Lecture: Intermediate Accounting 1 de Guzman

FINANCIAL INSTRUMENT (PAS 32)

Financial Instruments – is any contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument of another entity.

Financial Asset – is 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 or to exchange financial assets or financial liabilities with another
entity under conditions that are potentially favorable to the entity;

Financial Liability – a contractual obligation to deliver cash or another financial asset to another entity; or to exchange
financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity.

Equity instrument – is any contract that evidences a residual interest in the assets of an entity after deducting all of its
liabilities.

Fair Value – is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
 Hierarchy – (1) quoted price of identical asset or liability in an active market; (2) the quoted price of similar asset
or liability in an active market; (3) the quoted price of identical or similar asset in an inactive market; (4) price
developed by the entity using the best available information from the entity’s own data.
 Active market – a place where transactions are transacted with sufficient regularity and volume to provide
pricing information on an ongoing basis. (PFRS 13)

CURRENT ASSETS (PAS 1, Par. 66)

REQUISTIES:

 It is cash or cash equivalents unless the asset is restricted to settle a liability for more than twelve months after
the reporting period;
 The entity holds the asset primarily for the purpose of trading;
 The entity expects to realize the asset within twelve months after the reporting period;
 The entity expects to realize the asset or intends to sell or consume it within the entity’s normal operating cycle.

CASH AND CASH EQUIVALENTS

CASH – comprise cash on hand and demand deposits. (PAS 7); also refer to PAS 1, par. 66

 It must be unrestricted in use; it must be available for payment of obligations, expenses, etc.
 Money and other negotiable instrument that is payable in money and acceptable by the bank for deposit or
immediate credit. (ex. Money orders, bank drafts, checks except PDC)
 Includes cash on hand, cash in bank, working fund such as payroll fund, dividend fund, petty cash fund.

CASH EQUIVALENTS – short – term, highly liquid investments that are readily convertible to known amount of cash and
which are subject to an insignificant risk of changes in value. Its purpose is for meeting short-term cash commitments
rather than for investment or other purposes. (PAS 7)

 Ex. 3-month time deposit; 3-month money market instrument or commercial paper; 3-month treasury bill; 3-
year BSP treasury bill purchased three months before the date of maturity.
 Equity securities is not cash equivalents because it has no maturity date.
 Preference shares with redemption date and acquired three months before redemption date can qualify as cash
equivalents.
INVESTMENT OF EXCESS CASH

 Three months or less – Cash and cash equivalents;

 More than three months but within a year – short – term investments;
 More than a year – long – term investments.

MEASUREMENT OF CASH

 Cash is measured at face value;

 Bankrupt – net realizable value.
 Foreign currency – current exchange rate

PRESENTATION TO FS

 First line item under the caption “Cash and Cash Equivalents”. Details of which shall be disclosed in the notes to
financial statements.

CASH FUNDS (depending on its purpose)

 Payment of short - term obligations – current asset;

 Payment of long – term obligations – non – current asset.

BANK OVERDRAFT

 Withdrawals in excess of deposits; classify as current liability; can be offset against other banks accounts within
the same bank with debit balances or the amount is not material.

COMPENSATING BALANCE – minimum checking or demand deposit account balance that must be maintained in
connection with a borrowing arrangement with a bank.

 If not legally restricted – cash

 If legally restricted – short term investment if the related loan is short-term; long-term investment if the related
loan is long-term. (“Cash held as compensating balance”)

UNDELIVERED OR UNRELEASED CHECK – merely drawn and recorded but not given to the payee before the end of the
reporting period.

Adjusting entry: Cash xxx

Accounts payable or appropriate account xxx

POSTDATED CHECKS DELIVERED – check drawn, recorded, and already given to the payee but it bears a date
subsequent to the end of the reporting period.

Adjusting entry: Cash xxx

Accounts Payable or appropriate account xxx

STALE CHECK – a check not encashed by the payee within a relatively long period of time.

Adjusting entry: Cash xxx

Miscellaneous income (immaterial) xxx

Cash xxx

Accounts Payable or appropriate account xxx (material)

 CASH MANAGEMENT

 Cash must be protected from loss through theft or fraud.

 Cash Controls are as follows:
o Segregation of duties for handling cash and recording cash transactions;
o Imprest system – daily deposit of all cash receipts in the bank and making disbursements through
checks. Small amounts of expenditures shall be made out of petty cash funds;
o Voucher System - disbursements must be supported by vouchers to be recorded in the voucher register.
Actual payments are recorded in the check register;
o Internal audit at irregular intervals;
o Periodic bank reconciliation.

ACCOUNTING FOR PETTY CASH FUND

1. When a check is drawn to establish the fund

Petty cash fund xxx

Cash in bank xxx

2. Payment of expenses out of fund

No entries.

3. Replenishment of expenses.

Expenses xxx

Cash in bank xxx

4. Adjusting entries at the end of the reporting period.

Expenses xxx

Petty cash fund xxx

5. Increase in the fund

Petty cash fund xxx

Cash in bank xxx

6. Decrease in fund xxx

Cash in bank xxx

ACCOUNTING FOR CASH SHORTAGE

Initial entry:

Cash short or over xxx

Cash xxx

Adjusting entry:
 Due from cashier xxx

Cash short or over xxx OR

Loss from cash shortage xxx

Cash short or over xxx

ACCOUNTING FOR CASH OVERAGE

Initial entry:

Cash xxx

Cash short or over xxx

Cash short or over xxx

Miscellaneous income xxx

Cash short or over xxx

Payable to cashier xxx

PROBLEMS:

1. Company A had the following balances on December 31, 2018.

Cash in checking account P 350,000

Cash in money market account 750,000
Treasury bill, purchased November 1, 2018 maturing January 31, 2019 3,500,000
Time deposit purchased December 1, 2018 maturing March 31, 2019 4,000,000

How much is the cash and cash equivalents on December 31, 2018?

