December 2, 2023

Sir Christian Carbonell Janaban, CPA

Current Cash & cash

Equivalent
IA1 - Asset Non-Current

IA2 – Liabilities & Equity

IA3 – Other Composition of FS

CASH

Postdated check- cannot be considered as cash yet

Equity securities- cannot qualify as cash equivalent because share do not have maturity dates.

INTERNATIONAL ACCOUNTING STANDARD 1

Presentation of Financial Statements

An entity shall classify an asset as current when…

 It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle
 It holds the asset for the purpose of trading
 It expects to realize the asset within 12 months after the reporting period
 The asset is cash or a cash equivalent unless the asset is restricted from being exchanges or
used to settle a liability for at least 12 mos after the reporting perio

ASSET:
- Cash - Prepaid expenses
- Accounts receivable - Inventories
- Marketable Equity Securities
- Office & store supplies

CASH ITEMS
 Cash is measured at face value
 To qualify as cash presented as a current asset, cash items must be generally unrestricted

TYPES OF CASH

1. Cash on Hand
 Currencies & coins
 Cash currently on hand
 PCF (Petty Cash Fund)
- small amount of money set aside for small expenses
 Undeposited Checks
 Postal Money Order
- instrument issued by the gov thru post office
2. Cash in Bank
 Savings (ATM)- interest bearing
 Deman Deposit or current/ checking account ( Passbook or Check)- non-interest bearing, for
payment or collections of transaction
 Checks Received from Customer
1. Personal Checks
- Under sayo yung name ng check but it is a company’s check, sayo lang naka name
2. Certified Checks
- Certified by the bank
3. Cashier/ Managers Check
- under sa mismong bank
- issued by the bank
- guaranteed ng bank na may pambayad yung check
4. Bank Draft
- Drafted by bank
- For large amount of purchase
- Written order to pay to the order of the maker
5. Travelers check

3. Working Funds
 Petty Cash Fund
 Change Fund
 Dividend Fund
 Payroll Fund
* They are separated for specific purpose of operations. Only set aide for small operation with small expenses.

POSTDATED CHECK
Cash- issued by company
Not Cash- received by company

 Managers check/ Treasurers check/

Officers check, cashiers check
More secured
 Bank Drafts payment, mas unti
yung chance na
 Postal money Orders tumalbgog

NOT CONSIDERED CASH:

- customers post-dated check (Accounts receivable)
- stale check received (expired check, not withdrawn 6 mos)
-other technically defective checks (mutilated damage check)

CASH EQUIVALENTS
(Debt Instrument)
- Short-term
- Highly Liquid
- Readily Convertible to cash
- Subject to an insignificant risk of changes in value
(IAS 7: Statement of Cash Flows)

1. Treasury Bills- Issued by BTr – 90 days

2. Treasury Notes- 1-10 years
3. Treasury Bonds- more than 10 years
4. Time Deposit
5. Commercial papers or money market placement
6. Redeemable preference shares (liability w/ maturity dates)

NOTE TREASURY BONDS: date of purchase should be 3 months or less before MATURITY.

EXAMPLE:
TB 15 yrs starting 2023, then after 15 yrs, 3 mos before Maturity date sold to other, that other will record
TB as cash equivalents.

TEMPORARY INVESTMENT OF CASH

Cash Equivalents
- less than 3 months
Short-term Investment (Current Asset)
- More than 3 months but less than 1 year
Long-Term Investments (Noncurrent assets)
- more than 1 year

NOTES

(1) Cash in Foreign Currency (current exchange rate)

1. Closing rate (rate at the end of the day)
2. Spot Rate (current rate)

 - w/ foreign restriction
- w/out foreign restriction

(2) Bank Overdraft (Current Liabilities)

Exemption: maintains 2 account in the same bank, pedeng ibawas sa other account yung bank
overdraft.

