ACCOUNTING FOR

GOVERNMENT AND NPO

(FINANCIAL ASSETS AND
INVENTORIES)
 Chapter 6
Financial Assets

Learning Objectives
1. Define a financial asset and give examples.
2. Account for cash and cash equivalents.
3. Account for receivables.
4. Account for investments.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Definitions
 Financial instrument – is any contract that gives rise to both a financial
asset of one entity and a financial liability or equity instrument of another
entity. (PPSAS 28.9)

 Financial asset –any asset that is:

a. Cash;
b. An equity instrument of another entity;
c. A contractual right to receive cash or another financial asset from another
entity;
d. A contractual right to exchange financial instruments with another entity
under conditions that are potentially favorable; or
e. A contract that will or may be settled in the entity’s own equity instruments.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Examples of Financial Assets
 Cash and Cash equivalents
 Receivables
 Investments in equity and debt securities
 Derivative assets

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Initial Recognition
 A financial asset is recognized when an entity becomes a party to the
contractual provisions of the instrument. (PPSAS 29.16)

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Initial Measurement
 Financial assets are initially measured at fair value plus transaction costs, except
for financial assets at fair value through surplus or deficit whose transaction costs
are expensed.

 Transaction costs are incremental costs that are directly attributable to the
acquisition, issue, or disposal of a financial instrument.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Cash
 Cash – comprises cash on hand, cash in bank and cash treasury accounts.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Unreleased & Cancelled Checks
 Unreleased checks are reverted back to cash.

Cash in Bank, Local Currency-Current xx

xx

Accounts Payable (or other liability
Cancelled checks (e.g., stale, voided or spoiled) are reverted back to cash.
account)

The cancelled check pertains to:

Current year Prior period
Cash-Modified Disbursement Accumulated Surplus/
System (MDS), Regular xx (Deficit) xx
Accounts payable
Accounts payable xx xx
GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan
 Petty Cash Fund
 The Petty Cash Fund of a government entity is:
 maintained using the imprest system.
 sufficient to defray recurring petty expenses for 1 month.
 used for disbursements not exceeding ₱15,000 per transaction.
 replenished as soon as disbursements reach at least 75% or as needed.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Accounting for Cash Shortage/Overage
 The disbursing officer is liable for any cash shortage while any cash overage that he
cannot satisfactorily explain to the auditor is forfeited in favor of the government.
 Shortage:

 Overage:
Due from Officers and Employees xx
Advances for/to..(Appropriate account) xx

Cash – Collecting Officers xx

Miscellaneous Income xx

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Dishonored Checks
 A dishonored check is a check that is not accepted when presented for payment,
e.g., a check returned by the bank because of lack of sufficient funds – a ‘bounced’
check.
 Dishonored checks are recorded in the “Other Receivables” account.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Bank Reconciliation
 A government entity prepares monthly bank reconciliations for each of the bank
accounts it maintains, using the adjusted balance method.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Cash Equivalents
 Only debt instruments acquired within 3 months before their scheduled maturity
date can qualify as cash equivalents.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Receivables
 Receivables are initially measured at fair value plus transaction costs and
subsequently measured at amortized cost.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Categories of Financial Assets
Type of Examples Initial Subsequent
Financial Asset Measurement Measurement
a. Financial asset  Investments in Fair value Fair value; changes
at fair value quoted stocks or in FV are recognized
through surplus bonds. in surplus/deficit
or deficit
b. Held-to-  Investments in Fair value plus Amortized cost
maturity bonds and other transaction costs
debt securities
to be held until
maturity

c. Loans and  Accounts, Notes, Fair value plus Amortized cost

receivables Loans receivable transaction costs

d. Available-for-  Investments in Fair value plus Fair value; changes

sale financial stocks or bonds transaction costs in FV are recognized
assets not classified in equity
under (a) to (c)
GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan
above.
 Derivatives
 A derivative is a financial instrument or other contract that derives its value from
the changes in value of some other underlying asset or other instrument.
 Characteristics of a derivative:
1. Its value changes in response to the change in an underlying;
2. It requires no initial net investment (or only a very minimal initial net investment);
and
3. It is settled at a future date.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Purpose of a derivative
 The very purpose of derivatives is risk management.
 Risk management is the process of identifying the desired level of risk, identifying
the actual level of risk and altering the latter to equal the former.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

APPLICATION OF CONCEPTS

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-1 TRUE/FALSE
1. According to the GAM for NGAs, all financial assets are measured at fair value.
Answer: False

2. According to the GAM for NGAs. Government entities shall prepare bank
reconciliations only at year-end or whenever the needs arises.
Answer: False

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-1 TRUE/FALSE
3. Only debt instruments with a remaining maturity of three (3) months or less can
qualify as cash equivalents.
Answer: False

4. The PCF of a government entity is replenished when disbursements reach at

least 90% or as needed.
Answer: False

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-1 TRUE/FALSE
5. No journal entry is prepared when a disbursement is made out of the petty cash
fund.
Answer: True