2. Company B had the following balances on December 31, 2018.

Cash in bank – current account P 5,000,000

Cash in bank – payroll account 1,000,000
Cash on hand 500,000
Cash in bank – restricted account for building construction
expected to be disbursed in 2019. 3,000,000
Time deposit, purchased December 15, 2018 and due March 15, 2019 2,000,000

The cash on hand included a P 200,000 check payable to Company B, dated January 15, 2018.

How much is the cash and cash equivalents on December 31, 2018?

3. Company C provided the following data on December 31, 2018.

Checkbook balance P 4,000,000

Bank statement balance 5,000,000
Check drawn on Company C, payable to supplier dated and recorded on
December 31, 2018 but not mailed until January 15, 2018 500,000
Cash in sinking fund 2,000,000

How much is the “cash” to be reported on December 31, 2018?

4. Company D had the following balances:

Cash on hand P 500,000

Demand deposit 4,000,000
Certificate of deposit 2,000,000
Postdated customer check 300,000
Petty cash fund 50,000
Traveler’s check 200,000
Manager’s check 100,000
Money order 150,000

What total amount should be reported as “cash” at year end?

5. Company E reported the following information in 2018:

 Share investments of P 1,000,000 that are actively traded in the stock market.
 Government treasury bills of P 2,000,000 within a 10-year term but purchased on December 31 at which time
they had two months to go until maturity.
 Cash of P 3,400,000 in the forms of coin, currency, saving account, and checking account.
  Commercial papers of P 1,500,000 with term of nine months but purchased on December 31 at which time they
had three months to go until maturity.

How much is cash? Cash equivalents?

6. Company F had the following account balances on December 31, 2018.

Cash in bank P 2,250,000

Cash on hand 125,000
Cash restricted for addition to plant and expected to be disbursed in 2019. 1,600,000

Cash in bank included P 600,000 of compensating balance against short-term borrowing arrangement. The
compensating balance is not legally restricted as to withdrawal.

On December 31, 2018, what total cash should be reported under current assets?

7. Company G had the following cash balances on December 31, 2018:

Cash in bank P 1,800,000

Petty cash fund – all funds were reimbursed on 12/31/2018 50,000
Time deposit due February 1, 2019 250,000

Cash in bank included P 600,000 of compensating balance against short-term borrowing arrangement on
December 31, 2018. The compensating balance is legally restricted as to withdrawal.

On December 31, 2018, what total amount should be reported as cash and cash equivalents?

8. Company H reported cash accounts per ledger on December 31, 2018 at P 4,700,000 which consisted of the following:

Petty cash fund P 20,000

Undeposited receipts, including a postdated customer check for P 100,000 1,500,000
Cash in bank per bank statement, with a check for P 200,000 still outstanding 2,500,000
Deposit in bank closed by BSP 500,000
Vouchers paid out of collections, not yet recorded 150,000
IOUs signed by employees, taken from collections 30,000
Total P 4,700,000

What amount to be reported as “cash” on December 31, 2018?

9. Company I reported the checkbook balance on December 31, 2018 at P 5,000,000. In addition, the entity held the
following items on same date:

Check payable to Company I, dated January 2, 2019 in payment of sale made

in December 2018, not included in December 31 checkbook balance P 2,000,000
Check payable to Company I, deposited December 15 and included in
December 31 checkbook balance, but returned by bank on December 30
Stamped NSF. The check was redeposited on January 2, 2019 and cleared
On January 9, 2019. 500,000
Check drawn on Company I’s account, payable to vendor, dated and recorded in
Company I’s books on December 31, 2018 but not mailed until Jan. 2019. 300,000
Money market placement 1,000,000
 What amount should be reported as cash on December 31, 2018?

10. G-shock company reported petty cash fund which comprised the following:

Coins and currency P 3,300

Paid vouchers:
Transportation 600
Gasoline 400
Office supplies 500
Postage stamps 300
Due from employees 1,200 3,000
Manager’s check returned by bank marked NSF 1,000
Check drawn by the entity to the order of petty cash custodian 2,700

What is the correct amount of petty cash fund for statement presentation purposes?

11. Madilim Company reported an imprest petty cash fund of P 50,000 with the following details:

Currencies P 20,000
Coins 2,000
Petty cash vouchers:
Gasoline payments for delivery equipment 3,000
Medical supplies for employees 1,000
Repairs of office equipment 1,500
Loans to employees 3,500
A check drawn by the entity payable to the order of Grace dela Cruz,
Petty cash custodian, representing her salary 15,000
An employee’s check returned by the bank for insufficiency of fund 3,000
A sheet of paper with names of several employees together with contribution
For a birthday gift of a co-employee. Attached to the sheet of paper
Is a currency of 5,000

What amount of petty cash fund should be reported in the statement of financial position?
PROBLEMS ON PETTY CASH FUND (IMPREST)

Nov. 10, 2016. The entity established an imprest fund of P 10,000.

Nov. 29. Replenish the fund. The petty cash items include the following:

Currency and Coin 2,000

Supplies 5,000
Telephone 1,800
Postage 1,200

Dec. 31. The fund was not replenished. The fund composed of the following currency and coin, P 7,000; supplies P 1,500;
postage, P 500; miscellaneous expense, P 1,000.

Jan. 1, 2017. Reverse the entries on December 31, 2016.

Feb. 1, 2017. The fund is replenished and increased to P 15,000.

The composition of the fund: currency and coins P 1,000; supplies P 4,500, postage P 3,000 and miscellaneous
expense P 1,500.