Unit 3 Current Assets
Study Objective Define current assets, cash, receivables and inventories. Identify the principles of cash control. Explain bank reconciliation Identify the classification of receivables Explain how discounts and ban debts are recognized in accounts. Describe the methods in determining inventory quantities. 2
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What is current assets? Current assets are cash or items that can be converted into cash within a year. cash, accounts receivable, inventory, marketable securities, prepaid expenses, and short-term investment are all current assets. 4
3.1 Cash What is cash? What is a Cash Control System? What is Bank Reconciliation? 5
What is cash? Cash in accounting means currency (coins, paper money) on hand or on deposit in a bank or other depositories. 6
What is a Cash Control System? The basic contents of cash control system: Specify the range of cash payout Control the amount of cash on hand 7
Specify the range of cash payout Payments of the employees salaries, allowances, bonuses and fringe benefits; Allowances for business trip; Other petty payouts including postage, delivering services and small purchases of supplies. 8
Control the amount of cash on hand Internal control over cash receipts Internal control over cash disbursements 9
Internal control over cash receipts The procedures to control: Immediate counting of all cash received. Immediate recording of all cash received. Timely depositing of all cash received. 10
Internal control over cash disbursements The procedures to control: 1. Applying the petty cash system for small amount expenditures separately. 2. Establish a petty cash system with tight control and close supervision. 3. Prepare renumbered checks and sign them only when approved invoices are provided. 4. Supervise closely all cash-disbursement, related book keeping. 11
Internal control over cash disbursements 1. Applying the petty cash system for small amount expenditures separately. 3. Prepare renumbered checks and sign them only when approved invoices are provided. 2. Establish a petty cash system with tight control and close supervision. The procedures to control: 4. Supervise closely all cash-disbursement, related book keeping. 12
3.2 Receivables Accounts receivables Notes receivables Non-trade receivables 13
Accounts receivables Accounts receivables are the kind of accounts used to record the claims on customers due from the sale of commodities and services. Two major elements are mentioned here: Discount Bad debts 14
Discount Merchandisers and middlemen may offer discount to purchasers. Discount is classified into two types: trade discount and cash discount. Trade discount is the price reduction given by the seller mainly on the purpose of promoting its sales volume. Cash discount is a kind of sales discount, a competitive measure to get more subscriptions. 15
Bad debts The operating expenses or losses arising from the failure to collect receivables is called bad debts expense. Generally, two methods below are used in accounting for bad debts. Direct Write-off Method Allowance Method 16
Direct Write-off Method Bad debt is recorded when a receivable is made certain to be uncollectible Bad debts expense is recorded in a period different from the period in which the revenue was recorded These financial status cannot Be regarded as forever-valid Financial indexes for analytical Purpose. Both the income statement and the balance sheet may report the company s financial status less virtually. 17
Allowance Method Allowance method involves estimating Uncollectible accounts by periods. Estimated uncollectible are recorded at the end of each accounting period through an adjusting entry. A better and more accurate matching between bad debts and income & balance statements is achieved 18
Notes Receivables Notes receivables are formal written promise issued by one party to another and are to be collected unconditionally within a specified time. Its merits are: A strong, legal claim to the maker or its endorsee. Can be converted into cash by Discounting them to bank. Interests may be earned with an interest- bearing note. 19
Non-trade Receivables Non-trade receivables are short-term receivables resulting either from the sale of non-merchandise assets or from other forms of claims not bearing upon any sales or transactions. For example: loans to officers and company employees, interest and dividends receivables claims against insurance companies 20
3.3 Inventories The Definition and Types of Inventories Inventory Systems Inventory Measurement 21
The Definition and Types of Inventories Definition Inventory is one of the current asset and is used to refer to the merchandise and materials that will be converted into cash or consumed in the production within one year or during one operating cycle. Types raw material to be used in the production partially finished goods in process of manufacture finished goods ready for shipment to customers low-valued and easilydamaged implements 22
Inventory system Inventory system Perpetual inventory system Detailed records of each inventory purchase and sale are maintained in both quantity and in value. Periodic inventory system Only the revenue from sales is recorded each time a sale is made. 23
Inventory Measurement First-in, firstout Inventory Measurement Last-in, firstout Average cost Specific identification method 24
