Cash, Receivables & Marketable Securities

Hey there, finance whizzes! Ava, Benjamin, and Evelyn are diving into the world of dividends. Can you help them understand how dividends per share for common stock are used in the calculation of the following?

• a

• b

• c

• d

Answer explanation

Financial statements are often used to compute key ratios that help evaluate a company's performance. Profitability ratios help to measure the company's degree of success or failure. Shareholders specifically look at earnings and dividends on a per-share basis when comparing similar companies within an industry.

The dividends per share payout ratio measures the percentage of earnings distributed in the form of cash dividends. It is calculated by dividing the dividends per share by earnings per share (EPS). This ratio can vary widely by industry and is impacted by a company's maturity. Growth-oriented companies tend to reinvest earnings in the company and have lower payout ratios; mature companies typically pay out more to investors.

EPS measures net income earned on each share of common stock. It is calculated by dividing net income less preferred dividends by the weighted-average number of common shares outstanding. This ratio is impacted by net income, not dividends distributed. Higher EPS indicates greater value because investors will typically pay more for a company that earns higher profits relative to its share price.

Dividends per share is used in the numerator of the dividends per share payout ratio. EPS is this ratio's denominator (Choices A, C, and D). Dividends per share are not used to calculate EPS.

Hey Abigail, Ava, and Aria! Let's dive into the world of finance! Which of the following assets or transactions is an element of comprehensive income?

• Investments by owners.

• Sales revenue.

• Distributions to owners.

• Deferred revenue.

Answer explanation

Comprehensive income measures economic performance by calculating an entity's change in equity from nonowner transactions and events. Comprehensive income includes revenues, expenses, gains, and losses related to net income and to other comprehensive income. Comprehensive income is reported each financial period on the income statement. Sales revenue is a component of net income and, therefore, is included in comprehensive income.

(Choices A and C) Owner transactions include investments made into the enterprise (eg, contributions) and distributions of enterprise resources to owners (eg, dividends). These transactions are not considered a part of comprehensive income because investments are not revenues and distributions are not expenses. Owner activities are a component of equity but are not related to the business operations.

(Choice D) Deferred revenue occurs when an entity receives cash before providing goods or services to a customer. Deferred revenue is a liability (not income) as the entity has an obligation to perform future services upon receipt of the cash.

Hey Anika, Rohan, and James! Imagine you're all accountants for Brite.

Brite Corp. had the following liabilities at December 31, Year 3:

Accounts payable $55,000

Unsecured notes, 8%, due 07/01/Year 4 $400,000

Accrued expenses $35,000

Contingent liability $450,000

Deferred income tax liability $25,000

Senior bond, 7%, due 03/31/Year 4 $1,000,000

The contingent liability is an accrual for possible losses on a $1,000,000 lawsuit filed against Brite. Brite's legal counsel expects the suit to be settled in Year 5 and has estimated that Brite will be liable for damages in the range of $450,000 to $750,000.

What amount should Brite report in its December 31, Year 3, balance sheet for current liabilities? Can you solve this accounting puzzle?

• $515,000

• $940,000

• $1,490,000

• $1,515,000

Answer explanation

Current liabilities (CL) are short-term obligations that will be satisfied within one year of the balance sheet date or operating cycle, whichever is longer. There are many financial metrics involving CL (eg, liquidity, going concern) because they are an entity's most pressing obligations (ie, they must be paid first). Examples of CL include accounts payable, unearned revenue, and the current portion due of long-term debt.

In this scenario, Brite Corp.'s CL include the accounts payable and accrued expenses. In addition, both the unsecured note due 07/01/Year 4 and senior bond due 03/31/Year 4 are due within one year of the balance sheet date of 12/31/Year 3 and are also classified as CL. Brite's total CL are $1,490,000, as follows:

Accounts payable$55,000

Accrued expenses $35,000

Unsecured notes,due 07/01/Y4 $400,000

Senior bond,due 03/31/Y4 $1,000,000

Total CL$1,490,000

(Choice A) CL of $515,000 incorrectly exclude the senior bond and include the deferred tax liability (DTL). All DTLs are classified as long-term.

(Choice B) CL of $940,000 erroneously exclude the senior bond and include the contingent liability. Because the contingent liability is not expected to be settled until Year 5, it should be classified as long-term.

(Choice D) CL of $1,515,000 incorrectly include the DTL.

