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Accounting for current assets joseph f_valencia
- 1. ALLPPT.com _ Free PowerPoint Templates, Diagrams and Charts MBA – FINANCIAL ACCOUNTING PRESENTED BY: JOSEPH F. VALENCIA ACCOUNTING FOR CURRENT ASSETS
- 2. The 3 Most Common Financial Statements Income Statement The Balance Sheet Statement of Cash Flows gives the clearest picture of the financial position of the company Assets = Liabilities + Stockholders Equity
- 3. Assets a resource a company owns and expects to receive future benefit from Five (5) Main Categories of Assets 1. Current Assets 2. Long-term Investments 3. Properly, Plant, and Equipment 4. Intangible Assets 5. Other Assets
- 4. Current Assets cash and other assets that a company plans to either turn into cash or consume within one year or in the operating cycle of the asset, whichever is longer Operating Cycle the time between the purchases of raw materials needed to produce a product and the sale of the actual product
- 5. Composition of Current Assets
- 6. Composition of Current Assets 1. Cash and Cash Equivalents actual currency that is available for use; short-term investments that will mature, or become cash, within no more than three months a. Cash on hand b. Deposit in checking and savings account c. Money market funds permitting withdrawal by checks d. Checks from customer awaiting deposit e. Foreign currency
- 7. Composition of Current Assets 2. Marketable Securities Many firms put excess cash balances into short-term investments, known as marketable securities. Marketable securities are the next current asset in order of liquidity. Consist of stocks and bonds easily sold through a broker. 2 Types of Securities 1. Equity Securities - which represent ownership interests in other corporations. (stocks) 2. Debt Securities - which are evidence of lending transactions. (bonds) The bond market is where investors go to trade (buy and sell) debt securities, prominently bonds, which may be issued by corporations or municipalities. ... Stocks are traded on stock exchanges.
- 8. Composition of Current Assets 3. Accounts Receivable (A/R) The next most liquid current asset–arise when a firm sells on credit to customers. Example: alphaland Development, Inc. Credit Sales When a firm sells goods on credit to a customer, revenue is recognized at the time of sale, despite the fact that cash will not be received until a later date. Accounting for Credit Sales ASSETS = LIABILITIES + OWNERS’ EQUITY Accounts receivable +$100 Retained earnings +$100 (sales)
- 9. Composition of Current Assets 4. Inventory Inventory consists of products acquired for resale to customers. It is often the largest current asset of a firm. Calculating Gross Profit or Gross Margin Beginning inventory + Purchases Cost of goods available for sale - Ending inventory Cost of goods sold Cost Flow Assumption a. Specific identification b. Average Cost c. FIFO d. LIFO
- 10. Composition of Current Assets 4. 1 Different methods of valuing Inventory 1. Specific Identification - used when a firm sells low-volume, high-cost items. 2. Average Cost - an average cost of items is computed by dividing the number of units available for sale into the cost of goods available for sale. 3. FIFO - it assumes that oldest goods on hand are the first sold. 4. LIFO - the most recent purchases are assumed to have been sold.
- 11. Composition of Current Assets 4. 2 Valuation of Cost of Goods Sold (COGS) is the direct costs attributable to the production of the goods sold in a company. It includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. Calculating the Cost of Goods Sold - COGS Inventory that is sold appears in the income statement under the COGS account. COGS = Beginning Inventory + Purchases during the period – Ending Inventory
- 12. Composition of Current Assets 4. 3 Valuation of Closing Stock Closing stock is the amount of inventory that a business still has on hand at the end of a reporting period. This includes raw materials, work-in-process, and finished goods inventory. The amount of closing stock (properly valued) is used to arrive at the cost of goods sold in a periodic inventory system with the following calculation: Opening stock + Purchases - Closing stock = Cost of goods sold
- 13. Composition of Current Assets 5. Prepaid Expenses The last current asset and the least liquid is prepaid expenses. – Rent and insurance are examples. When rent is paid or an insurance policy purchased, the firm has purchased an asset. As time elapses, the asset is used up, and its cost becomes an expense. The pre-paids are generally a very small portion of a firm's current assets.
- 14. Composition of Current Assets 5. Prepaid Expenses