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Chapter 7: Question 23Q (page 362)

You are evaluating Woodlawn Racetrack for a potential loan. An examination of the notes to the financial statements indicates restricted cash at year-end amounts to $100,000. Explain how you would use this information in evaluating Woodlawn’s liquidity.

Short Answer

Expert verified

Restricted cashcannot be used to assess the liquidity of the business.

Step by step solution

01

Definition of Restricted Cash

The cash that cannot be used for purposes other than specified is known as restricted cash. Such cash cannot be used for general business operations and is reported as non-current assets.

02

Use of Restricted Cash in Assessing Liquidity

The restricted cash maintained by the business entity cannot be used to make payment of the current liabilities. It must be reported as non-current assets; therefore, it cannot be used to assess the liquidity of the business entity. It is not used in the calculation of the current ratio and quick ratio.

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Most popular questions from this chapter

Because of calamitous earthquake losses, Bernstein Company, one of your client’s oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately 30% of your client’s total sales have been made to Bernstein Company during each of the past several years. The amount due from Bernstein Company— none of which is collectible—equals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Bernstein Company receivable if it is using the allowance method of accounting for bad debts? Justify your suggested treatment.

Simms Company has significant amounts of trade accounts receivable. Simms uses the allowance method to estimate bad debts instead of the direct write-off method. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible were collected.

Instructions

(a) What are the deficiencies of the direct write-off method?

(b) Briefly describe the allowance method to estimate bad debts and the theoretical justification for its use?

(c) How should Simms account for the collection of the specific accounts previously written off as uncollectible?

Moon Hardware is planning to factor some of its receivables. The cash received will be used to pay for inventory purchases. The factor has indicated that it will require “recourse” on the sold receivables. Explain to the controller of Moon Hardware what “recourse” is and how the recourse will be reflected in Moon’s financial statements after the sale of the receivables.

When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?

What are the basic problems that occur in the valuation of accounts receivable?
See all solutions

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