Reading 33: Understanding the Balance Sheet LOS d习题精选 expected, contrast, liability, following, 2010

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LOS d: Compare and contrast current and noncurrent assets and liabilities.

Do the following characteristics have to be met in order to classify a liability as current on the balance sheet?

Characteristic #1 – Settlement is expected within one year or operating cycle, whichever is less.
Characteristic #2 – Settlement will require the use of cash within one year or operating cycle, whichever is greater.

Characteristic #1

Characteristic #2

A) No No

B) Yes No

C) No Yes

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A current liability is expected to be settled within one year or operating cycle, whichever is greater. It is not necessary to settle a current liability with cash. There are a number of ways to settle a current liability. For example, unearned revenue is a liability that is settled by providing goods or services.

 

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Firebird Company reported the following financial information at the end of 2007:

	in millions
Merchandise inventory	$240
Minority interest	70
Cash and equivalents	275
Accounts receivable	1,150
Accounts payable	225
Property & equipment	2,160
Accrued expenses	830
Current portion of long-term debt	120
Long-term debt	1,570
Retained earnings	4,230

Calculate Firebird’s current assets and working capital.

Current assets

Working capital

A) $1,665 million $420 million

B) $1,735 million $490 million

C) $1,665 million $490 million

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Current assets are equal to $1,665 ($275 cash and equivalents + $1,150 accounts receivable + $240 inventory). Working capital (current assets minus current liabilities) is equal to $490 ($1,665 current assets – $225 accounts payable – $830 accrued expenses – $120 current portion of long-term debt).

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Peterson Painting Company is a commercial painting contractor. At the beginning of 20X7, Peterson’s net working capital was $350,000. The following transactions occurred during 20X7:

Performed services on credit	$150,000
Purchased office equipment for cash	10,000
Recognized salaries expense	54,000
Purchased paint supplies on on credit	25,000
Consumed paint supplies	20,000
Paid salaries	50,000
Collected accounts receivable	157,000
Recognized straight-line depreciation expense	2,000
Paid accounts payable	15,000

Calculate Peterson’s working capital at the end of 20X7 and the change in cash for the year 20X7.

Working capital

Change in cash

A) $416,000 $82,000

B) $414,000 $82,000

C) $416,000 $80,000

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Transaction	Amount	Working capital	Cash
Performed services on credit	$150,000	Increase A/R
Purchased PP&E for cash	10,000	Decrease cash	-$10,000
Recognized salaries expense	54,000	Increase A/P
Purchased paint supplies on on credit	25,000	Increase inventories, increase A/P
Consumed paint supplies	20,000	Decrease inventories
Paid salaries	50,000	Decrease cash, decrease A/P	-$50,000
Collected accounts receivable	157,000	Increase cash, decrease A/R	+$157,000
Recognized straight-line depreciation expense	2,000
Paid accounts payable	15,000	Decrease cash, decrease A/P	-$15,000

The change in cash was $82,000 ($157,000 collections – $10,000 from equipment purchase – $50,000 salaries paid – $15,000 for payables).

Working capital at the end of 20X7 is $416,000 ($350,000 beginning working capital + $150,000 increase in accounts receivable from services – $10,000 office equipment purchase – $54,000 salaries expense accrual – $20,000 consumed supplies).

• Purchasing $25,000 of paint supplies on credit has no net effect on working capital (current assets and current liabilities increase). Consuming $20,000 of these supplies reduces working capital (current assets decrease).
• Salary expense reduces working capital by $54,000 when recognized (current liabilities increase). Paying $50,000 of these salaries has no net effect on working capital (current assets and current liabilities decrease).
• Collecting accounts receivable has no net effect on working capital (one current asset increases and another decreases).
• Recognizing depreciation does not affect working capital.
• Paying accounts payable has no net effect on working capital (current assets and current liabilities decrease).