(3) NSF Check (Non-sufficient Fund), DAIF (Drawn against Insufficient Fund), DAUD (Drawn
Against Uncollected Deposit)
- NOT INCLUDED IN CASH
- bouncing check
Accounts Receivable XXX
Sales XXX

Cash XXX
Accounts Receivable XXX

Accounts Receivable XXX

Cash XXX

EXEMPTION: Redeposited with same accounting period

(4) Compensating Balance

- maintaining balance in exchange for loan agreement

 Cash
- INFORMAL (not legally restricted)
 Cash held as compensating balance (short-term)
- FORMAL with written agreement (legally restricted)
 Long-term Investment
- Long-term legally restricted

(5) Stale Check

- did not in-cashed within specific period of time (6 mos)
*Depend kung sinong nag-issue
 Received Payee- NOT CASH
 Delivered (Issued)- CASH

(6) CASH FUND FOR CERTAIN PURPOSE

Current – Cash – PCF
- Payroll fund
- Taxes Fund
- Interest Fund
- Dividend Fund
- Travel Fund
Non-current - Pension Fund
- Sinking Fund

OTHER TOPICS ABOUT CASH

CASH SHORT OR OVER

Cash count < recorded cash Cash Shortage
Cash count > recorded cash Cash overage

Cash Shortage
Entry: Cash Short or over XXX
 Cash XXX

Upon investigation: will know kung bat nagkaron ng shortage (loss)

AJE: “Reason” for shortage XXX

Cash short or over XXX

Cash Overage
Entry: Cash XXX
Cash short or over XXX

Note: May cash overage ka nga pero for liab mo naman pala dapat yun, yung cashier lang nagbayad para sa enity.

AJE: Payable XXX

Cash XXX

NOTE: Case if the entity weren’t able to look for the reason

Cash shortage – miscellaneous expense

Cash overage – miscellaneous revenue

Cash short or over

- receivable from custodian

NOTE: Pagbinigyan ng deadline tas di na account, matic deduction sa salary ng custodian

PETTY CASH FUND

Payments for small amount where check payments are seen impracticable.

 Imprest Fund System

 Fluctuating Fund System

NOTES FROM PROBLEMS:

 If cash are set aside for payment of NCA, regardless to be executed sya for the next 2 months,
Non-current Asset

 Customers Postdated Check- issued by other company, bawas sa cash ng entity if narecord
na.

 Travel Advances not CASH

BANK RECONCILIATION STATEMENT AND PROOF OF CASH

INTERNAL CONTROL ON CASH: IMPREST SYSTEM

Cash receipts > deposited together
Cash payments > made through checks

(1) Cash-in-Bank ledger account of the entity

(2) Bank Statement issued by Bank

Bank Statement Ledger

- + + -

BANK RECONCILIATION STATEMENT

Prepared by an entity to reconcile the cash-in-bank account balance in the entity’s book versus
the balance as reported by the bank in the bank statement.

BANK RECONCILING ITEMS

(1) Deposit in Transit (+)

- already recorded by the entity in accounting ledger (cash-in-bank) as deposit but not yet
reflecting in bank statement. (nangyayari usually pag cut off na)

(2) Outstanding Checks (-)

- issued by company for payment, pero di pa nagrereflelct sa bank, di pa nabawas.

(3) Bank Errors (+) (-)

- Erroneous debits or credits by bank in entity’s account.

LEDGER BALANCE RECONCILING ITEMS

(Nangyari ng sa bank pero hindi pa naadjust sa ledger)

(1) Credit Memos (+)

- naadd na sa bank, oero sa ledger di pa. Those includes notes receivable collected by bank
on behalf of the entity and interest earned in putting their cash in the bank.

(2) Debit Memos (-)

- items charged against the company’s bank account not yet recorded in the company’s
ledger. These included NSF checks and Bank service charges.

(3) Book Errors (+) (-)

- Erroneous debits & credits of cash in the entity’s ledger.

ADJUSTED BALANCE METHOD

 BANK-TO-BOOK METHOD

BOOK-TO-BANK METHOD

ACCOUNTS RECEIVABLE
Retailers Trade and nontrade
Manufacturers receivables

Accounts receivables
Trade receivables
Notes Receivables

Accounts receivable - customer’s account

(other names) - Trade debtors
- Trade accounts receivables

Trade Receivables (current)

- claims arising from sale of merchandise or services.

Nontrade Receivables (current if 1 yr)

- claims arising from sources other than the sale of merchandise or services
Accounts Receivable
- open account, not supported by promissory notes

Notes Receivable
- supported by promissory notes.

