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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 Current Asset Section of a Balance Sheet Economic Consequences of Accounting on wealth or behavior of lenders and investors

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

Mugan-Akman 2007

economic consequences of accounting
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 firm’s choice of accounting principles
    • Effect on reporting entities of standard setters’ decisions
    • Effect on standard setters of their decisions

Mugan-Akman 2007

quality of earnings
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

Mugan-Akman 2007

what will affect quality of earnings
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

Mugan-Akman 2007

why is current asset management important
Why is Current Asset Management Important?
  • solvency
  • profitability
  • profitable but insolvent
  • quality of receivables
  • credit policies
  • idle cash

Mugan-Akman 2007

cash and cash equivalents
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

Mugan-Akman 2007

checks received from customers
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.

Mugan-Akman 2007

control over cash
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

Mugan-Akman 2007

receivables
Receivables
  • Accounts Receivable
  • Notes Receivable
  • Other Receivables

Mugan-Akman 2007

recognition of accounts receivable
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

Mugan-Akman 2007

valuation of receivables ifrs
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

Mugan-Akman 2007

impairment of accounts receivable ifrs
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

Mugan-Akman 2007

impairment loss
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

Mugan-Akman 2007

adjusting entry ifrs
Adjusting Entry-IFRS

Dekorasyon A.Ş. has outstanding receivables of TL120.000 as of 31 December 2003, and its management estimated that there is impairment of TL10.000

Mugan-Akman 2007

determining the impairment loss
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

Mugan-Akman 2007

illustration of impairment ifrs
Illustration of Impairment-IFRS

Sağlam Yapı 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

Mugan-Akman 2007

how much is the expense
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

Mugan-Akman 2007

adjusting entries target impairment loss known case 1
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

Mugan-Akman 2007

adjusting entries target impairment loss known case 2
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

Mugan-Akman 2007

write off of accounts receivable
Write Off of Accounts Receivable
  • a specific customer is not able to pay its debt

Risk A.Ş. declared bankruptcy on 20 March 2009

Mugan-Akman 2007

recovery of receivables written off
Recovery of Receivables Written Off

Risk A.Ş. informed Sağlam Yapı Market that it will pay TL 3.000 of its total debt on 3 April 2009 and the remaining amount later

Mugan-Akman 2007

direct write off
Direct Write-off

Dekorasyon A.Ş. 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.Ş. that he bankrupted in May 2005. Since it became evident that this receivable cannot be collected, Dekorasyon A.Ş. decided to write off the receivable.

Mugan-Akman 2007

accounting for uncollectible accounts fasb
Accounting for Uncollectible Accounts-FASB

Uncollectible Accounts

Allowance Methods

Direct Write-off Method

Percentage of Sales

Aging of Accounts Receivable

Mugan-Akman 2007

financing with accounts receivable
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

Mugan-Akman 2007

factoring accounts receivable
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

Mugan-Akman 2007

credit card sales
Credit Card Sales

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

Mugan-Akman 2007

notes receivable
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

Mugan-Akman 2007

promissory note iou
Promissory Note-(IOU)

Mugan-Akman 2007

accounting entries illustrated for notes receivable 1
Accounting Entries Illustrated for Notes Receivable-1

When the Note Received

At the end of the Fiscal Year

(*) Interest: 8.300*25%*90 days/360 days = TL 518,75)

Mugan-Akman 2007

accounting entries illustrated for notes receivable 2
Accounting Entries Illustrated for Notes Receivable-2

When the Note is Paid

If the Note is Dishonored

Mugan-Akman 2007

accounting for debt and equity investments
Accounting for Debt and Equity Investments

Mugan-Akman 2007

* usually classified as available for sale investments

slide34

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

Mugan-Akman 2007

classification of financial instruments
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.

Mugan-Akman 2007

short term investments trading securities
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.

Mugan-Akman 2007

accounting for trading securities
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.

Mugan-Akman 2007

accounting for marketable equity securities
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

Mugan-Akman 2007

slide39

Other Current Assets

  • Value Added Taxes Deductible and Carried Forward
  • Advances Given
  • PrepaidTaxes
  • Prepaid Expenses

Mugan-Akman 2007

liabilities
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

Mugan-Akman 2007

recognition of liabilities
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

Mugan-Akman 2007

valuation of liabilities
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

Mugan-Akman 2007

current liabilities
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

Mugan-Akman 2007

notes payable
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

Mugan-Akman 2007

accounting for notes payable a1
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

Kavaklıdere/Ankara31August 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

Mugan-Akman 2007

accounting for notes payable a2
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

Mugan-Akman 2007

accounting for notes payable b1
Accounting for Notes Payable-B1

Case B: Interest Included in the Face Value of the Note

  • note is discounted

Kavaklıdere/Ankara31 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

Mugan-Akman 2007

accounting for notes payable b2
Accounting for Notes Payable-B2

29 November 2007, when the note is repaid

Mugan-Akman 2007

slide50

Assume 30 Sept. end of fiscal year

18.000 x 22% x30/360

Accruals by Aycan - payee

  • Case A
  • Case B

Mugan-Akman 2007

slide51

Accruals by - lender

Case A

Case B

Mugan-Akman 2007

payroll related liabilities
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

Mugan-Akman 2007

slide53

Payroll Liabilities

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

Mugan-Akman 2007

payroll entry
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

Mugan-Akman 2007

corporate income taxes
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

Mugan-Akman 2007

corporate income taxes example
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:

Mugan-Akman 2007

value added taxes
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 > 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

Mugan-Akman 2007

accounting for vat transactions
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

Mugan-Akman 2007

vat entries
VAT entries

Mugan-Akman 2007

product warranty liabilities 1
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 = 15.000*3%= 450 units

The estimated cost of the defective parts = 450*750 =TL337.500

Mugan-Akman 2007

product warranty liabilities 2
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.

Mugan-Akman 2007

slide63

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

Mugan-Akman 2007

common financial ratios
Common Financial Ratios

Net Working Capital = Current Assets - Current Liabilities

Mugan-Akman 2007