Sunday, March 31, 2024
Be Proactive
Day 50 of The X Proactive Test (Year 1): PRIVATE VICTORY: HABIT 1 - Be Proactive: PRINCIPLES OF PERSONAL VISION: "I know of no more encouraging fact than the unquestionable ability of man to elevate his life by conscious endeavor." -Henry David Thoreau
(from my X account)
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Accounting: The Language of Business - Vol. 2 (Intermediate: Part 137)
The shrinking of the country thanks to the railroads and the introduction of uniformity encouraged investment, which, in turn, put more focus on accounting. Up to the 1800s, investing had been either a game of knowledge or luck. People acquired issues of stock in companies with which they were familiar through industry knowledge or acquaintanceships with the owners. Others blindly invested according to the encouragement of relatives and friends. There were no financials to check if you wanted to invest in a corporation or business; thus, the risks involved ensured that investing was only for the wealthy—a rich man’s sport, tantamount to gambling. This image persists today (Investopedia).
Short-Term Operating Assets: Cash and Receivables (Part B)
by
Charles Lamson
Restricted Cash and Compensating Balances
Cash is one of the only assets that typically does not involve any questions as to measurement. However, proper classification can be an issue. Two classifications—restricted cash and compensating cash balances—limit the use of cash in operations. Restricted Cash. A company classifies cash as a current asset on the balance sheet unless it is restricted from use in the current operating cycle. Cash balances that may involve restrictions on withdrawal include foreign bank accounts, collateral for certain obligations, or cash held by a third party for a specific purpose. Examples include a long-term debt sinking fund when the third party holds cash to make payments on the company's debt or an escrow account when the third party holds cash to pay the company's real estate taxes or make insurance payments. When cash is legally restricted from use in the current operating cycle, the company reclassifies the restricted amount from the regular cash line item on the balance sheet into restricted cash as follows:
In either case, companies cannot combine the legally restricted compensating balances with regular cash on the balance sheet.  If the compensating balances are not part of our contractual agreement, companies must disclose the amounts, terms, and length of the arrangement in the footnotes to the financial statements. However, a classification out of regular cash on the face of the balance sheet is not required. Regardless of the accounting treatment, a compensating balance requirement increases the entity's effective cost of borrowing. That is, the entity will have less cash to use but is still required at 10% interest. The required cash interest payment is $100 for the year (10% * $1,000). Due to an unsatisfactory credit rating, the creditor requires the business to leave 4% or $40 of the loan on deposit at the lending institution as security. It must keep $40 on deposit and can use only $960 ($1,000 - $40). Given that the annual interest payment is $100 and ignoring the time value of money due to the short-term nature of the loan, the annual cost of borrowing increases from 10% to 10.42% ($100 / $960). Cash and Cash Equivalents: IFRS Under International Financial Reporting Standards (IFRS), bank overdrafts are permitted to be included in cash and cash equivalents as a reduction if the overdraft balance is part of an integrated cash management strategy. This treatment allows for differences in banking systems and practices across countries. For example, banks in some countries may allow companies to have a negative cash balance that is repayable on demand. Required Disclosures for Restricted Cash and Cash Equivalents Accounting standards require separate disclosure for cash and cash equivalents that are restricted from withdrawal or use in operations. Companies describe the provisions of any restrictions in a note to the financial statements. Companies disclose informal compensating balance arrangements in the notes to the financial statements. These disclosures must describe the specific arrangements and the amount involved, if determinable, for the most recent audited balance sheet.  In 2016 Financial Statements, Tesla, Inc., the electric car designer and manufacturer, included $106 million of restricted cash in current assets and $268 million of restricted cash in noncurrent assets on its balance sheet. Exhibit 9.1 contains Tesla Inc.'s footnote disclosure discussion of its restricted cash balance. EXHIBIT 9.1 Restricted Cash Disclosure. Tesla, Inc., Annual Report, December 31, 2016 %20(3)%20(3)%20(3)%20(3)%20(1)%20(1)%20(2)%20(1)%20(1).jpg)  *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 444-446* end |
Saturday, March 30, 2024
WHAT YOU CAN EXPECT
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Friday, March 29, 2024
Day 48 of The X Proactive Test (Year 1): HOW TO USE THIS CONTENT
*The following content was originally printed earlier today on my X account. However, from here on out, I plan on continuously putting these posts in this blog as well on a daily basis, which, as you may have noticed, if you're a regular viewer, I started doing about a week ago.*
Before we begin work on applying the information that is offered in The X Proactive Test, I would like to suggest two paradigm shifts that will greatly increase the value you will receive from this material.
Thursday, March 28, 2024
ORGANIZATIONAL PC
In his book The 7 Habits of Highly Effective People, Stephen Covey describes the P/PC Balance, as the idea that effectiveness relies on balancing short-term results with long-term results.