Loans Receivable
- For banks and other financial institutions, receivables results primarily from loans to
customers.

TRADE AND OTHER RECEIVABLES:

Trade receivables
Nontrade receivables

Examples of Nontrade Receivables

1. Advances to or receivables from shareholders, directors, officers or employees.
2. Advances to affiliates
3. Advances to suppliers
4. Subscription receivable if current, if not deduct sa subscribed share capital
5. Creditors accounts
6. Special deposits on contracts bids
7. Accrued incomes:
- dividend receivable
- accrued rent receivable
- accrued royalties receivables
- accrued interest receivable on bond
investment
8. Claims receivable:
- claims against common carriers for losses or damages
- claim for rebates and tax refunds
- claims from insurance entity

Customers Credit Balances

- current liabilities
- no adjustments is necessary

If needed:
Accounts receivable XXX
Customer’s credit balances XXX

Initial Measurement of AR
Accounts receivable shall be measured initially at face amount or original invoice amount

Subsequent Measurement od AR
The net realizable value of accounts receivable is the amount of cash expected to be collected
or the estimated recoverable amount.
Net Realizable Value
Assets shall not be carried at above their recoverable amount

Deductions to AR:
1. Freight Charge
2. Sales Return
3. Sales Discount
4. Doubtful Accounts

Terms related to Freight Charge

Seller
FOB Destination
Freight Prepaid

Buyer
FOB Shipping point
Freight collect

ACCOUNTING FOR FREIGHT CHARGE

An entity has a P100,000 AR with terms 2/10, n/30, FOB Destination and freight collect

To record sale:
Accounts receivable 100,000
Freight out 5,000
Sales 100,000
Allowance for freight charge 5,000
To record collection within discount period:

Cash 93,000
Sales discount 2,000
Allowance for freight charge 5,000
Accounts receivable 100,000

Allowance for sales return

Sales return XXX

Allowance for sales return XXX

Allowance for sales discount

Sales discount XXX

Allowance for sales discount XXX

SALES DISCOUNT

Seller – Cash discount/ Sales Discount

Buyer- Purchase discount

TRADE AND OTHER RECEIVABLES

Receivables
Are claims that an entity expects to be settled by customers or parties through receipt of cash.

- Amount collectible from sale of goods or services on account, or as evidenced by a note of

promise to pay.
- Receivables arising from other income such as interest, commissions, rentals (accrued revenue)

- Loans and advances to company officers and employees and all other claims.

Measurement at initial recognition

- Original transaction price

Subsequent measurement
- Net realizable value

Classification

Trade - Current (Always)

Non Trade 12 mos or less (current)

More than 3 mos (non-current)

What is current assets?

a. Cash and cash equivalents
b. Part of operating cycle
c. 12 months or less
d. Hold for the purpose of being traded

Trade receivables
1. Accounts Receivables
2. Notes receivables

NOTES RECEIVABLES

Notes Receivable
- claims supported by formal promise to pay usually in the form of notes.
- represents only claims arising from sale of merchandise or service in the ordinary course of
business.
Negotiable promissory notes
- unconditional promise in writing made by one person to another.

Dishonored Notes
- a promissory note that matured and not paid
- should be removed from the notes receivable account and transferred to accounts receivable
included the face amount, interest and other charges.

INITIAL MEASUREMENT OF NOTES RECEIVABLE

- at present value (sum of all future cash flows discounted using the prevailing market rate of
interest for similar notes.)

Prevailing market rate- effective interest rate.

Short-term notes receivable

- face value (not discounted)

Long- term Notes Receivable

(1) Interest bearing notes receivable
- face value (present value upon issuance)
(2) Non-interest bearing notes receivable
-present value (discounted value of the future cash flows using effective interest rate)

NOTE: ALL NOTE IMPLICITLY CONTAIN INTEREST. “Interest being included in the face amount”
rather than being stated as a separate rate.

SUBSEQUENT MEASUREMENT
- amortized cost using effective interest method.
-long term noninterest-bearing notes receivable, amortized cost (present value + amortization
of discount) or (face value – unamortized unearned interest income)

LOAN RECEIVABLE
Loan Receivable
- financial asset arising from loan granted by bank or other financial institution to a borrower or
client.

