FAR 0 Merged Handouts and Reviewers

TARLAC STATE UNIVERSITY – COLLEGE OF BUSINESS AND ACCOUNTANCY
FAR 0: FINANCIAL ACCOUNTING AND REPORTING WITH

CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARS
CASH AND CASH EQUIVALENTS CASH EQUIVALENTS

Cash includes money and any other Highly liquid investments that are acquired
negotiable instrument that is payable in 3 months before maturity.
money and acceptable by the bank for  Time deposits
deposit and immediate credit. These  Money market placements
includes checks, bank drafts and money  Commercial papers
orders.  T-bills
Accordingly, to be reported as part of cash
and cash equivalents, an item must be: 3-MONTH RULE, from the date of
acquisition or purchase to date of maturity.
1. Unrestricted in use and
2. Used to pay current obligations  ≤ 3 months – Cash equivalent
 > 3 months, ≤ 1 year – Short-term
CASH investment
 > 1 year – Long-term investment
Cash is measured at face value while cash
in foreign currency is measured at current TAKE NOTE:
exchange rate.
1. In the absence of the date of acquisition
A. Cash on Hand or purchase, the investment is assumed to
be acquired at date of issue.
B. Cash in Bank
2. In the absence of the date of acquisition
1. Checking Account
or purchase and the date of issue or term to
Bank Overdraft – Bank account which maturity, the investment is assumed to be
has a credit balance. acquired at year-end.
General Rule: Classified as current 3. If silent, time deposits, money market

liability. placements, commercial papers and t-bills
Exception: Can be offset against other are considered as cash equivalents.
bank account with a debit balance in the
SAMPLE PROBLEM 1
same bank.
On December 31, 2019, Kass Company had
Checks not considered cash:
the following cash balances:
 Undelivered or unreleased check
 Postdated check Cash in bank, savings -
 Stale check PNB P 5,000,000
Cash in bank, checking -
2. Savings Account PNB (50,000)
Compensating Balance – Minimum deposit Cash in bank - BDO 2,500,000

balance. Part of cash if not legally restricted. Cash in bank – BPI
(payroll) 500,000
C. Cash fund – Cash set aside for a
Cash in bank - PSBank 3,000,000
particular purpose.
Cash on hand 600,000
Determining Factor: PURPOSE.
Petty cash fund 50,000
Examples of cash funds which are part of
cash, Bond sinking fund 4,000,000
• Petty cash fund • Payroll fund 6-month, Time deposit –
• Tax fund • Dividend fund acquired Nov. 15, 2019
due on Jan. 15, 2020 2,000,000
Example of cash funds which are not part of 120-day, Commercial
cash, paper due on Feb. 29,
2020 2,000,000
 Plant expansion fund
Money market placements
 Sinking fund*
due on March 31, 2020 1,000,000
*If bonds relating to such sinking fund is long-term.
T-bills 500,000
Page 1 of 3
Additional information: 2. What amount should be reported as

