

Manufacture or purchase inventory

InventoryInventory

Accounts Accounts ReceivableReceivable

The Operating CycleThe Operating Cycle

CashCash

Sales to customers

Receive payment

Manufacture or purchase inventory

InventoryInventory

Accounts Accounts ReceivableReceivable

　　由購料開始，經過生產－銷售－收款，稱為一個營業循環。如從現金流量觀點，自現金流出購料付現，到應收款項收現獲得現金流入，此一循環稱為現金循環。

圖 4-2 現金循環圖

Current Asset ClassificationCurrent Asset Classification

Current assets are those intended to be converted into cash (liquidated) in the near future.

The distinction is useful because it provides an easy-to-determine, low-cost measure of a company’s ability to produce cash in the short-run.

The relative size of current assets varies by industry as shown in the following tables.

Current Assets/Total Assets Current Assets/Total Assets

Company (Industry) Current Assets /Total Assets

General Electric (Manufacturing) .27

Chevron Oil (Oil drilling and refining) .20

Super Value (Grocery) .33

Tommy Hilfiger (Clothing) .36

Yahoo (Internet search engine) .57

Cisco (Internet systems) .34

SBC Communications (Telcom services) .23

Wendy’s (Restaurant services) .16

Bank of America (Banking services) .70

Merrill Lynch (Investment services) .91

Current RatioCurrent RatioCurrent assets are often compared to current

liabilities as an indicator of a company’s solvency.

Average current ratios also vary across industries as shown in the following tables.

Current Ratios Current Ratios

Company (Industry)

Current Assets /Current Liabilities

General Electric (Manufacturing) .75

Chevron Oil (Oil drilling and refining) 1.07

Super Value (Grocery) .87

Tommy Hilfiger (Clothing) 2.71

Yahoo (Internet search engine) 4.14

Cisco (Internet systems) 2.14

SBC Communications (Telcom services) .26

Wendy’s (Restaurant services) 1.08

Bank of America (Banking services) .86

Merrill Lynch (Investment services) 1.17

CashCash The cash account is the first asset listed in the

current asset section of the balance sheet. It consists of coin, checks, and bank drafts

received by the company. The only reporting issues for cash is whether there

are restrictions on its use. The amount of cash maintained by companies also

varies by industry as shown in the following tables.

Cash as a % of Total AssetsCash as a % of Total Assets

Company (Industry) Cash

/Total Assets General Electric (Manufacturing) .02

Chevron Oil (Oil drilling and refining) .05

Super Value (Grocery) .00

Tommy Hilfiger (Clothing) .13

Yahoo (Internet search engine) .20

Cisco (Internet systems) .13

SBC Communications (Telcom services) .01

Wendy’s (Restaurant services) .09

Bank of America (Banking services) .04

Merrill Lynch (Investment services) .05

Cash as a % of Current AssetsCash as a % of Current Assets

Company (Industry) Cash

/Current Assets General Electric (Manufacturing) .07

Chevron Oil (Oil drilling and refining) .23

Super Value (Grocery) .01

Tommy Hilfiger (Clothing) .36

Yahoo (Internet search engine) .35

Cisco (Internet systems) .38

SBC Communications (Telcom services) .03

Wendy’s (Restaurant services) .53

Bank of America (Banking services) .06

Merrill Lynch (Investment services) .06

Proper Management and Proper Management and Control of CashControl of Cash

Proper cash management requires that enough cash be available to meet the needs of the company’s operations.

Too much cash is undesirable as it loses purchasing power in periods of inflation.

Control of cash– Record control– Physical control

Accounts ReceivableAccounts Receivable Accounts receivable arise from selling goods or

services to customers on account. Table of accounts receivable as a percentage of

total assets by industry. Table of average accounts receivable collection

periods by industry. Allowance for Uncollectible Accounts

– T-accounts– Percentage of Sales– Aging

A/R as a % of Total AssetsA/R as a % of Total Assets

Company (Industry) A/R

/Total Assets General Electric (Manufacturing) .35

Chevron Oil (Oil drilling and refining) .09

Super Value (Grocery) .09

Tommy Hilfiger (Clothing) .09

Yahoo (Internet search engine) .04

Cisco (Internet systems) .07

SBC Communications (Telcom services) .10

Wendy’s (Restaurant services) .04

Bank of America (Banking services) .61

Merrill Lynch (Investment services) .47

A/R as a % of Current AssetsA/R as a % of Current Assets

Company (Industry) A/R

/Current Assets General Electric (Manufacturing) 1.03

Chevron Oil (Oil drilling and refining) .47

Super Value (Grocery) .26

Tommy Hilfiger (Clothing) .26

Yahoo (Internet search engine) .07

Cisco (Internet systems) .21

SBC Communications (Telcom services) .03

Wendy’s (Restaurant services) .24

Bank of America (Banking services) .87

Merrill Lynch (Investment services) .52

Allowance for Uncollectibles Allowance for Uncollectibles (T-account)(T-account)

Allowance for Uncollectibles

Beginning Balance

The allowance established in the prior period remains for current period write-offs.

Allowance for Uncollectibles Allowance for Uncollectibles (T-account)(T-account)

Allowance for Uncollectibles

Beginning Balance

Accounts Receivable

Write-off ofaccountsreceivable

Write-off ofaccountsreceivable

As receivable accounts are determined uncollectible, they are written-off to the allowance account as shown.

Allowance for Uncollectibles Allowance for Uncollectibles (T-account)(T-account)

Allowance for Uncollectibles

Beginning Balance

Accounts Receivable

Write-off ofaccountsreceivable

Write-off ofaccountsreceivable

Recognition of bad debt expense

Bad Debts Expense

Recognition of bad debt expense

At the end of each accounting period an estimate of the current period bad debt expense is recorded, increasing the allowance.

Allowance for Uncollectibles Allowance for Uncollectibles (T-account)(T-account)

Allowance for Uncollectibles

Beginning Balance

Recognition of bad debt expense

Bad Debts Expense

Recognition of bad debt expense

Accounts Receivable

Write-off ofaccountsreceivable

Ending Balance

Write-off ofaccountsreceivable

The ending balance in the allowance account remains as an estimate for future period write-offs.

C O P Y R I G H T

C o p y r i g h t © 2 0 0 3 , J o h n W i l e y & S o n s , I n c . A l l r i g h t s r e s e r v e d .R e p r o d u c t i o n o r t r a n s l a t i o n o f t h i s w o r k b e y o n d t h a t p e r m i t t e d i n S e c t i o n 1 1 7 o f t h e 1 9 7 6 U n i t e d S t a t e s C o p y r i g h t A c t w i t h o u t t h ee x p r e s s w r i t t e n p e r m i s s i o n o f t h e c o p y r i g h t o w n e r i s u n l a w f u l . R e q u e s t f o r f u r t h e r i n f o r m a t i o n s h o u l d b e a d d r e s s e d t o t h e P e r m i s s i o n s D e p a r t m e n t , J o h n W i l e y & S o n s , I n c . T h e p u r c h a s e r m a y m a k e b a c k - u p c o p i e s f o r h i s / h e r o w n u s e o n l y a n d n o t f o r d i s t r i b u t i o n o r r e s a l e . T h e P u b l i s h e r a s s u m e s n o r e s p o n s i b i l i t yf o r e r r o r s , o m i s s i o n s , o r d a m a g e s , c a u s e d b y t h e u s e o f t h e s e p r o g r a m s o r f r o m t h e u s e o f t h e i n f o r m a t i o n c o n t a i n e d h e r e i n .