After a thrilling day of balancing books, James and Abigail are eager to find out what amount Alton should report as its cash account balance after reconciling its bank statement.

Alton Co. had a cash balance of $32,300 recorded in its general ledger at the end of the month, prior to receiving its bank statement. Reconciliation of the bank statement reveals the following information:

Bank service charge: $15

Check deposited and returned for insufficient funds check: $120

Deposit recorded in the general ledger as $258 but should be $285

Checks outstanding: $1,800

After reconciling its bank statement, what amount should Alton report as its cash account balance? Can you help them figure it out?

• $30,338

• $30,392

• $32,138

• $32,192

Answer explanation

There are instances when the bank cash balance and the book cash balance are different. Bank reconciliations are used to reconcile the differences between the two amounts to find a corrected balance (ie, the net cash balance). Differences can be caused by deposits in transit, checks that have not cleared the bank, errors, or bank fees.

To use the bank statement to identify any unrecorded transactions, Alton Co. starts with its book balance of $32,300.

• The adjustment for the incorrect deposit ($285 − $258) requires an additional $27 to be added to the book balance.

• The bank service charge of $15 needs to be deducted from the book balance.

• The returned check (ie, insufficient funds check) is deducted from the book balance because the company had initially recorded it as cash received from a customer. When the check bounced, there was no corresponding increase in cash on the bank side. Therefore, Alton must deduct the amount ($120) from its cash book balance.

• The outstanding checks would already be accounted for in Alton's book balance when they were initially recorded.

The result is a net cash balance after adjustments of $32,192.

Hey Rohan, Grace, and Aria! Let's dive into the world of finance!

Kline Co. had the following sales and accounts receivable balances at the end of the current year:

Cash sales $1,000,000

Net credit sales $3,000,000

Accounts receivable, net, January 1 $100,000

Accounts receivable, net, December 31 $400,000

Assuming a 365-day year, can you figure out Kline's average collection period for its accounts receivable? Put on your thinking caps!

• 48.7 days.

• 30.4 days.

• 22.8 days.

• 12.2 days.

Answer explanation

Financial ratios allow financial statement users to combine accounting information in different ways to better understand a company's financial position. Such ratios can provide insight into areas such as the company's liquidity, activities, profitability, or debt coverage. This additional information helps the users to make better decisions. For example, accounts receivable (A/R) ratios can provide a better assessment of collectability from customers.

A/R turnover compares net credit sales to average receivables ([beginning A/R + ending A/R] / 2) to determine the number of times A/R turns over in a period. A/R turnover can also be expressed as the average number of days for A/R to be collected (ie, days sales in A/R), which is calculated as 365 divided by A/R turnover. This metric may indicate problems with A/R quality (ie, difficulty of collections).

In this case, Kline Co.'s average days in A/R is 30.4:

AR turnover = Net Credit sales ÷ AVG AR = 3M ÷　250,000=12

Average number of days in A/R(days sales in A/R)=365÷12=30.4 days

Hey Aiden, Elijah, and Sophia! To meet the disclosure requirements related to risks and uncertainties, can you figure out which of the following an entity will disclose?

I. The legal form of entity

II. The use of estimates

III. Concentrations of risk

• I, II, and III

• I and II only

• I and III only

• II and III only

Answer explanation

To comply with the disclosure requirements related to risks and uncertainties, an entity is required to disclose the nature of its operations, the use of estimates, certain significant estimates, and vulnerability to certain concentrations of risk. There is no requirement to disclose the legal form of entity.

Hey there, Benjamin and Aiden! Let's dive into the world of finance!

In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for credit losses of $20,000. What is the total risk of credit loss related to Butler's trade accounts receivable, and how much of that risk is off-balance sheet risk? Put on your thinking caps!

• a

• b

• c

• d

Answer explanation

The current expected credit loss model is used when accounting for credit losses (ie, bad debts). Instead of reducing the accounts receivable (A/R) directly, the expected credit losses accumulate in the allowance for credit losses, a contra account.

The net carrying value (CV) of the A/R equals what management expects to collect after considering credit risk. If all the A/R became worthless, both accounts would be removed from the books. Therefore, the CV represents the total risk of credit loss (Choices A and D).

In this scenario, if the A/R become worthless (ie, a total credit loss), the asset would be written off by removing the $250,000 A/R and the $20,000 allowance. Therefore, the total risk of credit loss equals $230,000 ($250,0000 − $20,000), the net carrying value. Because the A/R are recorded on the balance sheet in that amount, no portion of the loss would be considered off-balance sheet (Choice C).