First-in, first-out (FIFO) It is assumed that the first units purchased are the first ones sold. Ending inventory is valued at the most recent purchase prices. So the FIFO method is generally in harmony with the physical movement of merchandise in an enterprise. 25
Last-in, first-out (LIFO) The LIFO method assumes that the latest goods acquired are first to be sold, therefore, the costs of the latest goods purchased are to be assigned to unit cost of goods sold. This method is often used for goods in large quantity, such as sand, coal, etc. 26
Average cost Under average cost method (also called the weighed average), goods sold and in inventory have the same cost per unit, and the average figure comes from the following formula: Average Unit Cost=Total Cost of Goods/Total Units. 27
Specific identification method The specific identification method is best used for inventories of high-valued such as cars and construction equipments. When inventories are of a small unit price and involve large volumes, this method is not able to be carried out. 28
Brief Summary 1. Cash in accounting means currency (coins, paper money) on hand or on deposit in a bank or other depositories. It is also called quick asset Being easily transformed into any other type of asset. Therefore, some Method should be taken to control cash. 2.Receivables refer to amounts due from individuals and other entities within one year or the operating cycle. They generally conclude accounts receivables,notes receivables and non-trade receivables. 3.Inventory is a current asset and it is referred to the merchandise and Materials that will be converted into cash or consumed in the production within one year or during one operating cycle. In accounting, inventories affect the balance sheet as well as the income sheet. 29
End Of Unit 3
Unit 4 Non-Current Assets
Study Objective Determine the classification of non-current assets. Explain how to measure and report long-term investments in both common shares and bonds. Define plant asset and determine the cost of plant asset. Describe the two main methods of depreciation and how to apply them in accounting. Distinguish between revenue expenditures and capital expenditures during the useful life of a plant asset. Indicate the scope of intangible assets. 32
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What is Non-current assets? Non-current assets including: Long-term investments Plant assets Intangible assets 34
4.1 Long-term Investment Long-term investment refers to the investment not intended to be realized within a year. Including: Shares investment Bonds investment Other investment 35
Shares investment How to measure and report lingterm investments in both common shares? cost method equity method 36
Shares investment The accounting for investments in common stocks based on the extent of the investor s influence over the operating and financial affairs of the investee. Less than 20% of the stock: Cost method Between 20% to 50%: Equity method The percentage an investor owns the stock of an investee 50% and more: Consolidated Financial statement 37
Bonds investment Bonds investment must be accounted for according to actual amount paid. Where bonds are acquired at a premium or discount, the difference between the cost and the face value of the bonds shall be amortized over the periods to maturity of the bonds. Interest accrued during the period of bonds investment and the difference between the amount of principal and interest received on bonds sold and their book cost and interest accrued but not yet received shall be accounted for as current profit and loss. 38
4.2 Plant assets Plant Assets are tangible resources used in the operations of the business and are not intended for sale to the customers. For example, buildings and structures, machinery and equipment, transportation equipment, tools and implement are all plant assets. 39
Characteristics of Intangible assets Long-lived and relatively permanent (generally the useful life is over one year) Unit value is above the prescribed criteria Original physical form remains unchanged during the process of utilization 40
Determining the cost of plant assets Cost consists of all expenditures that are necessary in acquiring the assets and making it ready for its intended use. For example, the cost of buildings consists of the contract price plus payment for the architect s fees, building permits, and excavation costs. 41
Determining the cost of plant assets If the amounts are relatively large, expenditures required in assembling, installing, testing, repairing and maintaining, renewing and improving the unit should also be treated as part of the cost of the assets. If the amount is small, the expenditures are treated as current operational expenses. 42
Depreciation Depreciation means a part of the value of the asset is gradually transferred to the cost of products, or services because of wear and tear, or technological obsolescence during its useful life. 43
Depreciation Four factors should be taken into consideration when computing the depreciation of plant assets: Cost Useful life Salvage value Total units of output 44
Depreciation Method Depreciation Method Straight-Line Method Unit-of-Production Method 45
Straight-Line Method Under the straight-line method, the annual depreciation is the same for each year of the service life of an asset. In this sense, it is also called Service-Life Method. This method sounds rational and is more often applied when plant assets are used evenly in each accounting period. 46
