ACCOUNTING FOR CASH AND CASH EQUIVALENTS

Key Terms and Concepts to Know

Cash:
• Anything that can be used as medium of exchange
• Acceptable by bank at face value upon deposit

Cash Equivalents:
• Short – term and highly liquid investments that are readily convertible into cash and so
near their maturity that they present insignificant risk of changes in value because of interest
rates (PAS 7, paragraph 6)

RECOGNITION:
• Recorded as an asset and is reported on the statement of financial position when: 1.) It is
probable that the future economic benefits associated with cash will flow to the enterprise.
2.) The asset has a value that can be measure reliably.

MEASUREMENT:
• Initial Measurement - initially measure at face value
• Subsequent measurement
a. General Rule : at face value
b. Exceptions: Cash denominated in foreign currency rate; cash being held by a financial
institution that is in bankruptcy or other financial difficulty operations.

CLASSIFICATION/PRESENTATION:
• Current Asset - presented in the current asset portion of the statement of financial
position as “cash and cash equivalents”.
• Cash and Cash Equivalents – usually presented as the first item on the statement of
financial position. The account should only include only those amounts that are available for
use in current operations.
• Cash and Cash equivalents may either be cash on hand, in banks, cash fund or cash
equivalent.
a. Cash on hand includes currencies, coins, and checks, awaiting deposits, and cash in working
funds. Technically, defective customer collection check shall not be included as part of cash on
hand.
b. Cash in banks include deposits in both savings account and checking or current account
(demand deposit) not restricted for use in current operations.
c. Cash fund are set aside for current operating purpose. If cash is set aside other than for current
operating purpose, the same shall be presented as part of long term investment (fund
investment)
d. Cash equivalents are short term highly liquid investment so near their maturities that they are
subjected to very minimal risk of changes in value (due to interest). As a rule of thumb, PAS 7
identifies that the purchase of short term investments three-months prior to its
maturity shall be regarded as the threshold for the purpose of this definition.

• Compensating balance – cash balance maintained by a corporation in support of

existing borrowing arrangements

The statement of financial position of Kwarta Company shows cash of 330,820. The following
items were found to comprise this total amount:

Checking account in Metrobank (outstanding checks

as of year-end totaled 15,200) 105,200.00
Savings account is Far East bank 30,800.00
Petty cash fund (including expense receipts for 250) 1,500.00
Cash on hand (undeposited sales receipts) 4,200.00
Sinking fund cash 35,000.00
Cash in foreign bank (in equivalent pesos) 65,000.00
Customers' check on hand
Traveler's Check 14,000.00
Manager's Check 23,120.00
Short term treasury bills 52,000.00

What is the correct amount of cash?

Jennifer Incorporated established a petty cash fund of 5,000 for incidental expenses on June 1,
2012. At the end of the month, the count of cash on hand indicated that 670.40 remained in the
fund. A review of the petty cash vouchers disclosed the following expenses had been incurred
during the month:

341.6
Office supplies 0
1,321.4
Transportation 0
780.0
Postage 0
837.6
Miscellaneous 0
1,000.0
Representation 0

What is the amount of cash shortage?

Prepare the adjusting entry for the end of the month.

In reconciling the book and bank balance of the cash account of Perlas Corporation, you
discover the following for the month of December 2012:

400,000.0
Balance per bank statement 0
387,000.0
Balance per books 0
100,000.0
Receipts not yet deposited 0
Bank service charge 1,000.00
Customer's check returned by bank
marked DAIF 22,000.00

A paid check for 40,000 was recorded in the cash book as 4,000.

Assuming no other errors were noted, what is the amount of the outstanding checks at
December 31, 2012?
 The following data related to Jennifer Services Incorporated were gathered:

30-Nov-12 31-Dec-12
270,311.
Balance per books 00
294,771. 148,986.
Balance per bank statement 00 00
21,270.0 32,925.
Receipts not yet deposited 0 00
40,525.0 35,191.
Outstanding checks 0 50
295.0 158.
Bank service charges 0 00
5,500.0 4,925.
Interest credit by bank 0 00

Other information:
 Receipts and disbursements per books during December are P1,072,850 and P1,195,536.50,
respectively.
 Total credits reflected in the bank statement amounted to P1,065,620.
 Check #137412 for P2,300 recorded by depositor as P3,200 in error.
 Customer check for P5,947 deposited on December 28, 2012 was found to be uncollectible.
 Interest for P625 chargeable to Jennyfer Services was erroneously charged by the bank to the
company.
 No sufficient fund checks in the amount of P5,000 was returned by the bank and redeposited by
the company during December. No entry was made on the books for the return or redeposit.

Prepare a proof of cash.