Hey Zoe, Daniel, and Mason! Let's put on our thinking caps!

A company owns a financial asset that is actively traded on two different exchanges (Market A and Market B). There is no principal market for the financial asset. The information on the two exchanges is as attached picture.

What do you think is the fair value of this financial asset?

• $900

• $925

• $1,000

• $1,050

Answer explanation

In fair value reporting, the most reliable input is the price from the principal market. If no principal market exists, an item's fair value is the price from the most advantageous market. This market maximizes the sales proceeds of an asset or minimizes the transfer price of a liability.

A seller will transact wherever they will receive the most consideration. As a result, when determining the most advantageous market, transaction costs must be subtracted from the quoted market price because the seller would not receive that amount. However, fair value is the quoted market price (including transaction costs) from the most advantageous market because that amount is what a willing buyer must pay for that item.

There are three steps for using the most advantageous market to determine fair value. The financial asset's fair value is $1,000(quoted price from Market A) and is calculated as follows:

Step1:

Calculate net sales proceeds from each market

(quoted price-transaction costs)

Market A: $1,000-$75=$925

Market B: $1,050-$150=$900

Step2:

Identify most advantageous market

Market A: $925

Step3:

Determine fair value (quoted price)

Market A: $1,000

(Choice A) The value of $900 suggests that the asset's fair value is the sales proceeds from Market B. Market B is not the most advantageous, and sales proceeds do not equal fair value prices.

(Choice B) The $925 value assumes that the asset's fair value is the sales proceeds from Market A Although Market A is the most advantageous, the fair value is the quoted price, not the sales proceeds.

(Choice D) The value of $1,050 suggests the quoted price from Market B is the asset's fair value. Net proceeds are lower in this market, so Market B is not the most advantageous.

Hey there, finance whizzes! If Samuel, Liam, and Benjamin were on a quest to uncover how a company secured its treasure this year by issuing debt or equity securities, which financial statement would be their trusty map?

• Balance sheet.

• Statement of cash flows.

• Statement of changes in stockholders' equity.

• Income statement.

Answer explanation

The Statement of Cash Flows provides insights into cash inflows and outflows, including financing activities such as issuing debt or equity. This makes it the most appropriate statement to determine if a company obtained financing during the year.

Financial statements (F/S) provide an overview of a company's financial results and condition. A complete set of GAAP F/S includes the following reports:

• Balance sheet: reports balances of assets, liabilities, and stockholders' equity as of the reporting date

• Income statement: reports revenues, expenses, and resulting income or loss generated during the reporting period

• Statement of changes in stockholders' equity: details the change in owners' equity during the reporting period

• Statement of cash flows (SCF): provides information about a company's sources and uses of cash during a reporting period. It has three categories based on the nature of cash flows: operating; investing; and financing activities

The financing activities section of the SCF details cash flows involving issuing and repaying debt (ie, borrowings to finance the company) or equity (ie, transactions with owners) during the reporting period.

(Choice A) The balance sheet reports the cumulative balances for debt and equity as of the F/S reporting date, not whether financing was obtained during the reporting period.

(Choice C) The statement of changes in stockholders' equity shows equity financing activities; it does not report transactions involving debt.

(Choice D) The income statement reports a company's profitability during the reporting period. Financing activities do not impact revenue and expenses.

Hey Daniel, Evelyn, and Michael! Can you guess the name of the reporting concept that helps us understand the value of assets? Is it:

• Replacement cost.

• Fair value.

• Historical cost.

• Net realizable value.

Answer explanation

Replacement cost is the amount required to obtain an asset that is the same as or equivalent to an existing asset. Equivalent, in this context, means the replaced asset should perform the exact function as the existing asset. An example of an item that uses replacement cost is inventory. Under the LIFO or retail inventory methods, inventory is written down to the market price (ie, current replacement cost) if that price falls below the historical cost.

(Choice B) FV requires objective market transactions between unaffiliated third parties to determine an item's value. Such transactions may not exist when determining the amount to obtain the same or equivalent asset.

(Choice C) Historical cost represents an asset's original cost but does not reflect the current amount required to obtain or replace it.

(Choice D) NRV is the estimated selling price of an asset less estimated disposal costs. An asset sale (ie, exit price) is not the same amount that is required to obtain the same or equivalent asset