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Discy Latest Questions

  1. This answer was edited.

    Meaning of days sales outstanding Days sales outstanding (DSO) refers to the average number of days the receivables from credit sales remain outstanding in the books of accounts before they are converted to cash. A high DSO portrays that the time interval between credit sales and cash receivables isRead more

    Meaning of days sales outstanding

    Days sales outstanding (DSO) refers to the average number of days the receivables from credit sales remain outstanding in the books of accounts before they are converted to cash. A high DSO portrays that the time interval between credit sales and cash receivables is very long and might lead to problems in the cash flow of the company while on the other hand, a low DSO shows that the company is able to collect the amount in fewer days. It is important to note here that the formula for DSO is applicable only in relation to the credit sales of the company.

    The formula to calculate days sales outstanding is as follows:

    formula

    DSO can be calculated on a monthly, quarterly, or yearly basis depending on the terms of the company.

    Example

    XYZ Ltd. made credit sales amounting to 7,00,000 in October, out of which 4,00,000 are yet to be received. As there are 31 days in October, the DSO for XYZ Ltd. shall be calculated as follows:

    DSO = Accounts receivables/ Total credit sales x No. of days

    = 4,00,000/7,00,000 x 31

    = 17.7 days

    In my opinion, 17.7 days is a low average turnaround for a company to collect cash from accounts receivables in a month and hence portrays a good DSO however, it varies from company to company what they consider to be a high or low DSO.

    Hope this helps.

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  1. This answer was edited.

    Meaning of Days Payable Outstanding Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annRead more

    Meaning of Days Payable Outstanding

    Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annual basis. This portraits how well can a company manage its cash outflows.

    If the company takes less time to make payment to its outstanding suppliers then it states that an organization has a strong financial position. but if the company takes a more (or) longer time to pay its outstanding supplier then it could either be an action plan or else the company’s financial position is weak.

    Formula

    The following formula is used for calculating Days Payable Outstanding (DPO) of an organization.

    Formula of Days Payable Outstanding

    Where Cost of Goods Sold (COGS) = Opening Inventory + Purchases – Closing Inventory.

    Example

    ABC Ltd has furnished you with the following information. Compute Days Payable Outstanding.

    S.No.ParticularsAmount
    1.Average Accounts Payable45,000
    2.Cost of Goods Sold2,25,000
    3.Number of Days30

    Calculation Part-

    Days Payable Outstanding = Average Accounts Payable * No. of days/Cost of Goods Sold

    = 45,000 * 30/2,25,000

    = 6 Days

    In my perspective, 6 days is a low average period for an organization for making the payments to all the outstanding suppliers. Therefore it represents a fairly good DPO. Although it depends on the organization about their understandability on high or low DPO.

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  1. This answer was edited.

    An entity should not recognize a contingent asset in the financial statements. It can only be disclosed considering the probability of the inflow of economic benefits associated with the contingent asset. A tabular representation of the question asked – When, Where & How to disclose Contingent ARead more

    An entity should not recognize a contingent asset in the financial statements. It can only be disclosed considering the probability of the inflow of economic benefits associated with the contingent asset.

    A tabular representation of the question asked – When, Where & How to disclose Contingent Assets has been presented below.

    When, Where & How to disclose Contingent Assets

    Inflow of economic benefits (When)TreatmentRecognition/Disclosure (Where)Recognition/Disclosure (How)
    Virtually certain ( > 95% probability)Not treated as Contingent AssetRecognized as an “Asset” in the Balance SheetAsset will be recorded with the amount of inflow of economic benefits.
    Probable ( > 50% – 95% probability)Treated as Contingent AssetDisclosure is made in the-
    a. Financial Statements (Notes to Accounts); orb. Report of the approving authority (eg. Board of Directors),

    depending upon the requirement of local accounting standards.

    The entity shall give a brief description of the nature of the contingent assets at the end of the reporting period.

     

    If practicable, the entity shall also mention the estimate of the financial effect.

    Not Probable ( < 50% of probability)Not treated as Contingent AssetDisclosure not permitted

    Moving forward, let me also make you understand the disclosure with the help of an example.

    Example of Disclosure of Contingent Assets

    A fire broke out in the factory of ABC Jute Ltd destroying the entire jute worth 44,000,000. The jute destroyed was covered under an insurance policy. The policy prescribed acceptance of the amount of claim, amounting to 80% of the jute destroyed ie. 35,200,000 (80% * 44,000,000).

    Before the end of the financial year, ABC Jute Ltd received informal information from the insurance company that their claim has been processed and the payment has been dispatched for the claim amount.

    Suggest when, where & how to disclose this transaction in the financial statement.

    Solution-

    There is a possible asset (claim amount) & the inflow of economic benefits is also probable ( > 50% – 95% probability). Therefore, ABC Jute Ltd can treat and disclose this as a Contingent Asset. Disclosure shall be made in the Notes to Accounts or Report of Board of Directors, considering the requirements of the accounting standards.

    The following disclosure shall be made by ABC Jute Ltd as at the end of the reporting period:

    Notes to Accounts(Financial Statements)/Report of Board of Directors

    Contingent Asset

    ABC Jute Ltd has filed for the receipt of the insurance claim amount of 35,200,000 (44,000,000* 80%) to the insurance company, in respect of the jute destroyed.
    The inflow of economic benefits has been considered as probable because it has received informal information from the insurance company that their claim has been processed and the payment has been dispatched.

    Hope you got an insight into the disclosure requirements of Contingent Assets.

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