current assets

what is a current asset?

Cash and assets expected to be converted into cash within one year

where do you find the current assets?

at the top of the balance sheet

what are the top five assets typically listed? (ordered in liquidity)

1. Cash

2. Investments

3. Accounts receivable (IOUs from customers)

4. Inventory

5. prepaid expenses (insurance)

what does liquidity mean?

can be turned into cash

so if it is the most liquid or has the highest liquidity, it is the easiest turned into cash

what are the 4 non current assets?

1. land

2. tangible assets (like machines)

3. operating leases

4. intangible assets (copyrights/patents)

what is petty cash?

cash actually on hand. like physical dollar bills and coins

how does cash exit the balance sheet?

1. if an asset is purchased

2. used to pay off a liability

3. pay off a dividend

what is a dividend?

a payment to a worker/manager

how are investments measured on the balance sheets?

generally measured at its fair value, which is the price the company would expect to receive if it sold the investment on the balance sheet date

how does an investment get off the balance sheet?

when an investment is SOLD

what are “accounts receivable”?

IOUs from customers as result of a sale on account (“credit sale”). it is typically due in 30 or 60 days. It is often referred to as AR.

how are “accounts receivable” measured on the balance sheet?

NET

total amount owed from customers (accounts receivable gross) - an allowance or estimate of how much will not be collected. the resulting value is called accounts receivable, net. that is what is reported on the balance sheet.

how do you ”accounts receivable” exit the balance sheet?

1. cash comes in from the customer

2. the receive is deemed to be hopelessly in collectible and is written off the books

3. the company sells the AR to the bank (this is called “factoring”)

what is factoring?

when a company sells the AR to a bank

(not super common but does happen)

what is allowance for doubtful accounts?

the estimate of the amount of accounts receivable the company does not expect to collect.

(typically ranges from 2%-8% not super common)

what does contra asset account mean?

that this account DECREASES the reported value of an asset (accounts receivable) on the balance sheet

what would be the accounts receivable net?

47,500

50,000- 2,500=47,500

how will companies decide who won’t pay?

look at historical data. knowledge of customers, general economic conditions to estimate the amount of uncollectibke accounts

what is inventory?

goods the company intends to sell to customers in the normal course of business

how is inventory measured on the balance sheet?

cost to purchase the inventory or the cost to manufacture the inventory

how does inventory exit the balance sheet?

1. the good is purchased by a customer

2. the good is written off as being unsalable (obsolete)

what are prepaid assets?

cash payments made in ADVANCE for an asset typically services that will be used up in the future. Common examples: prepaid rent, and prepaid insurance

(not converted into cash like the other assets, but it is used up)

what is the income statement formula?

sales revenue - expenses = profit

are there any expenses on the balance sheet?

trick question, only PREPAID EXPENSES which means it is an asset

true/false: The cash balance presented on the balance sheet includes cash in all of the company bank account and any cash that is on site at the company?

true

investments in the balance sheet are generally measured at their _____

fair value

what are other names for allowance for doubtful accounts?

allowance for bad debts

allowance for uncollectible items

what is the difference between prepaid assets and prepaid expenses?

nothing. sometimes it is even just called prepaid

what are the 2 types of contra assets?

1. allowances of doubtful accounts

2. accumulated depreciation