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  1. Assets Mugan-Akman 2005

  2. Liabilities and Shareholders’ Equity Mugan-Akman 2005

  3. Current assets • assets that are expected to be converted into cash within one year or within the operating cycle of an entity • Cash and cash equivalents, short-term investments, accounts/notes/other receivables, inventories and other current assets. Mugan-Akman 2005

  4. MIGROS Mugan-Akman 2005

  5. Why is Current Asset Management Important? • Solvency- debt paying ability • Profitability- efficient use of resources to generate revenue • profitable but insolvent • quality of receivables • credit policies • idle cash Mugan-Akman 2005

  6. Cash and Cash Equivalents • Cash • Coins, banknotes,demand 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 in cash vault • 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 • ! STOCKS(SHARE CERTIFICATES)ARE NOT CASH EQUIVALENTS DUE TO THEIR SIGNIFICANT RISK. Mugan-Akman 2005

  7. Control Over Cash Cash is, • easily transportable • large number of transactions involving cash So control procedures should be very effective for cash are: • Establish Responsibilities- responsible only have access • Segregation of Duties- recorder vs. holder • Documentation Controls- receipts, payment vouchers, bank advice notes, bank statements • Physical Controls- should be kept in cash vault • Independent Internal Verification- controller vs recorder • Use of Bank Accounts Mugan-Akman 2005

  8. MIGROS Mugan-Akman 2005

  9. Receivables • Accounts Receivable» amounts owed by customers on account from sale of goods or services • Notes Receivable» more formal than A/R. A promissory note is signed by the customer. • Other Receivables »non-trade receivables; interest receivables, receivables from personnel, loans given to subsidiary companies,tax receivables. Mugan-Akman 2005

  10. 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 2005

  11. Valuation of Receivables-IFRS A/R is recorded in the accounts but the critical question is: How should the receivables be reported in the financial statements? • 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) to prevent overstatement of assets • Net Realizable Value represents the amount of cash expected to be collected from the receivables – A/R should be recorded not at the accrued amount but the net present value of cash collections from receivables. • net recoverable amount of accounts receivable (or trade receivables) is equal to their original values unless there is an indication of impairment Mugan-Akman 2005

  12. Valuation of Receivables-IFRS • 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 Mugan-Akman 2005

  13. Impairment of Accounts Receivable-IFRS • Matching principle- losses should be estimated from selling on credit and should be recorded in the accounting period sales made. • 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 2005

  14. 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 –the account that accumulates the estimated losses • a contra-asset account • deducted from Accounts Receivable in order to determine the net realizable value of receivables • Permenant account so carried to next year and analyzed again either for an increase in the allowance or a decrease due to the realization of the loss through write-off. Mugan-Akman 2005

  15. 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 2005

  16. 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 with their balances and due dates and whether there is an indication of impairment Mugan-Akman 2005

  17. Illustration of Impairment-IFRS Sağlam Yapı Market is in the process of preparing the financial statements for the year 2004.The credit department examined all outstanding receivables and determined that the following accounts may be impaired as of 31 December 2004. Total accounts receivable as of 31 December 2004 is TL 59.750 of TL 26.500 is not impaired. Difference= impairment loss of TL 4.183 Mugan-Akman 2005

  18. 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 2005

  19. 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 2005

  20. 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 2005

  21. Write Off of Accounts Receivable • a specific customer is not able to pay its debt Risk A.Ş. declared bankruptcy on 20 March 2005 Mugan-Akman 2005

  22. 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 2005 and the remaining amount later Mugan-Akman 2005

  23. 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 2005

  24. 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 2005

  25. Credit Card Sales Gourmet Restaurant served dinner to various customers on 11 May 2005 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 2005

  26. Notes Receivable • A promissory note is an unconditional promise to pay a certain amount of money in the future. • To lend money • To settle an accounts receivable • notes with maturity dates less than or equal to 12 months are classified as short-term Mugan-Akman 2005

  27. Promissory Note-(IOU) Maker-Animal Co. Payee-Health Pharmacy Issue Date-2Jun 2005 Maturity Date-30Sep 2005 Mugan-Akman 2005

  28. Accounting Entries Illustrated for Notes Receivable-1 When the Note received for the settlement of an accounts receivable At the end of the Fiscal Year to accrue for earned interest due to passage of time (*) Interest: 8.300*25%*90 days/360 days = TL 518,75 Mugan-Akman 2005

  29. Accounting Entries Illustrated for Notes Receivable-2 When the Note is Paid If the Note is Dishonored(defaulted) Mugan-Akman 2005

  30. MIGROS Mugan-Akman 2005

  31. Mugan-Akman 2005

  32. Other Current Assets • Value Added Taxes(VAT) Deductible and Carried Forward • Advances Given • PrepaidTaxes • Prepaid Expenses Mugan-Akman 2005

  33. Common Financial Ratios Used in Management of Current Assets Mugan-Akman 2005

  34. Mugan-Akman 2005