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Excess Cash may be invested in time deposits, money market instruments and treasury bills for the
purpose of earning interest income.
Classification of investments
If the term is three months or less such instruments are classified as cash equivalents
If the term is more than three months but within one year such investments are
classified as short-term financial asset or temporary investments and presented
separately as current assets.
If the term is more than one year such investments are classified as non-current or
long term investments.
Foreign Currency
o Foreign Currency and deposit in foreign countries which are not subject to any foreign exchange
restrictions should be translated to Philippine pesos using the current exchange rate and are
included in cash.
o Deposits in foreign bank which are subject to foreign exchange restrictions, if material should
be classified separately among non-current assets and the restrictions are clearly indicated
Customers postdated checks and NSF( No Sufficient Fund) and IOUs ( I owe you)
o Should be reported as receivables and not cash.
o NSF checks are oftentimes describe as DAIF ( drawn against insufficient funds ) or DAUD
( drawn against unclear deposit)
Postage Stamps and expenses advances
o Not cash but reported as prepaid expenses.
Bank Overdraft
o A bank overdraft that cant be offset against another account is reported as liability.
o It occurs when a depositor has written checks for a sum greater than the amount in the depositors
bank account, resulting credit balance in that cash account.
o A bank overdraft may be offset against a positive balance in another bank account with the
same bank if a right of offset exists between the bank and the depositor, in such case the
depositor reports the net positive amount as cash.
o If the net amount represents an excess of cash balance over the credit balance, it is shown as
cash, while if the net amount represents an excess of overdrawn account over the cash
balance, it is shown under the liabilities.
o An overdraft can also be offset against the other bank account if the amount is not material.
Windows Dressing
o Is a practice of opening the books of accounts beyond the close of the reporting period for the
purpose of showing a better financial position and performance.
o The entries made to window dress must be reversed to correct the statements.
Lapping
o Consist of misappropriating a collection from one customer and concealing this defalcation by
applying a subsequent collection made from the other customer, it involves series of
postponements of the entries for the collection of receivables.
Kiting
o Occurs when a check drawn against a first bank and depositing the same check in the second
bank to cover the shortage in the latter bank.
Cash Management
The cash short or over account is only a temporary or suspense account. When the financial statements are
prepared the same should be adjusted. If the amount of cash shortage is not material, it can be debited to
miscellaneous expense.
Imprest System - a system of control of cash which requires that all cash receipts should be deposited intact and
making disbursements through issuance of checks.
Voucher System - a system to control cash disbursements, all disbursements must be supported by properly
approved vouchers, which must be recorded in the voucher register. Actual payment are recorded in the check
register.
Receivables
Receivables are financial assets that represent a contractual right to receive cash or another financial asset from
another entity.
Trade receivables refer to claims arising from sale of merchandise or services in the ordinary course of
business .
Account Receivable are open accounts or those not supported by promissory notes.
o Another name for account receivable
Customers accounts
Trade Debtors
Trade Accounts Receivable
Notes Receivable are those supported by formal promises to pay in the form of notes.
Nontrade receivables represents claims arising from sources other than the sale of merchandise or
services in the ordinary course of business.
Current Receivables
Trade Receivables which are expected to be realized in each within the normal operating cycle or one year
whichever is longer.
Nontrade Receivables which are expected to be realized in cash within one year
Non-Current Assets
Nontrade Receivables that is collectible beyond one year.
Examples of nontrade receivables
Advances to or receivables from shareholders, directors, officers, or employees - If collectible in one year,
should be classified as current assets, otherwise classified as non current assets
Advances to affiliates usually treated as long term investments
Advances to suppliers current assets
Subscription Receivable current if collectible in one year, otherwise shown as deduction from
subscribed share capital
Creditors debit balance result of overpayment or returns and allowances, or advances to
creditors(prepaids for supplies, inventories etc.), classified as current assets. If the balance is immaterial,
an offset maybe made against creditors accounts credit balances and only the net payable may be
presented.