INITIAL MEASUREMENT
- at fair value (transaction price) + transaction cost (directly attributable to acquisition of FA)

Transaction cost include Direct origination costs.

Indirect origination costs- outright expense

SUBSEQUENT MEASUREMENT
- at amortized cost using effective interest method

Origination Fess
- the fees include compensation

- if received from borrower, unearned interest income (amortized over the term of loan)

Direct origination costs

- not chargeable against the borrower
- offset directly against any unreal origination fees received.

If the origination fees received exceed the direct origination costs, the difference is unearned
interest income and the amortization will increase interest income.

If the direct origination costs exceed the origination fees received, the difference is charged to
“direct origination costs” and the amortization will decrease interest income.

The origination fees received and the direct origination costs are included in the measurement
of the loan receivable.

IMPAIRMENT OF LOAN
- recognize a loss allowance for expected credit losses on financial asset measured at amortized
cost at amount equal to the lifetime expected credit losses if the credit risk on that financial
instrument has increased significantly since initial recognition.

Credit losses are the present value of all cash shortfalls

Expected credit losses are an estimate of credit losses over the life of the financial instrument.

Measurement of impairment

When measuring expected credit losses, an entity should consider:

a. The probability-weighted outcome
b. The time value of money
c. Reasonable and supportable information

The amount of impairment loss can be measured as the difference between the carrying
amount and the present value of estimated future cash flows discounted at the original effective
rate.
The carrying amount of the loan receivable shall be reduced either directly or through the use of
an allowance account.

Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the
other party by failing to discharge an obligation.

The risk does not necessarily relate to the credit worthiness of the issuer.

Three- stage impairment approach

(1) Low credit risk
(2) Significant increase in credit risk but no objective evidence of impairment
(3) Objective evidence of impairment

12- month expected credit loss

A 12-month expected credit loss is defined as the portion of the lifetime expected credit loss
from default events that are possible within 12 months after the reporting period.

Lifetime expected credit loss

Lifetime expected credit loss is defined as the expected credit loss that results from all default
events over the expected life of the instrument.

Lifetime expected credit loss shall always be recognized for trade receivables through aging,
percentage of accounts receivable and percentage of sales.

Interest income
a. Under stages 1 & 2 interest income is computed based on the gross carrying amount or
face amount.
b. Under stage 3, interest income is computed based on the net carrying amount which is
equal to the face amount minus allowance for loan impairment.

RECEIVABLE FINANCING
Pledge, assignment and factoring

Receivable Financing
- financial flexibility or capability of an entity to raise money out of its receivables.

Forms of Receivable Financing

(1) Pledge of accounts receivable
 (2) Assignment of accounts receivable
(3) Factoring of accounts receivable
(4) Discounting of notes receivable

INVENTORIES
INVENTORIES
- are assets 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 or in rendering of
services

Trading – Merchandise Inventory (buy & sell)

Manufacturing a. Finished goods
b. Goods in Process
c. Raw Materials
d. Factory/ Manufacturing supplies

Services
Labor and other costs of personnel directly engaged in providing the service.

Goods include in the inventory

(1) Goods owned and on hand
(2) Goods in transit and sold FOB destination
(3) Goods in transit and purchased FOB Shipping point
(4) Goods out on consignment
(5) Goods in the hand of salesman or agents
(6) Goods held by customers on approval or on trial

Purchase -in the moment na nagpurchase (FOB Shipping)

In practice
Sales

Outright Sales - own product

Consignor Sales - Sales of Consignor

NOTE:
Selling cost- never included in cost of inventory
Trade Discount (Sale)
- deduction from the list/ catalog discount in order to arrive @ the invoice price w/c is the price
actually charge by buyer

Purpose: To encourage trading/ increase sales

Cash Discount (Prump Payment)

- deductions from the invoice price when the payment is made w/in the discount period.

