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I'm trying to calculate the flow ratio for Tekelec (TKLC). The balance sheet shows the following current liabilities:

Accrued expenses 16,321
Current portion of deferred revenues 36,352

Out of a total current liabilities of 76,232

These items are a pretty substantial portion of current liabilities. They are changing the flow ratio substantially over time, but I'm not sure if they should be included. They don't reflect real liabilities in the sense that TKLC will never pay cash out to someone for those items.
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Mequonwj,

You asked about including these in the Flow Ratio:
Accrued expenses 16,321
Current portion of deferred revenues 36,352

I would absolutely include Accrued expenses. IIRC, this account measures things like wages that have been earned but not been paid yet or other expenses like that. (overhead perhaps?)

I'm not totally sure about the "current portion of deferred revenues". This could mean that the company has accepted the cash but not "booked" the revenues, which would be good since they already have the cash presumambly earning interest for the company. The Current portion bit probably means that it is deferred revenue that they will be recognizing in the near future, perhaps a year or so, at least that's my guess.

As always, I defer to the real accountants out there, not a duffer like myself. ;)

Hope that helped.

Bob


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They don't reflect real liabilities in the sense that TKLC will never pay cash out to someone for those items.

For both they WILL pay out cash to someone. Accrued Expenses are expenses that have occured just haven't been paid. With Deferred Revenues TKLC has been paid but has yet to provide the services or goods. When they do provide the goods or services in the future there will be the usual expenses incurred.

So the full amount of Deferred Revenue doesn't represent future cash outflow but some/most of it does (maybe equal to the usual Cost of Goods Sold %?).

That is my take.

Ryan
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Dear y'all,

Not a "real accountant" by any means, but...

IMHO the point of the flow ratio is a measure of how much "free money" (non-interest bearing liabilities) a company has vs. "tied up money" (working capital requirements). Given this, I agree with TMFBobdog.

One example of "accrued expenses" would be paycheques owing. In most jobs folks are not paid daily, so a company gets free use of their employees' pay in the interim (until the employees receive and cash their paycheques).

I'm confused about the "current portion of deferred revenues" being a liability. It sorta sounds to me more like an asset. Unless they are paying out stuff, in which case certainly the "deferred revenue" is "free cash".

Stewart (in The Quest for Value) talks about "non-interest bearing current liabilities" as being free money, so from that point of view you may include both.

Best,

Lleweilun Smith
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I'm confused about the "current portion of deferred revenues" being a liability. It sorta sounds to me more like an asset. Unless they are paying out stuff, in which case certainly the "deferred revenue" is "free cash".

The cash collected is an asset (Debit on the books) so there needs to be a Credit entry to keep everything in balance. Usually the Credit would be Sales/Revenue. But because of the matching principal (align Revenue with Expenses) it isn't appropiate here, thus the Credit to Deferred Revenue. When the service is performed in the future the Revenue and Expenses will be aligned. But, yes, it is certainly "free cash" and appropriate to include for the Flow Ratio.

It's basically Float, which I know you're familiar with, jmls.

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Dear Ryan,

Thanks for the explanation.

insert newbie question

I hear accountant-types talk about "debits" and "credits". In general, what sorts of things are what? I have a feeling that this is part of "accounting 101" :)

BTW, what accounting texts did you use/would you recommend? FDWBaltimore recommended Granoff and Bell, but its out of print. I have grabbed White et. al. from the library, I haven't yet bought it, but I will...

I figure that I can't learn enough about accounting :)

Lleweilun Smith

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Lleweilun,

Deferred revenue is also known as "unearned revenue." The entry would be:

Debit Cash
Credit Unearned Revenue

Debiting increases assets like cash, accounts receivable and crediting increases liabilities like unearned revenue or notes payable, etc.

A common example of unearned revenue would be the rent received by the landlord. He/she has the cash in hand, but has not earned the rent until the end of the month. Under accrual accounting, revenue is recognized when earned and expenses are recognized when incurred and they should match.

I would recommend as an introduction "Accounting for Dummies." If you want something more indepth, then try Accoutning Principles by Weygandt, Kieso, and Kell.

Hope this helps,

Tom
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Thanks. I'm thinking these are 'good' liabilities in the sense that the company has the use of the money or services interest free since they haven't paid for it yet. In that case they should be included in the flow ratio calculation and the consequent reduction in the ratio is 'real' in the sense of reflecting good cash mangement on the part of the company.
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Ya know this is something I've been meaning to ask for a while but I've been putting it off.

Is accrued compensation a "good" liability? My reasoning is:

1. Accrued compensation is vacation time, sick leave etc. This is shown on the books in dollars but it is really measured in hours.

2. When an employee gets a raise the hours of earned vacation and sick leave remain the same but the dollar value of that time has gone up.

3. So in a sense there is interest being paid on this liability. I'm not sure if it is as "good" a liability as Accounts Payable or Deferred Revenue.

Comments?

Marv
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Hi everybody,

My usual procedure is to try to smooth out any one time oddities in dealing with cash flow. An example sometimes is deferred revenue.

In this case if the $36 mill is not typical of the amount of deferred revenue usually carried on the books, then I would back out the excess by reducing the deferred and crediting cash.

Otherwise, you get a series of cash flow statements that may be significantly distorted because of a non recurring timing issue. For example, say the company received the $36 million in the last week of 1Q for a job taking approximately 9 weeks starting the 1st week of 2q.

The 1q cf will show an additional $36 million cash from operations that will be reduced in 2q by the costs of the project. Since there should be some cost to the project, 1q cf could be misleading without some adjustment for analysis.

ZB
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Marv,

If you think about the way most companies handle vacation and leave compensation, I'm not sure that there necessarily is much "interest" accruing to deferred compensation, except perhaps in those cases where salaried employees separate from a company and receive payment for unused vacation and leave time... and most companies have fairly strict limits on "banking" such leave.

If the company you are looking at has an unusually high amount of deferred compensation, compared to its competitors, I would agree this might be a concern, though I'd be more concerned about trying to place a value on ESOPs, which are usually *not* identified as deferred compensation.

There is a lot of disagreement at present on how such compensation should be reported, and many companies choose the method that tends to "hide" much of this item in the footnotes, and which security analysts are still grappling with in terms of assessing its real impact on a firm's intrinsic and probable future value.

A very interesting article on the subject of ESOPs as a "semi-hidden" liability appears to be:

http://www.capatcolumbia.com/Articles/FoFinance/Fof6.pdf
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hi,

when i was grappling with debits and credits, i found this resource and still pull it out for reference:

http://www.smartbiz.com/sbs/arts/cbf3.htm

it's a concise guide to accounting.

j
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