Assets accounts receivable

Liquid assets are those that can be realized almost immediately, such as cash, accounts receivable, and marketable securities. Although inventories are current assets, they must not be regarded as hquid assets because they cannot usually be converted into cash without winding up the business. 

Assets are classified as current, fixed, or intangibles. Current assets include cash, cash equivalents, marketable securities, accounts receivable, inventories, and prepaid expenses. Cash and cash equivalents are those items that can be easily converted to cash. Marketable securities are securities that a company holds that also may be converted to cash. Accounts receivable are the amounts due a company from customers from material that has been delivered but has not been collected as yet. Customers are given 30, 60, or 90 days in which to pay however, some customers fail to pay bills on time or may not be able to pay at all. An allowance is made for doubtful accounts. The amount is deducted from the accounts receivables. Inventories include the cost of raw materials, goods in process, and product on hand. Prepaid expenses include insurance premiums paid, charges for leased equipment, and charges for advertising that are paid prior to the receipt of the benefit from these items. The sum of all the above items is the total current assets. The term current refers to the fact that these assets are easily converted within a year, or more hkely in a shorter time, say, 90 days. 

Working capital In the accounting sense, the current assets minus the current liabilities. It consists of the total amount of money invested in raw materials, supplies, goods in process, product inventories, accounts receivable, and cash minus those liabilities due within 1 year. 

The accounting definition of woridng capital is total current assets minus total current liabilities. This information can be found from the balance sheet. Current assets consist chiefly of cash, marketable securities, accounts receivable, and inventories current liabilities include accounts payable, short-term debts, and the part of the long-term debt currently due. The accounting definition is in terms of the entire company. 

Assets are items of value possessed by the company or commitments by others to pay the company some amount. This latter quantity is called an account receivable because it is an amount that the company expects to receive in the future under current obligations. 

Current assets Petty cash Cash in bank Accounts receivable Allow for doubtful accounts Inventory—prescription Inventory—other Prepaid federal income tax Prepaid state income tax Total current assets Noncurrent assets Automobiles Machinery equipment Office equipment Leasehold improvements Accumulated depreciation Total noncurrent assets Total assets... 

Assets are commonly divided into the classifications of current, fixed, and miscellaneous. Current assets, in principle, represent capital which can readily be converted into cash. Examples would be accounts receivable, inventories, cash, and marketable securities. These are liquid assets. On the other hand, fixed assets, such as land, buildings, and equipment, cannot be converted into immediate cash. Deferred charges, other investments, notes and accounts due after 1 year, and similar items are ordinarily listed as miscellaneous assets under separate headings. 

An entrepreneur who becomes the owner initially creates a firm with a personal investment. Then, the new firm purchases and sells assets, collects receivables, pays liabilities, and conducts many other business activities called transactions. Each transaction must be evidenced with a business document. For example, a business entity that purchases office furniture costing 500 by paying 200 in cash and the balance of 300 on credit should provide the accountant with a purchase invoice verifying the price and quantity, a check stub of the owner s checkbook or a receipt for a cash payment, and a bill that the balance of 300 is due in 30 days (an accounts payable). These documents evidence accounting information used by accountants and are available for current and future review by independent certified public accountants. 

Only the most liquid of assets are included in this ratio, and the best ratio is usually 1 1, but this varies with the industry concerned. Table 9.12 calculates the acid-test ratio. Although the Blue company has a better current ratio than the Gold company, it does not have a better acid-test ratio, and, therefore, may have to sell its inventory at discounted prices in order to raise cash for current debt that is due. The Gold company, which did not have a favorable current ratio, does have an acceptable acid-test ratio because most of its current assets are in cash, accounts receivable, and marketable securities. 

The efficiency ratio, also called the activity ratio, measures the speed at which a company moves its assets through operations. The efficiency and solvency ratios can be used together to effectively assess fhe firm s solvency position. Two of the most common activity ratios are the accounts receivable turnover and inventory turnover ratios. 

Total Current Assets. The sum of cash, marketable securities, inventories, accounts receivable, and prepaid expenses is called total current assets. 

Marketable Securities Accounts Receivable Inventories Prepaid Expenses Total Current Assets... 

Financial Reporting Financial reporting maps the finances of the company and provides the data for externals. The essential tasks are the bookkeeping and the annual statement of accounts. For bookkeeping, all significant business transactions are tracked. Furthermore, the accounts receivable, the accounts payable, and the assets accounting are documented. 