6. A government entity established a P30,000.00 petty cash fund. The custodian

must be bonded for at least P5,000.00.
Answer: False

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-1 TRUE/FALSE
7. According to the GAM for NGAs, all financial assets shall be initially measured at
fair value plus transaction costs.
Answer: False

8. Transaction costs on financial assets classified under the held-to-maturity

category are expensed outright
Answer: False

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-1 TRUE/FALSE
9. A derivative derives its value from the changes in the value of a specified rate,
price, event, or some other variable.
Answer: True

10. Risk management is the process of identifying the desired level of risk,
identifying the actual level of risk, and altering the latter to equal the former.
Answer: True

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-4 For Classroom Discussion
1. According to the GAM for NGAs, a government entity’s cash comprises all of the
following, except?
a. Cash on hand
b. Cash in Bank
c. Cash Equivalents
d. Cash Treasury Accounts.
Answer: Cash Equivalents (It is a line item in the Statement of Financial Position)

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-4 For Classroom Discussion
2. Which of the following is excluded from the amount of cash that is reported in the
Statement of Financial Position of a government entity?
a. Unreleased checks drawn
b. Cancelled checks drawn
c. Undeposited collections
d. Post-dated checks received
Answer: Post-dated checks received (It cannot be deposited as of the moment. Therefore, the cash is
still in the hands of the issuing entity)

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-4 For Classroom Discussion
3. An unexplained cash overage of a government entity is recorded as a
a. Credit to a payable account
b. Debit to cash shortage or overage account
c. Credit to miscellaneous income account
d. Credit to a cash shortage or overage account
Answer: Credit to miscellaneous income account

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-4 For Classroom Discussion
4. All of the following are considered internal controls over cash, except?
a. Requiring a cash custodian to be properly bonded. The amount of the bond shall not be
less than the cash accountability of the custodian.
b. Preparing a bank reconciliation for each bank account maintained by a government
entity.
c. Making estimates of recurring expenses before establishing an amount for a petty cash
fund.
d. Maintaining the PCF under a Fluctuating Balance System wherein the total cash on hand
and PCF vouchers may or may not be equal to a fixed amount of PCF at any given point
of time.
e. Requiring at least three bidders or canvasses before making purchases.
Answer: Letter D (Imprest system is being used/observed)

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-4 For Classroom Discussion
5. The per transaction threshold for petty cash disbursements of a government entity is?
a. P5,000.00
b. P10,000.00
c. P15,000.00
d. No limit; sky is the limit
Answer: P15,000.00

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-4 For Classroom Discussion
6. A government agency shall prepare a bank reconciliation for each bank account
maintained. Bank reconciliations are prepared using the?
a. Bank to Book method
b. Book to Bank method
c. Adjusted Balance method
d. Any of these
Answer: adjusted balance method

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-4 For Classroom Discussion
7. If the adjusted balance of cash is less than the unadjusted balance per books and there are
no other reconciling items or errors, the difference is most likely caused by?
a. Credit memo
b. Debit memo
c. Deposit in transit
d. Outstanding checks
Answer: debit memo

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-4 For Classroom Discussion
8. According to the GAM for NGAs, receivables are measured at?

Initial Subsequent
a. Fair Value Amortized cost
b. Fair Value plus Amortized cost
transaction costs
c. Fair Value minus Amortized cost
transaction
Answer: Letter B costs

d. Fair Value Fair Value

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-4 For Classroom Discussion
9. The subsequent changes in the fair value of an investment that is classified as available for
sale are recognized in?
a. Surplus or deficit
b. Net assets or equity
c. Not recognized
d. Any of these as an accounting policy choice
Answer: Letter B

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

PROBLEM 6-4 For Classroom Discussion
10. According to the GAM for NGAs, the very purpose of derivatives is?
a. Risk management
b. Speculation
c. Risk incurrence
d. A or B
Answer: Letter A

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Chapter 7 Inventories

Learning Objectives
1. Account for inventories by a government entity.
2. Describe the procedures in the receipt and disposition of inventories by a
government entity.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Inventories of a government entity
a. Inventory Held for Sale (e.g., medicines for sale in
government pharmacies)
b. Inventory Held for Distribution (e.g., rice and other
welfare goods held for distribution)
c. Inventory Held for Manufacturing (e.g., raw materials,
work-in-process)
d. Inventory Held for Consumption (e.g., office supplies
inventory)
e. Semi-Expendable Property – consists of machinery,
equipment, furniture and fixtures and similar items that
are not capitalized as PPE because their costs are below
the ₱15,000 capitalization threshold for PPE.
GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan
 Measurement
 Inventories are initially measured at cost and
subsequently measured at the:
a. Lower of Cost and Net realizable value – for goods
held for sale; and
b. Lower of Cost and Current replacement cost – for
goods held for distribution.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Measurement of Cost
 Cost comprises the following:

a. Purchase cost, excluding trade discounts.

b. Direct costs incurred in bringing the asset to its
intended location and condition.
 Cost excludes the following:

a. Abnormal amounts of wasted materials, labor, and

production overhead;
b. Selling costs; and
c. Administrative overheads

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Measurement of NRV and CRP
 Net Realizable Value (NRV) is the estimated selling
price less estimated costs of completion and
estimated selling/disposal costs.