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Wednesday, March 27, 2024
Three Kinds of Assets - The Seven Habits of Highly Effective People
Tuesday, March 26, 2024
THE SEVEN HABITS PARADIGM: EFFECTIVENESS DEFINED
In 7 Habits of Highly Effective People, Stephen Covey defines effectiveness as the balance between obtaining desired results and caring for that which produces those results.
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Accounting: The Language of Business - Vol. 2 (Intermediate: Part 136)
The appearance of corporations in the United States and the creation of the railroad were the catalysts that transformed bookkeeping into the practice of accounting.
Short-Term Operating Assets: Cash and Receivables (Part A)
by
Charles Lamson
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Introduction
Would a balance sheet seem complete without cash? Nearly all firms report cash on their balance sheet and view it as a factor in day-to-day operations and growth. However, most companies sell the majority of these goods and services on credit and wait to receive the related cash flows. Why do businesses sell on credit and delay cash collection? The answer is simple: credit sales increase sales volume, motivating companies to trade off the risk that buyers will not pay against the benefits of increased sales. Companies do mitigate this risk. For example, Levi Strauss & Company (Levi's), the global apparel company, analyzes new distributors for creditworthiness before it makes any sales on credit. Some portion of a company's receivables, however, will not be collected. Management must exercise judgment to estimate the losses expected from uncollected accounts receivable. It is impossible, though, to determine the amount of accounts receivable that will ultimately become uncollectable with perfect accuracy. The financial statements disclose information related to these estimates. Levi's net accounts receivable from customers were $479 million, or about 16.0% of its total assets, at the end of fiscal 2016. Levi's estimated that it would not collect about $12 million, representing roughly 2.4% of accounts receivable, and reduced its accounts receivable by this amount. Levi's, like any other company, carefully monitors customers' accounts receivable to improve cash collections and make adjustments to its credit terms and policies. Cash and receivables are parts of a company's short-term operating assets. As noted in the case of Levi's, receivables can make up a significant portion of a company's liquidity position. Receivables require proper credit management to ensure that a company can convert sufficient resources into cash needed to liquidate current obligations when they become due. Companies hold short-term operating assets such as inventory, supplies, and prepaid expenses in order to provide goods and services to customers on a timely basis.  In the next several posts, we will focus on cash and receivables, addressing two important issues: measurement and classification. Proper measurement and classification of cash and receivables enables a financial statement user to accurately assess a company's short-term liquidity position. Cash typically does not pose a significant measurement issue but may not always be available for use in the current operating cycle. Receivables involve both measurement (due to the risk of not collecting the cash) and classification issues (due to the timing of the expected collection). Any significant delay in the collection of receivables can adversely affect a company's operating cycle and liquidity position. Accounting for Cash and Cash Equivalent We begin our discussion of accounting for cash by reviewing key terminology and introducing concepts such as restricted cash, compensating balances, and required disclosures [For most of the relevant authoritative literature for this topic; see FASB ASC 305—Cash and Cash Equivalents and ASC 210-10—Balance Sheet—Overall for U.S. GAAP and IASC, International Accounting Standard 7, “Statement of Cash Flows” (London, UK: International Accounting Standards Committee, Revised) for IFRS.] We'll discuss internal controls over cash in a future post. Review of Cash and Cash Equivalents Together, transactions involving cash and cash equivalents are part of the firm's overall cash management activities. Companies add cash equivalents to cash in one line entitled “cash and cash equivalents” on the balance sheet. The statement of cash flows was introduced in Part 70. In the next several parts, we focus on the definition and measurement of cash. Cash consists of coins, currency, and bank deposits, as well as negotiable instruments such as checks and money orders. Firms generally classify cash as a current asset unless it is restricted from use in the current operating cycle.  Cash equivalents are short-term, highly-liquid Investments with original maturities of three months or less; examples include treasury bills, commercial paper, certificates of deposit, and money market funds. Cash equivalents are cash substitutes that companies can easily convert back into cash if needed in the operating cycle. Original maturity is the length of time from the investment's purchase date to its due date. For example, a 3-year treasury instrument acquired with two months remaining until its due date qualifies as a cash equivalent because the company will hold it for less than three months. Bank overdrafts occur if a company writes checks in amounts that exceed the balance in its account. That is, the account has a negative balance. Firms typically report bank overdrafts as current liabilities on the balance sheet rather than as “negative assets.” If material, firms also must disclose bank overdrafts in the notes or list them separately on the face of the balance sheet.  *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 443-444* end |
Monday, March 25, 2024
THE MATURITY CONTINUUM
The maturity continuum is a model that describes three stages of increasing maturity: dependence, independence, and interdependence. It's part of Stephen Covey's book The 7 Habits of Highly Effective People.
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Sunday, March 24, 2024
HABITS DEFINED
Habits are acquired behavior patterns that are regularly followed until they become almost involuntary. They can be beneficial or harmful to a person's goals.