MEASUREMENT

Initial ---------------------------------------------------------------------- Subsequent

@ Cost LCNRV
(on item by item basis)

Cost of Inventories
(1) Cost of purchase
(2) Cost of conversion
 (3) Other cost incurred in bringing the inventories to their present location and condition
(Direct Attributable Cost)

Cost of purchase
+ Purchase Price
+ Import Duties IGNORED: - Foreign
+ Irrevocable Taxes Exchange Differences
+ Freight Cost - Interest
+ Handling Cost Expense Over Financing
+ Other directly attributable cost Period
- Trade Discount - Selling Cost
- Rebates

Cost of Conversion
+ Direct Labor
+ Overhead ------------------- - Factory Expenses
 Fixed - Indirect Materials
 Variable - Indirect Labor

Other Cost : cost incurred due to customers specification

Excluded: (1) Abnormal Wastages

(2) Storage – Finished goods
(3) Administrative Expenses
(4) Distribution/ Selling Expenses

IGNORED: - Transferred to consignees

- Sales Return- Unsalable

SUBSEQUENT MEASUREMENT

LCNRV -Lower of cost and Net Realizable Value

Net Realizable Value

- is the estimated selling price in the ordinary course of business less estimated cost of
completion and the estimated cost of disposal.

NRV = SP – Cost to Complete – Cost to Sell

Reason Why Selling (NRV) Price is lower than its cost

 (1) Inventories are damaged
(2) Inventories have become wholly or partially obsolete
(3) The selling price have declined
(4) Estimated cost of completion/ cost of disposal has increased

RULE:
Cost > NRV ----- w/ inventory writedown
Cost < NRV ----- no inventory writedown

ACCOUNTING METHOD

(1) Direct (Cost of Goods Sold) Method

Inventory, End XXX
Income Summary XXX

(2) Allowance Method

Loss of Inventory Writedown XXX
Allow on Inventory Writedown XXX

(1) DIRECT PRESENTATION (2) ALLOWANCE PRESENTATION

Inventory Beg XXX Inventory Beg XXX
Net Purchases XXX Net Purchases XXX
TGAS XXX TGAS XXX
Inventory, End (XXX) Inventory, End (XXX)
COGS XXX COGS, before WD XXX
COGS of Inty. WD (XXX)
COGS, After WD XXX

REVERSAL
Allowance on Inventory writedown XXX
Gain on reversal of inventory writedown XXX

SYSTEMS OF INVENTORY RECORDING

(1) Periodic Inventory System

- updated balances of inventories is based on its physical count
- Applicable for low-value inventories

(2) Perpetual Inventory System

- Inventory records are updated in every transaction
- applicable for high-value inventories

Inventory Cost allocation and flow

(1) Specific identification method (P23)
 (2) First-in, First-out (FIFO) (P25)
(3) Weighted Average-periodic (P25)
(4) Moving Average-perpetual (P27)

Affected by the inventory valuation method used by an entity

- Cost of Goods sold
- net Income of the entity
- Amounts owed for income taxes

Not affected: Amount paid to acquire merchandise

COST FORMULAS

Specific Identification
Cost of EI = units on Hand X Specific UC

FIFO
Cost of EI = units on Hand X UC of latest purchases

Weighted Average
Cost of EI= Units on Hand X WAUC
WAUC = total cost of GAS/ Total available for sale

Method of Inventory Estimation

(1) Gross Profit Method
(2) Retail inventory Method

COST FLOW METHOD

Cost of Good Sold – magkano mo binenta lahat

Units X Cost = COGS

SPECIFIC IDENTIFICATION
- for item that are not ordinarily interchangeable
-for goods or services produced and segregated for specific projects

Gross Profit
Sales (7,500 units X P75 SP) P 562,500
Cost of Goods Sold 387,500
Gross Profit P 175,000

To check, the total combined ending inventory and cost of goods sold should equal the cost of
goods available for sale.
 Beg. Inventory (2,000 X P50) P 100,000
Purchases:
Batch B P225,000
Batch C 330,000
Batch D 80,000 635,000
Cost of Goods Available for Sale P 735,000

FIRST-IN, FIRST-OUT (FIFO) or WEIGHT AVERAGE COST FORMULA

- for items other than those mentioned for specific identification

FIFO @ PERPETUAL

Gross profit
Sales (6,000 units X P80 SP) P 528,000
Cost of Goods Sold 361,000
Gross Profit P 167,000

FIFO @ PERIODIC

Ending Inventory P 1,400 units

Most recent cost P65 1,000 units 65,000.00

Next most recent cost P60 400 units 24,000.00
89,000.00

WEIGHTED AVERAGE METHOD

Step 1. Compute for the cost of goods available for sale and the average cost per unit.