“cash equivalents”?
* Cash in bank, savings account in PNB
includes P300,000 of compensating balance Time Deposit 2,000,000
against short-term borrowing arrangement Money market placements 1,000,000
at December 31, 2016. The compensating T-bills 500,000
balance is legally restricted as to withdrawal
Cash equivalents 3,500,000
by Kass.
ACCOUNTING FOR PETTY CASH FUND
* The Cash in bank in BDO is restricted for
plant additions expected to be disbursed in There are two methods of handling the petty
February 2020. cash, namely, the imprest fund system and
the fluctuating fund system.
* Recorded against the Cash in bank –
PSBank is a check of P200,000 dated SAMPLE PROBLEM 2
December 25, 2019 in payment of accounts
payable, the check was mailed January 5, As part of the internal control, PCF
2020. Company established a petty cash fund
* The cash on hand includes a P200,000 1. Established a petty cash fund of P10,000
check payable to Kass dated January 15, on January 2.
2020 and a check payable to vendor for 2. Petty cash expenses – January 2-31.
P100,000 dated December 31, 2019, such
check was delivered January 1, 2020. Postage 1,500
Supplies 5,500
* The petty cash fund includes Transportation 1,200
unreplenished December 31, 2019 petty Miscellaneous 800
cash expense vouchers of P10,000 and
employee IOUs of P20,000. 3. The fund is replenished.
* The bond sinking fund was established 4. The fund is increased to P15,000.
three years ago for bonds maturing on June
Prepare the journal entries to record the
30, 2020.
transactions.
1. What amount should be reported as
IMPREST FUND SYSTEM – The imprest
“cash”?
system is a system of control of cash which
Cash in bank – PNB requires that all cash receipts should be
5,000,000 deposited intact and all cash disbursements
(300,000) should be made by means of check.
(50,000) 4,650,000
1. Petty cash fund 10,000
Cash in bank – BPI 500,000 Cash in bank 10,000
Cash in bank – PSBank
2. No journal entry. The petty cashier
3,000,000
simply prepares memorandum entries in
200,000 3,200,000
the petty cash journal.
Cash on hand
3. Postage expense 1,500
600,000
Supplies expense 5,500
(200,000) 400,000
Transportation expense 1,200
Petty cash fund Miscellaneous expense 800
50,000 Cash in bank 9,000
(10,000)
When the petty cash fund runs low, a
(20,000) 20,000
replenishment check drawn which is usually
Bond sinking fund 4,000,000 equal to the petty cash disbursements.
Cash 12,770,000 4. Petty cash fund 5,000

Cash in bank 5,000
Page 2 of 3
FLUCTUATING FUND SYSTEM – Petty cash The cash in the petty cash fund shall be the
disbursements are immediately recorded remaining currency and coins plus
under the fluctuating fund system thus accommodated checks unless the checks
resulting in a fluctuating petty cash balance are NSF or postdated.
per book from time to time.
NOTES:
Cash in bank 10,000
2. Postage expense 1,500
Miscellaneous expense 800
In contradistinction with the imprest fund
system where disbursements are recorded
only upon replenishment of the fund.

Cash in bank 9,000
Cash in bank 5,000
SAMPLE PROBLEM 3
The petty cash fund of Becky Company on
December 31, 2019 is composed of the
following:
Coins and currencies P 16,000
Petty cash vouchers:
Postage stamps 2,000
Supplies 3,000
Cash advances to employees 4,000
Employee’s check returned by
bank marked NSF 5,000
Check drawn by the company
payable to the order of Ms.
Patty, petty cash custodian,
representing her salary 15,000
A sheet of paper with names
of employees together with
contribution for a birthday
gift of a co-employee in the
amount of 5,000
TOTAL 50,000
The petty cash ledger account has an