 Current replacement cost is the cost the entity would

incur to acquire the asset on the reporting date.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Cost Formulas
 Specific identification – used for items that are not
ordinarily interchangeable and those that are
segregated for specific projects.
 Weighted average cost – used for large numbers of
items of inventory that are ordinarily
interchangeable. This shall be applied under a
perpetual inventory system.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Journal entries – Initial recognition
Inventory Held for Sale Inventory Held for Distribution

Merchandise Inventory xxx Welfare Goods for Distribution xxx

Accounts Payable xxx Accounts Payable xxx

Inventory Held for Manufacturing Inventory Held for Consumption

Raw Materials Inventory xxx Office Supplies Inventory xxx

Accounts Payable xxx Accounts Payable xxx

Semi-Expandable Property
Semi-Expendable Machinery xxx
Accounts Payable xxx

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Recognition as an Expense
The carrying amount of an inventory is recognized as an
expense in the period it is:
a. Sold;
b. Distributed;
c. Exchanged;
d. Consumed; or
e. Written down to its NRV or Current replacement cost
(only the portion of the carrying amount in excess of
the NRV or CRC is recognized as an expense).

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Receipt and Disposition of Inventories
 Requisition

1. End users prepare the Purchase Request (PR)

form.

2. Purchasing Unit prepares the Purchase Order

(PO).

(Note: A canvass from at least 3 suppliers is required

for purchases amounting to ₱1,000 and above.)

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Receipt and Disposition of Inventories
 Receipt

 Property/Supply Division prepares the Inspection

and Acceptance Report (IAR) and forwards it to
the Property Inspector.
 Property Inspector inspects the delivered items
and fills up the IAR.
 The Property/Supply Division records accepted
deliveries in the Stock Card (SC).

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Receipt and Disposition of Inventories
 Receipt (Cont’d)

 The Accounting Division records accepted

deliveries in the books of accounts and in the
Supplies Ledger Card (SLC).
 The Property/Supply Division prepares the
Disbursement Voucher (DV) and then forwards
it, together with the supporting documents, to
the Accounting Division for processing of
payment.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Receipt and Disposition of Inventories
 Disposition

 End users prepare the Requisition and Issue Slip

(RIS) to request for the issuance of inventory.
 The Property/Supply Division prepares the Report
of Supplies and Materials Issued (RSMI). The
Stock Card is updated using the RSMI.
 The Accounting Division uses the RSMI for
recording in the books of accounts and updating of
the Stock Ledger Card.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Receipt and Disposition of Inventories
 Other documents
 Waste Materials Report – used to report wasted
materials, such as destroyed spare parts and other
spoilages.
 Report on the Physical Count of Inventories – used in
reporting the results of physical counts.
 Report of Accountability for Accountable Forms – used to
report the movement and status of accountable forms.
 Inventory Custodian Slip – prepared when issuing semi-
expendable property.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 APPLICATION OF CONCEPTS

PROBLEM 7-1: TRUE OR FALSE

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 1. According to GAM for NGAs, inventories of
government entities are subsequently measured
at net realizable value or current replacement cost
depending on whether the inventory is classified
as held for sale or held for distribution.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 What is the initial and subsequent measurement
of inventories received from non-exchange
transactions?

What about the agricultural produce?

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 2. According to the GAM for NGAs, purchases of
machinery, equipment, furniture and fixtures and
similar items below the P10,000.00 capitalization
threshold for PPE are recorded as inventories.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 3. Relief goods, office supplies, equipment and
furniture and fixture are items that may be
appropriately be recorded as inventories by a
government entity.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 4. The GAM for NGAs allows government entities
to use FIFO cost flow formula.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 5.The GAM for NGAs allows government entities
to use a periodic inventory system.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 6. The specific identification cost formula is not
available for use by government entities,
according to the GAM for NGAs.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 7. The Purchase Request (PR) form is prepared
when end users request for the issuance of items
of inventory that are available on stock.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 8. If the beginning balance of inventory is P50, net
purchases are P100 and the cost of goods sold is
P30, the ending inventory must be P120.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 Problem:
Entity A, a government entity sells eggs. At the
start of the period, Entity A’s inventory consisted
of 1 red egg with a carrying amount of P2.00.
During the period, Entity A acquired 1 brown egg
for P3.00 and 1 blue egg for P4.00. Entity A sold
the brown egg during the period.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 9. Under the Specific identification cost formula,
Entity A’s cost of sale is P2.00.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 10. If the eggs are ordinarily interchangeable.
Entity a’s cost of sale is P2.50, assuming the sale
occurred only after all the purchases were made.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 APPLICATION OF CONCEPTS
PROBLEM 7-4: FOR CLASSROOM DISCUSSION

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

 END

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan