Question

Accounting own wds

1.Why do companies report trade receivables net of allowances of doubtful accounts?

2.What is a subsidiary?

3.What does the cash conversion cycle measure?

4.Arizona Tool Works lists trademarks and brands under both amortizable intangible assets and indefinite-lived intangible assets. What is the difference between these two categories? That is, how are these two categories reported differently in the financial statements?

Answer 1

1. The trade receivables are gross receivables for the firm from the customers to whom credit sales have been made. The allowance for doubtful accounts are Provison provided based on estimated uncollectible. Allowance for doubtful accounts are contra accounts having credit balance. Hence they are net off against the accounts receivable at the end of the year and net Accounts receivable is shown in current assets in Balance sheet.

2. A subsidiary is an investment made by a parent company (also called as holding company) in another company known as subsidiary company. The parent holds more than half of the stock of the subsidiary company for a controlling interest. If the investment is 100% in subsidiary company it is known as wholly owned subsidiary company. The investments in subsidiary are made by parent company for strategic reasons.

3. The cash conversion cycle measures the conversion time required for the firm from the moment of purchase of raw materials to conversion to finished goods and sale to customers till it is converted to cash again through collection. It is an important measure of working capital of the firm. The lower the conversion cycle it is better for the firm. To lower conversion cycle a firm has to reduce inventory and accounts receivables days and increase its accounts payable days.

4. The amortizable intangible assets are the intangible assets which have a definite life and which are subject to annual amortization. The indefinite-lived intangibles assets are intangible assets which have an indefinite life and not subject to annual amortization. The amortizable intangible assets are reported Balance sheet net of amortization and indefinite lived intangible assets are shown at original cost