 ACCOUNTING FOR ACCOUNTS RECEIVABLE
Key Terms and Concepts to Know

Receivables:
• Represents collectible from customers and others, most frequently arising from sales of
merchandise, claims from money lent, or performance of services.
• A financial asset that represents a contractual right to receive cash or another financial
asset form another entity.
• Under PFRS 15 paragraph 108, a receivable is an entity’s right to consideration that is
unconditional.

CLASSIFICATION OF RECEIVABLES:

As to source: Trade Receivables – refer to claims arising from sale of merchandise or

services in the ordinary course of business operations. This includes:

a.) Accounts Receivable / customer’s accounts / trade debtors – these are open accounts
not supported by promissory note arising from sale of merchandise or services in the ordinary
course of business.
b.) Notes Receivable – formal claim against another that is evidenced by a written promise
called promissory note, or a written order to pay at a later time called time draft.

Non-trade Receivables – claims arising from sources other than from sale of
merchandise or services in the ordinary course of business operations; such as the following (a)
advances to officers and employees (b) advances to subsidiaries (c) dividends and interest
receivable (d) deposits as a guarantee of performance or payment (e) deposits to cover
potential damages or losses (f) claims for insurance, tax refunds, lawsuits, merchandise
damaged or lost in transit, returnable items, etc.

RECOGNITION:
a. It is probable that the future economic benefits associated with the receivables will flow
to the enterprise.
b. The receivables have value that can be measured reliably.

INITIAL MEASUREMENT:
At fair market value
For a TRADING CONCERN (Merchandising / Manufacturing), fair market value shall be:
 The invoice price (list price less trade discount) where cash discounts are accounted for
under GROSS METHOD.
 The cash price (list price less trade discount and cash discount), where cash discounts
are accounted for under the NET METHOD.

GROSS METHOD NET METHOD

Upon Sale: AR (gross amount) xx AR (net amount) xx
Sales (gross amount) Sales (net amount)
xx xx
Collection with cash Cash (net amount) xx Cash (net amount) xx
discount: *Sales Discount xx AR (net amount)
AR (gross amount) xx
xx
Collection without cash Cash (gross amount) xx Cash (gross amount) xx
discount: AR (gross amount) **Discount forfeited
xx xx
AR (net amount)
xx
*Sales discount is a contra revenue account, deducted from gross sales to determine
net sales, while **discount forfeited is other income item.

For a FINANCING CONCERN (Bank, Trust and similar institutions), fair market value shall be the
net initial investment or the net cash given-up on the loan transaction. More specifically, the
net initial investment shall be:

Principal amount of loan xx

Add: Origination cost xx
Less: Origination fees (xx)
FMV of the Loan / Initial Investment xx

SUBSEQUENT MEASUREMENT (VALUATION):

For TRADING CONCERNS (Merchandising / Manufacturing), Accounts receivable – trade,

amortized cost is also the net realizable value / net recoverable which is:

Gross Accounts Receivable xx

Less: Allowances* (xx)
Amortized cost xx

*Valuation allowances include: allowance for bad debts, allowance for sales returns, allowance
for sales discount and allowance for freight charges.

For FINANCING CONCERNS (Bank, Trust and similar institutions) Loans Receivable – amortized
cost, shall be:
Initial amount recognized/ FMV at initial recognition xx
Less: Principal collections xx
Less: Amortization of premium on loan* xx
Add: Amortization of discount on loan* xx
Less: Imapairment loss**, if any (xx)
Amortized Cost xx

*Premium on the loan results when amount the initial amount recognized (FMV at initial
recognition) is higher than the principal amount. That is, if origination cost is higher than
origination fees. This also result to the nominal/coupon interest rate on loan (interest
collected/accrued) being higher than the effective/yield interest rate on the loan (interest
income). The premium on the loan is technically a loss on the point of view of the creditor since
the cash outlay on the loan is higher than the principal amount to be ultimately collected.
Matching principle however, dictates that such loss should be allocated over the term of the
loan through amortization, to decrease the related income – interest income. Thus, interest
income shall be lower than the interest collected or accrued.

*Discount on the loan, on the other hand, results when amount the initial amount recognized
(FMV at initial recognition) is lower than the principal amount. That is, if origination cost is lower
than origination fees. This also results to the nominal/coupon interest rate on loan being lower
than the effective/yield interest rate on the loan. The discount on the loan is technically a gain
on the point of view of the creditor since the cash outlay on the loan is lower than the principal
amount to be ultimately collected. Matching principle however, dictates that such gain should
be allocated over the term of the loan through amortization, to increase the related income –
interest income. Thus, interest income shall be higher than the interest collected or accrued.

**When there are any evidences of the loans receivable being impaired (e.g. financial difficulty
being experienced by the debtor) a test of impairment shall be done to the loans receivable.
The receivable shall be impaired if its carrying value becomes higher than the present value of
the new future cash flows as a result of the impairment event using the original effective
interest rate, that is the effectively/yield rate prevailing when the loan was originated. The
difference shall in fact be the impairment loss.