Special deposits on contract bids normally classified as non-current assets, if collectible currently
classified as current assets
Accrued Income dividends receivable, accrued rent income, accrued royalties income, and accrued
interest income currebt assets
Claims Receivable- claims against common carriers, for the losses or damages, claims for rebates and tax
refunds, claims from insurance entities current assets
Initial measurements of Receivables
Financial assets shall be recognize initially at fair value (which is usually the transaction price) plus
transaction cost that is directly attributable to the acquisition.
For short-term receivables, the fair value is equal to the face value or the original invoice account. It is
not discounted because discounting is usually immaterial. Accounts receivables shall be measured
initially at face value.
For long-term receivables that are interest bearing, the fair value is equal to face value.
For long-term receivables that are noninterest bearing, the fair value is equal to present value of all the
future cash flows discounted using the prevailing market rate of interest for similar receivables.
Initially, long-term interest bearing notes receivables shall be measured in face value, and long-term
non-interest bearing notes receivables are measured in present value.
Accounts Receivables
Account Receivables are open accounts arising from sale of merchandise or services in ordinary course of
business. It is measured initially at face value or original invoice amount, however subsequently account receivable shall
be measured at net realizable value, meaning the amount of cash expected to be collected or the estimated recoverable
amount.
Accordingly, in estimating the net realizable value if trade accounts receivables, the following deductions are
made:
Sales Discount
o Trade Discount volume or quantity discounts, are means of converting catalog list price to the
prices actually charge to the buyer. To state simply, both account receivable and the related
revenue are always recorded net of trade discounts.
o Sales Discount a reduction from an invoice price by reason of prompt payment.
Gross Method the account receivable and sales are recorded at gross amount of the
invoice. No accounting recognition of the available cash discount until it is actually
taken.
Net Method The account receivables and the sales are recorded at net amount of the
invoice, meaning the invoice price minus the cash discount.
The sales allowance forfeited account is classified as other income.
Allowance Method the accounts receivable is recorded at the gross sales price, the sales
revenue is recorded at net amount and the available cash discount and recorded as credit
in the valuation account, allowance for sales discount.
Accounting for Bad Debts
Two methods of accounting uncollectible accounts
o Allowance Method requires recognition of a bad debt loss if the accounts are doubtful
of collections. If the doubtful accounts are subsequently found to be worthless or
uncollectible, the account is written off. If the collection is made on account previously
written off as uncollectible, the customary procedure is first to recharge the customers
account with the amount collected and possibly with the entire amount previously
charged off if it is now expected that collection will received in full.
o Direct write-off method requires recognition of bad debt loss only when account proved
to be worth less or uncollectible.
Distribution cost the granting of credit and collection of accounts are under the charge
of the sales manager.
Administrative Expense the granting of credit and collection of accounts are under the
charge of an officer other than the sales manager. In the absence of any contrary
statement, doubtful accounts shall be classified as administrative expense.
Notes Receivable
Notes receivables are claims supported by formal promises to pay usually in the form of notes. The note may be
payable in demand or at a definite future date. The term notes receivable represents only claims arising from sale of
merchandise or service in the ordinary course of business. The notes received from officers, shareholders and affiliates
shall be designated separately.
Dishonored notes when a promissory note matures and is not paid, it is said to be dishonored.
Dishonored notes shall be removed from notes receivable account and transferred to accounts receivable at
an amount to include, if any, interests and other charges.
Initial measurement of notes receivable
Conceptually, notes receivable are measured initially at present value. The present value is the sum of all
the future cash flows discounted using the prevailing interest for similar notes, it is actually the effective
interest rate, however short-term notes receivable are measured at face value. The initial measurement of long-
term notes will depend on whether the notes are interest bearing or non-interest bearing. Interest bearing long-
term notes are measured at face value which is actually the present value upon issuance. Non-interest bearing
long term notes are measured at present value which is the discounted value of the future cash flows using the
effective interest rate.
Subsequent measurement
Subsequently, long-term notes receivable shall be measured at amortized cost using the effective
interest method.
The amortized cost is the amount at which the note receivable is measured initially:
For long-term non-interest bearing notes receivable, the amortized cost is the present value plus
amortization of the discount, or the face value minus the unamortized unearned interest income.
