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 |
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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.
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 |
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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).
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 |
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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).
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