If, in subsequent period, the amount of the impairment loss is reversed and the reversal can be
related objectively to an event occurring after the impairment was recognized, the previously
recognized impairment loss shall be reversed. The reversal shall not result in a carrying amount
of the financial asset that exceeds what the amortized cost would have been had the
impairment not been recognized at the date the impairment is reversed. The amount of
reversal shall be recognized in profit or loss.

ACCOUNTING FOR NOTES RECEIVABLE

Key Terms and Concepts to Know

Notes receivable should be stated at present value. This present value of a note receivable
maybe its face value (for notes that are short - term and interest bearing long-term notes) or
discounted value (for long-term non – interest bearing and long-term interest bearing but the
stated/nominal rate is different than the prevailing rate on interest for similar debt
instruments).

Notes Receivable:
• May have any duration from a day or two up to many years.
• Long-term notes receivable may be used to finance the purchase of a long-lived
asset such as a car.
• Notes bear interest for their term that is paid at the end of the term, the maturity
date.
• Interest rates are typically stated as a percent per annum, that is, as a yearly or
annual rate.
• Interest revenue is earned as time passes, regardless of whether payment has
been received.
• Interest revenue for outstanding notes receivable is typically accrued at the end of
the year, although it may be accrued at the end of a quarter or month.

Short-term Notes Receivable:

• Short-term notes receivable are frequently accepted by the seller in payment for a
sale or to replace an account receivable from a prior sale.
• If the short-term note is not paid or dishonored at maturity, the seller debits accounts
receivable for the amount of the principal and interest because it is still owed to the seller by
the buyer. In place of the account receivable, the seller may also accept another note
receivable.
• Short-term notes are repaid at maturity including interest.

A Promissory Note is a written promise to pay a specific dollar amount on demand or at a

specific time, usually with interest.
• If the note is paid according to the terms, the note is honored.
• If the note is not paid as agreed according to the terms, the note is dishonored.
• If the note is dishonored, the amount due including the interest earned and
unpaid is recorded in accounts receivable.

At the end of the accounting period, in order to comply with the matching principle, interest
must be accrued for the number of days between the most recent interest payment date and
the end of the accounting period using the calculation method shown above.

On July 17, K Company received a 12,000, 90-day, 10% note on account from M
Company.

Required: Determine:
a) Due date for the note
b) Interest earned during the term of the note
c) Maturity value of the note
Prepare journal entries whether:
d) The note is honored on the maturity date
The note is dishonored on the maturity date
a) Due Date:
Term of the note = 90
Days remaining in July 31 – 17 = 14
Remaining term of the note 76
Days in August 31
Remaining term of the note 45
Days in September 30
Remaining term of the note 15

Since the remaining 15 days are less than the 31 days in October, the
note is due on October 15.

b) Interest:
Calculated as Principal X Rate X Time
12,000 x .10 x 90 days/360 days = 300
Time is calculated as the term of the note divided by 360
days for the year.

Time is always based on a 360-day year.

c) Maturity Value:
Calculated as Principal + Interest 12,000 + 300
= 12,300

d) Note is honored:
7/17 Notes receivable 12,000
Accounts receivable 12,000

10/15 Cash 12,300

Notes receivable 12,000
Interest receivable 300

e) Note is dishonored:
7/17 Notes receivable 12,000
Accounts receivable 12,000

10/15 Accounts receivable 12,300

Notes receivable 12,000
Interest receivable 300

Company accepted a 12,000, 90-day, 15% note dated October 22 and a 24,000,
60-day, 10% note dated December 1.

Required: Prepare the adjusting entry for accrued interest on December 31. Journalize the
receipt of cash on the due date for each note.

a) Interest has been earned for 30 days

Days remaining in December 31 – December 1 = 30 days

Interest earned:
24,000 x .10 x 30 days /360 days = 200

Interest receivable 200

Interest revenue 200

Cash 24,400
Notes receivable 24,000
Interest revenue for January 200
Interest receivable 200
 b) Interest has been earned for 30 days
Days remaining in October 31 – October 22 = 9 days
Days in November = 30 days
Days in December = 31 days
Total days to accrue 70 days

Interest earned:
12,000 x .15 x 70 days /360 days = 350

Interest receivable 350

Interest revenue 350

Cash 12,450
Notes receivable 12,000
Interest revenue for January 1 100
Interest receivable 350
ACCOUNTING FOR INVETORIES
Key Terms and Concepts to Know

INVENTORIES:
 Held for sale in the ordinary course of business
 In the process of production for such sale
 In the form of materials or supplies to be consumed in the production process or in
rendering the services

INVENTORY CLASSIFICATION
 Merchandising business – Merchandise inventory or Inventory
 Manufacturing business – Raw Materials inventory, Work in process inventory ,
Finished goods inventory and Manufacturing supplies inventory
 Service provider business – Work in process inventory

RECOGNITION:
 Recorded as assets
 Reported on the balance sheet when the following conditions are met:
o It is probable that the future economic benefits associated with inventories will
flow to the enterprise.
o The inventories have cost or value that can be measured reliably

INITIAL MEASUREMENT
Inventories are initially measured at cost (cost of purchase, cost of conversion and other costs
incurred in bringing the inventories to their present location and condition necessary according
to management’s intention).