Loan Receivable
A loan receivable Is a financial asset arising from a loan granted by bank or other financial institution to a
borrower or client.
If the initial amount recognized is lower than the principal amount, the amortization of the difference is
added to carrying amount. if the initial amount recognized is higher than the principal amount, the
amortization of the difference is deducted from the carrying amount.
Origination Fees - The fees charged by the bank against the borrowers for the creation of the loan.
It includes, Compensation for activities ( evaluating the borrowers financial condition, evaluating
guarantees, collateral and other security, negotiating the terms of loan, preparing and processing documents and closing
the loan transaction).
Accounting for Origination Fees
The origination fees received from borrower are recognized as unearned interest income and amortized
over the term of the loan. If the origination fees are not chargeable against the borrower, the fees are known as direct
origination cost, deferred and also amortized over the term of the loan. Preferably, the direct organization costs are offset
directly against any unearned 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 received exceed the origination
fee, 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.
Inventories
Inventories are assets which are held for sale in the ordinary course of the business, in the process of
production for such sale or in the form of materials or supplies to be consumed in the production process or in
the rendering of services. It encompasses goods purchased and held for resale it also encompasses finished
goods produced, goods in process and materials and supplies awaiting use in the production. In case of service
provider, inventories includes the cost of service for which the entity has not yet recognized the related
revenue. The cost of service consists primarily of the labor and other cost of personnel directly engaged in
providing the service, including supervisory personnel and attributable overhead.
Classes of inventories
Inventories of a trading concern is one that buys and sells goods in the same form
purchased. The term merchandise inventory is generally applied to goods held by a
trading concern.
Inventories of manufacturing concern is one that buy goods which are altered and
converted into another form before they are made available for sale.
o Finished goods are completed products which are ready for sale.
Finished goods have been assigned their full share of manufacturing
costs.
o Goods in process partially completed products which require further
process or work before they can be sold.
o Raw materials are goods to be used in the production process. No work
or process has been done on them as yet by the entity inventorying them.
It is restricted to materials that will be physically incorporated I the
production of other goods and which can be traced directly to the end
product of the production process.
o Factory or manufacturing supplies similar to raw materials but their
relationship to the end product is indirect. These supplies may be referred
to as indirect materials. It is indirect because it is not physically
incorporated in the products being manufactured.
Goods includible in the inventory
As a rule, all goods to which the entity has title shall be included in the inventory, regardless of
location. Where title has already passed from the seller to the buyer, the goods form part of the inventory
of the latter. The phrase passing of the title is a legal language which means the point of time at
which ownership changes.
o Goods owned and on hand
o Goods in transit and sold FOB destination
o Goods in transit and purchased FOB shipping point
o Goods out on consignment
o Goods in the hands of salesman or agents
o Goods held by customers on approval or on trial
*exemption on legal test : the goods sold on installment are included in the inventory of the buyer and
excluded from that of the seller.
Weighted Average
o Periodic the cost of the beginning inventory plus the total costs of purchases
during the period is divided by the total unit purchased plus those in the beginning
inventory to get a weighted average unit costs. Such weighted average unit cost Is
then multiplied by the units on hand to derive the inventory value. Divide the
total goods available for sale by the total number of units available for sale.
o Perpetual when used in the conjunction with the perpetual system, the weighted
average method is popularly known as the moving average method. The weighted
average may be calculated on a periodic basis or as each additional shipment is
received depending upon the circumstances of the entity. Under this method a
new weighted unit cost must be computed after every purchased and purchased
return. The total cost of goods available after every purchase and purchase return
is divided by the total units available for sale at this time to get a new weighted
average unit cost and multiplied by the units on hand to get the inventory cost.
Specific Identification means that specific costs are attributed to identified items of
inventory. The cost of inventory is determined by simply multiplying the units on hand by
their cost. This requires records which will clearly determine the actual costs of goods on
hand.
Net Realizable Value is the estimated selling price in the ordinary course of business less the estimated
cost of completion and the estimated cost of disposal.