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Saturday, March 23, 2024
CHARACTER: A Composite of Our Habits
OUR CHARACTER, BASICALLY, is a composite of our habits. "Sow a thought, reap an action; sow an action, reap a habit; sow a habit, reap a character; sow a character, reap a destiny," the maxim goes.
Friday, March 22, 2024
A NEW LEVEL OF THINKING
If you want to have a happy marriage, be the kind of person who generates positive energy and sidesteps negative energy rather than empowering it. If you want to have a more pleasant, cooperative teenager, be a more understanding, empathic, consistent, loving parent. If you want to have more freedom, more latitude in your job, be a more responsible, a more helpful, a more contributing employee. If you want to be trusted, be trust-worthy, If you want the secondary greatness of recognized talent, focus first on primary greatness of character.
Accounting: The Language of Business - Vol. 2 (Intermediate: Part 135)
Bookkeeping migrated to America with European colonization. Although it was sometimes referred to as accounting, bookkeepers were still doing basic data entry and calculations for business owners. However, the businesses in question were small enough that the owners were personally involved and aware of the financial health of their companies. Business owners did not need professional accountants to create complex financial statements or cost-benefit analyses (Investopedia).
Revenue Recognition (Part V)
by
Charles Lamson
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Significant Judgment in Revenue Recognition Companies disclose the judgment and changes in judgments made in applying the revenue recognition guidance. Companies provide a description of the timing of satisfaction of performance obligations, including the methods used to recognize revenue and an explanation of why the methods provide a faithful depiction of the transfer of goods or service. Companies also disclose information about the transaction price and the amounts allocated to performance obligation based on:
Financial Statement Analysis Comparison of the Percentage-of-Completion and Completed-Contract Methods This section highlights the financial statement effects of the percentage-of-completion versus the completed-contract methods. The primary criticism of the completed-contract method is that it does not properly measure economic activity. This criticism is avoided under the percentage-of-completion method. The total revenues and costs for a long-term contract are the same under the completed-contract and percentage-of-completion methods. However, the timing of revenue and gross profit recognition on the contract differs with the methods. The percentage-of-completion method recognizes gross profit over the production. Whereas the completed contract method recognizes gross profit only at the end of the contract. The following tables based on the Bronco Builders illustrations from Examples 8.22 (from Part 128) and 8.23 (Part 129) compare the gross profit recognized and the net asset or net liability reported each year under the two revenue recognition methods.  %20(1)%20(2).jpg) Total gross profit recognized, $300,000 is the same; only the timing of recognition differs. The percentage-of-completion method best measures economic activity as it reports gross profit as production takes place each year. %20(2)%20(1).jpg) The percentage-of-completion method also best measures the net asset (liability) position of the contractor. The difference in the valuation of the net asset (liability) is due to the recognizable recognition of gross profit under the percentage-of-completion method. Failure to recognize gross profit under the completed-contract method overstates the net liability or understates the net asset. Therefore, using amounts such as revenue, net income, total assets, liabilities, and equity differ in the two methods. Because the percentage-of-completion method recognizes gross profit over the production process, revenues and net income will typically be higher in early years than under the completed-contract method. Therefore, the profit margin ratio will be higher under the percentage-of-completion method. Under the percentage of completion method, assets are generally higher (and liabilities are lower) because the asset construction and progress includes a portion of the estimated profits. Equity is also higher under the percentage-of-completion method because profit is recognized. Therefore, the debt-to-equity ratio will generally be lower under the percentage of completion method. Exhibit 8.8 summarizes these effects on common ratios.  Exhibit 8.8 Select Financial Statement Ratios: Percentage-of-Completion Method versus Completed-Contract Method %20(4)%20(1).jpg) Example 8.28 illustrates and compares these financial statement analysis ratios under the percentage-of-completion and completed-contract methods. %20(5)%20(1)%20(1)%20(1).jpg) %20(5)%20(1)%20(1)%20(2)%20(1)%20(1).jpg) %20(5)%20(1)%20(1)%20(2)%20(2)%20(1).jpg)  *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED. PP. 418-420* end |
Thursday, March 21, 2024
The Way We See the Problem Is the Problem
“The more aware we are of our basic paradigms, maps, or assumptions, and the extent to which we have been influenced by our experience, the more we can take responsibility for those paradigms, examine them, test them against reality, listen to others and be open to their perceptions, thereby getting a larger picture and a far more objective view.” – Stephen R. Covey
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Wednesday, March 20, 2024
The Principle-Centered Paradigm
People are at their best and most successful at reaching their goals when they’re being driven by a core set of principles, rather than by a list of DOs and DON’Ts.
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WRITING AND USING A PERSONAL MISSION STATEMENT
Day 82 of The X Proactive Test (Year 1): WRITING AND USING A PERSONAL MISSION STATEMENT: A personal mission statement is a declaration o...
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Measurement Methods by Charles Lamson There are two major measurement methods: counting and judging. While counting is preferre...
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Product Life Cycles by Charles Lamson Marketers theorize that just as humans pass through stages in life from infancy to death,...
