Chapter 7 Mugan-Akman 2007 2

Assets

Current assets

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

Chapter 7 Mugan-Akman 2007 3

Chapter 7 Mugan-Akman 2007 4

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

Chapter 7 Mugan-Akman 2007 5

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.

Chapter 7 Mugan-Akman 2007 6

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

Chapter 7 Mugan-Akman 2007 7

Chapter 7 Mugan-Akman 2007 8

Types of Receivables

• Accounts Receivable

• Notes Receivable

• Other Receivables– Receivables from employees– Tax receivables– Etc…

Chapter 7 Mugan-Akman 2007 9

Accounting for Receivables

• Initial Recognition– Recorded and carried at amortized cost

• Valuation– Valued and presented at Net Realizable Value

• Classification

• Disclosure

Chapter 7 Mugan-Akman 2007 10

Receivables are Carried at Amortized Cost

• When sales are made on credit, the interest imputed in the transaction is not recognized as sales revenue but as INTEREST INCOME

• By using the Effective Interest Method

Chapter 7 Mugan-Akman 2007 11

Illustration• The sales price of TL 58.000 was charged to customer

for a sales on credit (n/90) on 1 November. If the same goods were sold at cash, the price would have been TL 50.000

• The effective interest rate for the transaction is:

1/FV

i = 1PV

Future value

PV = Present Value

n = days to maturity

i = effective interest rate

n

FV

1(90/360)58,000

i = 1 = %81.0650,000

Chapter 7 Mugan-Akman 2007 12

Debit Credit

Accounts Receivable 58.000

Unearned financial income 8.000

Sales Revenue 50.000

At 31 of December30/360

58,000PV = 55,200 TL

(1+0,8106)

31.Dec.05 Unearned Financial Income 5.200 Interest Income 5.200

Chapter 7 Mugan-Akman 2007 13

Valuation of Receivables-IFRS

• Uncollectability risk

• Net Realizable Value (Net Recoverable Amount) – Net present value of expected cash collections– Effective interest rate

• Assessment of impairment and determination of impairment loss, if any

Chapter 7 Mugan-Akman 2007 14

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

Chapter 7 Mugan-Akman 2007 15

Illustration of Impairment-IFRSSağlam 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 2007. Total accounts receivable as of 31 December 2007 is TL 59.750

Invoice Net

Recoverable Amount Amount

Altay A.Ş. TL 5.000 TL 4.800

Güçlü A.Ş. 4.000 3.820

Mir A.Ş. 9.800 9.322

Risk A.Ş. 5.450 2.905

OTM A.Ş. 9.000 8.220

TL 33.250 TL 29.067

Customer

Difference= impairment loss of TL 4.183

Chapter 7 Mugan-Akman 2007 16

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

Chapter 7 Mugan-Akman 2007 17

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 4.183CRBalance of Allowance for Uncollectible Accounts Before Adjustment 2.950CREstimated Impairment Loss TL 1.233

Date Account Title and Description Debit Credit

Impairment Loss on Accounts Receivable Allowance for Uncollectible Accounts 1.233To record impairment loss of accounts receivable

31.Ara.07 1.233

Balance Sheet RepresentationAccounts Receivable TL 59.750Allowance for Uncollectible Accounts 4.183Net Realizable Value of Accounts Receivable TL 55.567

Chapter 7 Mugan-Akman 2007 18

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 6.283CREstimated Allowance for Uncollectible Accounts 4.183CRRecovery of Impairment Loss TL 2.100

Date Account Title and Description Debit Credit

Allowance for Uncollectible Accounts 2.100 Recovery of Impairment Loss 2.100To record the recovery of impairment loss

31.Ara.07

Balance Sheet RepresentationAccounts Receivable TL 59.750Allowance for Uncollectible Accounts 4.183Net Realizable Value of Accounts Receivable TL 55.567

Chapter 7 Mugan-Akman 2007 19

Write Off of Accounts Receivable

• a specific customer is not able to pay its debt

Risk A.Ş. declared bankruptcy on 20 March 2008 Date Account Title and Description Debit Credit

Allowance for Uncollectible Accounts Accounts Receivable-Risk A. Ş 5.450To write off the receivable from Risk A.Ş.

20.Mar.08 5.450

Chapter 7 Mugan-Akman 2007 20

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 2008 and the remaining amount later

Date Account Title and Description Debit Credit

Accounts Receivable- Risk A.Ş. Allowance for Uncollectible Accounts 5.450To recover the written off receivable from Risk A.Ş.

Cash 3.000 Accounts Receivable- Risk A.Ş. 3.000To record collection from Risk A.Ş.

03.Nis.08 5.450

03.Nis.08

Chapter 7 Mugan-Akman 2007 21

Chapter 7 Mugan-Akman 2007 22

Chapter 7 Mugan-Akman 2007 23

Financing with Accounts Receivable

• Pledge of accounts receivable

• Factoring with accounts receivable

Chapter 7 Mugan-Akman 2007 24

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

Chapter 7 Mugan-Akman 2007 25

Other Current Assets

• Value Added Taxes Deductible and Carried Forward

• Advances Given

• Prepaid Taxes

• Prepaid Expenses

Chapter 7 Mugan-Akman 2007 26

Chapter 7 Mugan-Akman 2007 27

Common Financial Ratios Used in Management of Current Assets

Current AssetsCurrent Ratio =

Current Liabilities

sLiabilitieCurrent

sInvestmentSecurity Short term Rec. Notes and Accounts Eqvt Cash and(Cash RatioQuick

Net SalesAccounts Receivable Turnover =

Average Accounts Receivable

365Collection Period=

Accounts Receivable Turnover

Chapter 7 Mugan-Akman 2007 28

2006 2005 2004Current Ratio 0,79 0,83 1,11Quick Ratio 0,44 0,46 0,71Receivable Turnover 127 88Average Collection Period 2,9 4,2

Chapter 7 Mugan-Akman 2007 29