Beginning Inventory (2,000 X P50) P100,000

Purchases:
October 3 (3,000 X P55) P165,000
October 13 (2,000 X P60) 120,000
October 29 (1,000 X P65) 65,000 350,000
Cost of Goods Available for Sale P450,000
Divide by total units for sale 8,000 units
Average cost per unit (multiplier) P56.25

Step 2. Total amount of ending inventory

 Total remaining units P 1,400
Average cost per unit 56.25
Cost of ending inventory P78,750

Step 3. Compute cost of Goods sold

Cost of Goods available for sale P 450,000

Less; Ending inventory 78, 750
Cost of Goods sold 371, 250

No. of units sold 6,600

Multiply: Average cost/ unit 56.25
Cost of good sold P37.250

Step 4: Gross profit

Sales (6,600 units X P80) P 328,000

Less: COGS 372,250
Gross profit P 156, 750

Periodic > Weighted Average

Perpetual > Moving Average

Moving Average
Total Cost / total units available = Average Cost

INVENTORY ESTIMATION

GROSS PROFIT METHOD

- when interim financial statements are prepared
- when inventory is destroyed by fire of flashfloods.
- when testing of the validity of an inventory cost determined under either periodic or
perpertual system

Gross Profit method assumes:

(1) the relationship between gross profit and sales remains stable over time
(2) the beginning inventory plus purchases equal total goods to be accounted for
Goods not sold must be on hand
(3) If sales reduced to cost, are deducted from the sum of the opening inventory plus
purchases, the result is the ending inventory
The gross profit method allows expressing and using a gross profit percentage based on either
cost of goods sold or net sales to estimate inventory value.

 Gross Profit rate based on sales

 Gross profit rate based on cost

GP rate based sales GR rate based cost

Net sales 6,000,000 100% 125%
COGS 4,800,000 80% 100%
Gross Profit 1,200,000 20% 25%

From the calculation below, if gross profit based on sales is 60%, what is the gross profit based
on cost?

Net Sales P 10,000,000 100% 250%

COGS 4,000,000 40% 100%
Gross Profit P 6,000,000 60% 150%

Standard COGS Formula Inventory Estimation

Formula
Beginning Inventory
+ Net purchases . Beginning Inventory
Cost of Goos available for Sale + Net purchases
- Ending inventory . .
Cost of Goods Sold Cost of Goos
available for Sale
- Cost of Goods Sold
RETAIL INVENTORY METHOD .
Techniques for the measurement of the cost of inventoriesEnding
may beInventory
used for the convenience if
the results approximate cost.

FORMULA:
Beginning Inventory at Retail Price
+ net purchases at Retail Price .
Cost of Goods available for sale @ retail price
- Net Sales .
Estimated ending inventory @ retail price
X Cost-to-retail ration .
Estimated ending inventory @ cost

COS computation

GPR based on Sales

 COS = net sales X cost ratio
Cost Ratio = 1- GPR

GPR based on Cost

COS = Net Sales / (1 + GPR)

TERM BUYER SELLER

(1) FOB Shipping point  
(2) FOB Seller  
(3) FOB FAS (Free Along Side)  
(4) FOB CIF (Cost Insurance Freight)  
(5) FOB Place of Seller  
(6) Bill & hold arrangement  
(7) Sold on installation  
(8) Sale w/ high probability of return  
(9) Goods manufactured at customer (specification)  
(10) Special order  
(11) Fob Destination  
(12) FOB Buyer  
(13) FOB ex ship  
(14) FOB Place of Buyer  
(15) Lay away sales  
(16) Sales w/ buyback agreement  
(17) Lapse buyback agreement 
(18) Hold for shipping instruction  
(19) Sale on trial or approval  
(20) inventory pledge  