off-balance-sheet financing

Examples of off-balance-sheet financing in the following topics:

• Being Aware of Off-Balance-Sheet Financing

  • Off-Balance-Sheet-Financing represents rights to use assets or obligations that are not reported on balance sheets to pay liabilities.
  • Off-Balance-Sheet-Financing is associated with debt that is not reported on a company's balance sheet.
  • An example of off-balance-sheet financing is an unconsolidated subsidiary.
  • It is important to consider these off-balance-sheet-financing arrangements because they have an immediate impact on a company's overall financial health.
  • Jeffrey Skilling is the former CEO of Enron, which was notorious for it's use of off-balance-sheet-financing.

• Resource Cost Write-Off

  • The term write-off describes removing an asset whose value is zero and is no longer in use from the balance sheet.
  • An asset is written off the balance sheet by recording a journal entry.
  • The decrease in the asset and accumulated depletion accounts reduces the balance to zero and removes the account from the balance sheet.
  • A write-off journal entry removes an asset not in use and its related contra account (accumulated depletion) from the balance sheet.
  • An asset write-off removes an asset's cost off the balance sheet and expenses it on the income statement.

• Relationships Between Statements

  • The income statement, specifically, net income reconciles the beginning (prior ending period) balance sheet to the current balance sheet.
  • The statement of shareholder's equity connects the income statement and the balance sheet.
  • The statement of cash flows shows the cash inflows and cash outflows from operating, investing, and financing activities.
  • A clean surplus occurs when all changes in the balance sheet are reconciled by the income statement.
  • That is, the net change in the balance sheet accounts will not equal net income.

• Reporting Current Liabilities

  • The presentation of the balance sheet should support the accounting equation of assets = liabilities + owner's equity.
  • They are paid off with assets or other current liabilities .
  • For many companies, accounts payable is the first balance sheet account listed in the current liabilities section.
  • Therefore, late payments are not disclosed on the balance sheet for accounts payable.
  • Current liabilities is the first section reported under liabilities on the balance sheet.

• Cost of Interest During Construction

  • The amount of interest cost incurred and/or paid during an asset's construction phase is part of an asset's cost on the balance sheet.
  • When an asset is constructed, a company typically borrows funds to finance the costs associated with the construction.
  • The capitalization of interest costs involves adding the amount of interest expense incurred and/or paid during the asset's construction phase to the asset's cost recorded on the balance sheet.
  • No separate line item is needed on the balance sheet to disclose the interest costs associated with the asset.
  • This interest cost is recorded as interest expense and reported as a period cost on the income statement rather than the balance sheet.

• Valuing Accounts Receivable

  • Receivables of all types are normally reported on the balance sheet at their net realizable value, which is the amount the company expects to receive in cash .
  • Companies use two methods to account for bad debts: the direct write-off method and the allowance method.
  • Smith fails to pay a $100 balance, for example, the company records the write-off by debiting bad debts expense and crediting accounts receivable from J.
  • Since the specific customer accounts that will become uncollectible are not yet known when the adjusting entry is made, a contra-asset account named allowance for bad debts, which is sometimes called allowance for doubtful accounts, is subtracted from accounts receivable to show the net realizable value of accounts receivable on the balance sheet.
  • Differentiate between the direct write-off method and the allowance method of accounts receivable valuation

• Introduction to the Statement of Cash Flows

  • The statement of cash flows is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities.
  • The statement of cash flows also reconciles the cash balance from one balance sheet to the next.
  • These non-cash transactions include depreciation or write-offs on bad debts or credit losses.
  • Financing Activities.
  • Describe the effect operating, investing and financing activities have on the statement of cash flows, and how that statement differs from the income statement

• Current Maturities of Long-Term Debt

  • In accounting, the long-term liabilities are shown on the right side of the balance sheet, along with the rest of the liability section, and their sources of funds are generally tied to capital assets.
  • Examples of long-term liabilities are debentures, bonds, mortgage loans and other bank loans (it should be noted that not all bank loans are long term since not all are paid over a period greater than one year. ) Also long-term liabilities are a way for a company to show the existence of debt that can be paid in a time period longer than one year, a sign that the company is able to obtain long-term financing .
  • If the current liability section already has an accounts payable account (balance which is usually paid off in 30 days), the current portion of the loan payable (due within 12 months) would be listed after accounts payable.

• Fundamental Accounting Equation

  • The transaction is in "balance. "
  • An extension of that basic rule involves the balance sheet.
  • The total assets listed on a company's balance sheet must equal the company's total liabilities, plus its owners' equity in the company.
  • This identity reflects the assumption that all of a company's assets are either financed through debt or through the contribution of funds by the company's owners.
  • This company is "balanced

• Recognizing Notes Receivable

  • These assets represent rights to receive future payments that are not due at the balance sheet date.
  • To present an accurate picture of the affairs of the business on the balance sheet, firms recognize these rights at the end of an accounting period by preparing an adjusting entry to correct the account balances.
  • When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry.
  • The ending balance on the trial balance sheet for accounts receivable is usually a debit.
  • Describe the difference between using the allowance method vs. the write off method when recording a note receivable