The following costs are generally not to be included as part of inventory’s initial cost:
o Storage cost (unless storing the inventory is an integral part of the production process)
o Selling/ distribution cost
o General and administrative cost
o Abnormal spoilages, wastages, shrinkages and similar losses

Items to Be Included in Inventory

 Legal title to goods determines inclusion
 The following goods are included in the seller’s inventory:
o Goods in transit (if seller has title during shipment)
o Goods out on consignment
o Goods sold under buyback agreements
o Goods sold with high rates of return that cannot be estimated
o Installment sales (if collectability cannot be estimated)

Costs Included in Inventory

o Costs included in inventory are known as “inventoriable costs”
o These costs include:
o Product costs (direct materials, direct labor and manufacturing overhead)
o Purchase (net) costs, and freight-in
 o Period costs (selling and administrative) are not inventoriable costs
o “Basket” purchases total cost allocated to units based on relative sales value

COST FLOW ASSUMPTIONS

Methods of Determining COST OF ENDING INVENTORY

 Specific Identification
 First in First Out
 Last In First Out
 Average Cost

SPECIFIC IDENTIFICATION
 Items sold and purchased are individually identified as to cost
 Works best with items that are unique, high cost, with small numbers held as inventory
Advantage:
 Matches actual costs with revenue

Disadvantages:
 May be costly to implement and maintain
 May lead to income manipulation

AVERAGE COST METHOD

 Average unit cost calculated (and used for COGS) with each new purchase with moving
average
 Seen as a compromise between LIFO and FIFO

Advantages:
 Easy to apply, objective, not as subject to income manipulation
 Provides income tax minimization during rising prices
Disadvantage:
 Recent costs reflected in COGS, older costs reflected in Inventory

FIRST-IN, FIRST-OUT METHOD

Advantages:
 Attempts to approximate physical flow of goods
 Ending inventory close to current cost

Disadvantages:
 Current costs not matched to current revenues
 Oldest cost of goods are used with current sale price
 In times of rapidly increasing prices, leads to gross profit and net income distortions

Advantages of LIFO Method

 Matches more recent costs with current revenues
 Under LIFO, the need to write down inventory to market is minimized
 Disadvantages of LIFO Method
 Results in lowest net income and hence reduced earnings
 Ending inventory is understated
 Does not approximate physical flow of goods except in special situations
 LIFO liquidation may result in income that is not appropriate
 May cause poor buying habits (layer liquidation)
 Not accepted by CCRA for tax purposes
 Current (replacement) cost measurement lost

As part of your engagement to audit the financial statements of Acuna Company for the year
ended December 31, 2016, you have been assigned the merchandise inventory account. You
found the following items to be included in the merchandise inventory:

Items counted in the warehouse (bodega) P4,000,000

(including P32,000 damaged and unsalable
goods)
Items included in the count specifically 80,000
segregated per sales contract
Goods held on consignment, at sales price, 250,000
cost 125,000
Items in receiving department, returned by 60,000
the customer, in good condition
Goods out on consignment, at sales price, 200,000
cost 150,000
Items ordered and in receiving department, 30,000
invoice not yet received
Items ordered, invoiced received but goods 100,000
not received. Freight is paid by the buyer.
Items on counter for sale 150,000
Items in the receiving department, refused by 200,000
the entity because of damage
Items in shipping department 220,000
Items shipped today, invoice mailed, FOB 35,000
shipping point
Items shipped today, invoice mailed, FOB 25,000
destination
Items currently being used for window display 13,000
P5,363,000

Correct amount of inventory.

Items counted in the warehouse (bodega) 3,888,000

(4,000,000 – 32,000 – 80,000)
Items in receiving department, returned by 60,000
the customer, in good condition
Goods out on consignment, at cost 150,000
Items ordered and in receiving department, 30,000
invoice not yet received
Items ordered, invoiced received but goods 100,000
not received. Freight is paid by the buyer.
Items on counter for sale 150,000
Items in shipping department 220,000
Items shipped today, invoice mailed, FOB 25,000
destination
Items currently being used for window display 13,000
P4,636,000