As shown in Table 16.3, assets for this corporation are divided into Current Assets, Investments, Property, and Other Assets. Current assets are items of economic value that could be converted to cash in less than one year, including cash and cash equivalents, marketable securities, accounts receivable, inventories, prepaid expenses, and deferred income taxes. The current assets total 4,630,000,000. Investments pertain to investments in companies in which ownership interest by U.S. Chemicals is 50% or less, but where U.S. Chemicals exercises significant influence over operating and financial policies. Property constitutes fixed assets, including land, buildings, machineiyr, equipment, and software, and is listed at its bod... 

The acid-test ratio, also called the quick ratio, is a modification of the current ratio with the aim of obtaining a better measure of the liquidity of a company. In place of current assets, only assets readily convertible to cash, called quick assets, are used. Thus, it is defined as the ratio of current assets minus inventory to current liabilities. Marketable securities, accounts receivable, and deferred income tax assets are considered to be part of quick assets. From Table 16.3, the quick assets for U.S. Chemicals, in millions of dollars, is 4,630 - 1,420 -312 = 2,898. This gives an acid-test ratio of 2,898/4,153 = 0.70, which is not a desirable ratio, since it is less than one. At the end of the year 2000, Monsanto Company had a much better acid-test ratio of 1.35. 

Estimates of working capital requirements fall Into four cireas inventories, accounts receivable, cash in hand, and current liabilities. To estimate these, it is necessary to consider the different production stages in which materials can be found, wdiich are (1) raw materials paid for but not received (a portion of current assets) (2) raw materials on hand but not paid for (a portion of current liabilities) (3) materials in process (4) finished products in store whether on-site orpff-site and (5) finished prod-ucts delivered to customers but not yet paid for (accounts receivable). The calculation of the amounts of each of these material inventories depends on such factors as distance from raw material suppliers, types of contracts for raw material purchases, raw material purchase fh nancing methods, quantity discounts and lot sizes available for raw materials, available modes of transportSition, cost of storage facilities, plant size and capacity, seasonality of sales volumes, marketing system, and customer credit policies. 

Working capital is the difference between a company s short-term assets (e.g., cash, inventories, accounts receivable) and its short-term liabilities (e.g., accounts payable, interest payments, and short-term debt). Thus, working capital—particularly the portion reflected by cash—represents the amount of flexible funds available to the company to invest in R D and other projects. Increasing inventory turns, therefore, can shift working capital toward cash, thereby freeing up funds for immediate use in profit-generating activities and projects. 

Balance sheets are routinely prepared for a wide variety of businesses, such as manufacturing organizations and consulting firms, and not-for-profit entities. Accounts receivable often dominate the assets of consulting engineering firms, that is, accounts receivable are very large compared to tangible items, and may approximate a firm s net worth (James 1998). 

The key components of asset turnover are accounts receivable turnover (ART) inventory turnover (INVT) and property, plant, and equipment turnover (PPET). These are defined as follows ... 

Describe key financial measures of firm performance. The key financial measures of firm performance include return on equity return on assets accounts payable turnover profit margin asset turnover and accounts receivable turnover inventory turns property, plant, and equipment turns and cash-to-cash cycle. 

It is important to realize, too, that revenues are not the same as assets. Revenue is earned through the disposition of assets or sale of an asset. Although revenues may enter the company in the form of an asset, such as cash or accounts receivable, revenue represents an increase in owners equity not an increase in an asset. 

Rarely, all of the information needed for analysis is made obvious on the balance sheet, income statement, or statement of cash flows. Instead, it may require closer examination to find the necessary information. The numbers reported in the financial statements may not be exactly what is needed for financial analysis and day-to-day decision making by those in supply chain and operations because of the assumptions made by a company s financial experts. Accountants have the liberty to make assumptions based on historical trends when preparing financial statements. Examples of these assumptions include the amount of accounts receivable will not be collected, or what liabilities exist, such as tax, pension, and legal liabilities. Accountants also make assumptions about how to value tangible assets, how to value brand and intangible assets, and an amount to allocate to goodwill. As a result of these assumptions, financial results can vary widely. 

From a supply chain and operations perspective, cost is the most common valuation method. This is largely due to the asset categories associated with supply chain and operations. For example, inventory is typically valued at acquisition cost or replacement cost property, plant, and equipment (PP E) are also valued at acquisition cost. Other asset categories often use a different valuation method. Fair market value is often used when assets are actively traded, such as investments in stocks, marketable securities, and accounts receivables. 

Many suppliers and merchants sell goods and services on account, and there is an expectation that these companies will receive payment from those who owe them cash. Realistically though, companies that extend credit or financing terms for payment do expect that there will be instances when payment will become uncollectable. The asset account on the balance sheet, accounts receivable, is adjusted to show what is owed less any payments that the company thinks it will not collect or any sales returns before cash being collected from the customer. 

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