Let’s imagine we are running a bakery. Sugar and flour are operating expenses. - 12846

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1.    Let’s imagine we are running a bakery. Sugar and flour are operating expenses.  The mixers or refrigerators are fixed or capital assets. How are these managed on the financial statements?  Which shows up on the income statement and which shows up on the balance sheet?

The sugar and flour expenses are those expenses that are necessary to keep the business running. These are trade expenses and should therefore be shown as operating expenses in the income statement. Mixers and refrigerators are also expenses but these are expenses  whose benefits will accrue over a period of time that is longer than a year. These will therefore be capitalized as assets on the balance sheet.

2.    If supplies have not been paid for, then they are a current liability. They would be in the Accounts Payable section on the Balance Sheet.  For example, at a bakery, sugar and flour hadn't been paid for yet, but it had been received, then accounting must accrue the expense until the invoice is paid.  

So let's look at the transaction:

$100 worth of Sugar and Flour - 
Sugar and Flour invoiced, but not paid = $100 Increase to Accounts Payable and $100 Increase to Inventory
Sugar and Flour paid, but not used = $100 decrease to Cash, $100 decrease to Accounts Payable
Sugar and Flour used = $100 decrease to inventory, 
$100 offset to...what?  (to ensure Assets = Liability + Equity)

How does this flow to the Income Statement?

 

 

 

3.    What is the difference between liabilities and expense?  How might an organization still pay wages without incurring a liability? Which financial statement shows liabilities?  Which one shows expenses?

 

4.    Let’s think about Costco's inventory management technique.  We've all noticed the bins above our head's stocked with goods.  However, I've noticed some items are not kept in stock all the time.  Costco uses an economies of scale negotiating technique. What is this and how does it impact their working capital?

 

 

5.    A company uses the revolving line of credit to meet their day to day working capital requirements.  For example, if the day's cash requirements exceed the cash inflow, the treasury analyst will submit a funding request to the bank.  The bank will fund the amount requested and the treasury analyst will send out the other wire transfers, ACH's, or checks.  

If the treasury analyst determines there is an excess in cash, they will pay down the revolving line of credit.  

With Commercial Paper, the treasury group must manage the maturities of the Commercial Paper.  So, if the CP matures in 30 days, they need to make sure they have this funding requirement in their cash flow forecast. 

What are other short term investment tools the Treasury group may use to earn a return on cash on hand?

 

 

 

6.    Many organizations "factor" their accounts receivable.  That is to say, they see how much money their customers owe them and they agree to pay the bank the full amount of the accounts receivable when they are paid.  In exchange the company will take a reduced amount as a loan.

To put it more simply, think about check cashing operations.  They are simply factoring accounts receivable, where the receivable is the person's paycheck.  

When we think about check cashing places, what are the immediate con's to this?  Why do people still do it?  Why would businesses?

 

Solution Description

1.    Let’s imagine we are running a bakery. Sugar and flour are operating expenses.  The mixers or refrigerators are fixed or capital assets. How are these managed on the financial statements?  Which shows up on the income statement and which shows up on the balance sheet?

The sugar and flour expenses are those expenses that are necessary to keep the business running. These are trade expenses and should therefore be shown as operating expenses in the income statement. Mixers and refrigerators are also expenses but these are expenses  whose benefits will accrue over a period of time that is longer than a year. These will therefore be capitalized as assets on the balance sheet.

2.    If supplies have not been paid for, then they are a current liability. They would be in the Accounts Payable section on the Balance Sheet.  For example, at a bakery, sugar and flour hadn't been paid for yet, but it had been received, then accounting must accrue the expense until the invoice is paid.  

So let's look at the transaction:

$100 worth of Sugar and Flour - 
Sugar and Flour invoiced, but not paid = $100 Increase to Accounts Payable and $100 Increase to Inventory
Sugar and Flour paid, but not used = $100 decrease to Cash, $100 decrease to Accounts Payable
Sugar and Flour used = $100 decrease to inventory,