When we discuss payment terms and managing cash flows we are faced to deal with the needs of our customers. I have had experience with companies who say that their customers ask for 6 month payment terms. 6 months! Imagine trying to accommodate your own business within the same cash supply timeframe and producing, paying bills within the 6 month period. When I dag further I realized that those companies were themselves in a tight spot since they’re customers were enforcing longer payment terms and so on. It sounded like a vicious circle. Furthermore, there are countries that require certain taxes to be paid upfront for the whole year and the amounts are based on expected sales volumes and what not. Where does the money come from? It’s a cycle and at some point your company is going to part of it. Continue reading
I don’t want to go into too much detail of what’s happening in the world right now and whether something is right or wrong, but what I do want to stress is that such events do have their effect on accounting.
Something to note is that the effect is only then there if you’re actually dealing with companies from the countries involved. So let’s say that you’ve got just customers from there and no other activities, stores etc. What should one watch out for? Continue reading
When those financial assets (like cash, bank accounts, accounts and notes receivable etc) are initially recognized, at every balance sheet date they need to be again measured. They need to have a true and fair value on the balance sheet and it may not be the value it was initially recognized with. This is called measuring and there are specific terms for certain types of assets.
On initial recognition, the instruments are either measured at the transaction price or at the present value of future payments discounted at the market rate of interest for a similar debt instrument. The last one applies to all instruments which are considered as financing assets, i.e. when the payment is deferred beyond normal business terms. Now, this is initial recognition, however, as said before, the instruments need to be measured at every balance sheet date.
One side of the balance sheet is called ‘assets’ and they consist of various types of assets – there are inventories, accounts receivables, cash, fixed and immaterial assets etc. When some are physical and touchable sort of speak, then others are without any physical substance. Financial instruments considered also as financial assets are those without any physical substance obviously and are defined as contractual right for an asset. Essentially they form a part of assets.
Financial instruments on the asset side of the balance sheet are for example cash, deposits, bank accounts, commercial papers and bills, accounts and notes receivable, bonds, investments into shares etc. Those are all immaterial assets which arise more or less from contractual agreements.
Simply put a bond is a form of financing and as such is an agreement to repay borrowed money with deemed interest (called ‘coupon’) intervals. So in essence bond could be considered also as a loan. However, note here that when loan payables are fairly easy to be recognized, bonds have a few things that need to be kept in mind. What is the price of one bond and what does it consist of? With loan payable it is far easier, so we will try to give you a few pointers just for the basics of bonds.