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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鈥檚 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

(Notes Receivable with Realistic Interest Rate) On October 1, 2017, Arden Farm Equipment Company sold a pecan-harvesting machine to Valco Brothers Farm, Inc. In lieu of a cash payment Valco Brothers Farm gave Arden a 2-year, $120,000, 8% note (a realistic rate of interest for a note of this type). The note required interest to be paid annually on October 1. Arden鈥檚 financial statements are prepared on a calendar-year basis.

Instructions

Assuming Valco Brothers Farm fulfills all the terms of the note, prepare the necessary journal entries for Arden Farm Equipment Company for the entire term of the note.

Your accounts receivable clerk, Mitra Adams, to whom you pay a salary of \(1,500 per month, has just purchased a new Acura. You decide to test the accuracy of the accounts receivable balance of \)82,000 as shown in the ledger.

The following information is available for your first year in business.

(1) Collection from customer $198,000.

(2) Merchandise purchased 320,000.

(3) Ending merchandise inventory by 90,000.

(4) Goods are marked to sell at 40% above cost.

Instructions

Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on the account.

Finman Company designated Jill Holland as petty cash custodian and established a petty cash fund of \(200. The fund is reimbursed when the cash in the fund is at \)15, which it is. Petty cash receipts indicate funds were disbursed for office supplies \(94 and miscellaneous expense \)87. Prepare journal entries for the establishment of the fund and the reimbursement.

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

Discuss the accounting for sales allowances and how they relate to the concept of variable consideration.
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