Year For example: Assume that ABC company bought a piece of plant asset at the cost of $15,000 with an estimated useful life of 4 years and an estimated salvage value of $800. Depreciable Cost ABC company Depreciation Schedule Depreciable Rate Annual Depreciation Accumulated Depreciation Book Value 1 st year $14,200 25% $3,550 $3,550 $11,450 2 nd year $14,200 25% $3,550 $7,100 $7,900 3 rd year $14,200 25% $3,550 $10,650 $4,350 4 th year $14,200 25% $3,550 $14,200 $800(salvag e value) Note: Depreciable Cost = Cost - Salvage Value Depreciable Rate = 100% / Useful Life Annual Depreciation=Depreciable Cost X Depreciable Rate Book Value = Cost Accumulated Depreciation 47
Unit-of-Production Method The unit-of-production method relates depreciation to the use and output brought by the asset rather than to the time. Under this method, depreciation is determined by multiplying the units of output produced in the year by depreciation per unit. This method is especially used in some lines of business where the use frequency of certain plant assets varies greatly from period to period. 48
For example: In the above case, the total output of the asset bought by ABC company are 100,000 units of product (the first year output be 5,000 units; the second year be 55,000 units; the third year be 35,000 units and the fourth year be 5,000 units), depreciation schedule under this method should then be as follows: ABC company Depreciation Schedule Year Depreciable Cost/unit Units of output Annual Depreciation Accumulated Depreciation Book Value 1st year $0.142 5,000 $710 $710 $14,290 2nd year $0.142 55,000 $7,810 $8,520 $6,480 3rd year $0.142 35,000 $4,970 $13,490 $1,510 4th year $0.142 5,000 $710 $14,200 $800(salvage value) Note: Annual Depreciation= Depreciable Cost X Units of output 49
Expenditures during the useful life Expenditures of all kinds may happen during the useful life of a plant asset. Capital expenditures: Those infrequently-occurring and large amount of costs for additions and improvements for the purpose of increasing the operating efficiency and productive life and capacity of the unit are referred to as capital expenditures. Revenue expenditures: A company may incur costs for ordinary repairs to maintain the operating efficiency and productive life and capacity of the unit. For example, the oil addition of a motor, the replacing of the plumbing of the office building. These frequentlyoccurring small amount of costs are recorded in revenue expenditures. 50
Plant asset disposals Plant assets may be disposed by the way of being retired, sold, or exchanged At the time of disposal, it is necessary to determine the book value of the plant asset. Whichever method of disposal is used, the book value will be compared with the disposing result to get the gain on disposal or loss on disposal. Both of the two items will be recorded in current income statement. 51
4.3 Intangible Assets Intangible assets refer to the long-term assets that are of value because of the exclusive privileges and rights to their owners and have no physical existence.. Including: Patent Copyright Trademark and trade name Franchise Goodwill 52
Characteristics of Intangible assets No physical existence For long-term service Monopolistic Uncertainty of Their revenues 53
Patents Patents are granted by relevant government institution (National Intellectual Property Office), enabling its owner exclusive rights to the patented device for 17 years. 54
Copyrights Granted by government institution, giving its owner exclusive right to publish, reproduce and sell his writings and other forms of artistic works for a period of not more than 50 years beyond the author s death. This is called copyright. 55
Trademarks and Trade names A trademark or a trade name is a word, phrase, or symbol that identifies a particular enterprise or product. Examples are Lenovo, Coco-cola, the letter M for McDonald s and such like. Trademarks and trade names play a great role in determining the sales volume and popularity of an enterprise and its products. 56
Franchises Franchises are the rights granted to an organization, or an individual, by the government or a company to conduct specific business in a designated geographical area. Licenses to use the city street, to operate a bus line, as well as the rights to sell certain products in a certain district, are examples of this. 57
Goodwill Goodwill is the value of all favorable features of a business enterprise. These include: desirable location, superior management, high quality of products and services, and favorable financial standing. Goodwill is continually built and gradually accumulated at no identifiable cost. Unlike other intangible assets, goodwill cannot be sold separately in the market. But the purchase price of a whole entity will inevitably embody a payment for the goodwill of it. 58
Brief Summary 1. Cash in accounting means currency (coins, paper money) on hand or on deposit in a bank or other depositories. It is also called quick asset Being easily transformed into any other type of asset. Therefore, some Method should be taken to control cash. 2.Receivables refer to amounts due from individuals and other entities within one year or the operating cycle. They generally conclude accounts receivables,notes receivables and non-trade receivables 3.Inventory is a current asset and it is referred to the merchandise and Materials that will be converted into cash or consumed in the production within one year or during one operating cycle. In accounting, inventories affect the balance sheet as well as the income sheet. 59
End Of Unit 4