imprest balance of P50,000. What is the
correct amount of petty cash on December
31, 2019?
Coins and currencies 16,000
Check drawn by the company
payable to the order of Ms.
Patty, petty cash custodian,
representing her salary 15,000
Adjusted petty cash fund 31,000
Page 3 of 3
1. Denver Corporation reported a total cash and cash What should be reported as “cash and cash equivalents”
equivalent of P6,325,000 on December 31, 2019 which on December 31, 2019?
includes the following information:
SOLUTION:
 Two (2) certificates of deposits, each totalling
P500,000. These certificates of deposit have a maturity of Petty cash fund – unadjusted 50,000
120 days. Unreplenished expense vouchers (10,000)
 A check that is dated January 12, 2021 in the Employees IOUs (20,000)
amount of P125,000
Petty cash fund – adjusted 30,000
 A commercial paper of P2,100,000 which is due
in 120 days
 Currency and coins on hand amounted to P7,700 Cash on hand - unadjusted 600,000
Denver Corporation has agreed to maintain a cash Post-dated check delivered 200,000
balance of P500,000 in one of its bank at all times and it Cash on hand - adjusted 800,000
is not available for withdrawal and to ensure future credit
availability included in the above balance.
How much is the correct amount of cash and cash Cash in bank - current account 5,000,000
equivalents?
Cash restricted to withdrawal (300,000)
SOLUTION:
CIB - current account, adjusted 4,700,000
CCE - unadjusted 6,325,000
Certificate of deposits - 120 days (1,000,000)
Post-dated check received (125,000)
Cash in bank - current account 4,700,000
Commercial paper - 120 days (2,100,000)
Cash in bank - payroll account 1,000,000
Cash restricted to withdrawal (500,000)
Adjusted CCE 2,600,000
Commercial paper 2,000,000
Cash and cash equivalents 8,520,000
2. Rial Company had the following account balances on
December 31, 2019.
3. Shekel Company had the following account balances
at December 31, 2019.
Cash in bank - current account. 5,000,000
Cash in bank 2,250,000
Cash in bank - payroll account 1,000,000
Cash legally restricted for
Cash in bank - restricted account for
additions to plant 1,200,000
plant additions expected to be
 The cash on hand includes a check from a
disbursed in 2020 2,500,000 customer dated January 10, 2020 for 25,000.
Commercial paper 2,000,000  The cash in bank includes P600,000 of
compensating balance against short term borrowing
 The petty cash fund includes unreplenished agreement. The compensating balance is legally
December 31, 2019 petty cash expense vouchers of restricted as to withdrawal
P10,000 and employee IOUs of P20,000
The total amount to be included as cash on December 31,
 The cash on hand includes a P200,000 check 2019 is?
payable to Rial dated January 15, 2020
SOLUTION:
 In exchange for a guaranteed line of credit, Rial
has agreed to maintain a minimum balance of P300,000 Cash on hand - unadjusted 125,000
in its current bank account
Post-dated check received from customer (25,000)
Cash on hand - adjusted 100,000 5. On December 31, 2019, Crypto Company and the
following cash balance:
Cash in bank - unadjusted 2,250,000
PCF (all reimbursed on
Compensating balance - restricted (600,000)
December 31, 2019) 50,000
Cash in bank - adjusted 1,650,000
Time deposit - 120 days due on
January 15, 2020 2,000,000
Savings deposit 500,000
Bond sinking fund 4,000,000
Total cash 1,750,000
Money market placements 1,000,000
 Cash in bank includes 300,000 of compensating
4. Crowns Company provided the following information balance against short-term borrowing arrangement at
with respect to its cash and cash equivalents on December December 31, 2019. The compensating balance is legally
31, 2019. restricted as to withdrawal by Crypto.
Checking account at Security Bank (100,000)  The bond sinking fund was established three
Checking account at BPI 3,500,000 years ago for bonds maturing on June 30, 2020
Payroll account 500,000  A check of 200,000 dated January 15, 2020 in

payment of accounts payable was recorded and mailed on
Sales tax account 400,000 December 31, 2019
Sinking fund cash 2,000,000 On the statement of financial position, what amount
Employee post-dated check 300,000 should be reported as “cash and cash equivalents”?
Traveler’s check 300,000 SOLUTION:
NSF check 150,000 Cash in bank - unadjusted 5,000,000
PCF (all reimbursed as of Compensating balance - restricted (300,000)
December 31, 2019) 50,000 Post-dated check delivered 200,000
Money order 200,000 Cash in bank - adjusted 4,900,000
T-Bills, 90 days due Jan. 20, 2019 1,000,000

What amount would be reported as unrestricted cash and Cash in bank 4,900,000
cash equivalents on the statement of financial position? PCF (all reimbursed on
SOLUTION: December 31, 2019) 50,000
Checking account at BPI 3,500,000 Savings deposit 500,000
Payroll account 500,000 Bond sinking fund 4,000,000
Sales tax account 400,000 Money market placements 1,000,000
Traveler’s check 300,000 Cash and cash equivalents 10,450,000
PCF (all reimbursed as of
December 31, 2019) 50,000 6. The cash account of Los Angeles Company on
Money order 200,000 December 31, 2019 consists of:
T-Bills, 90 days due Jan. 20, 2019 1,000,000 Cash in bank 2,250,000
Cash and cash equivalents 5,950,000 Cash restricted for additions to plant
(expected to be disbursed in 2021) 3,000,000
Petty cash fund (all expense vouchers Postage stamps 2,000
of P18,000 were replenished on Supplies 3,000
December 31, 2019) 30,000 Cash advances to employees 4,000
 Included in the cash in bank is a compensating Employee’s check returned by bank
balance of P750,000 against short-term borrowing
arrangement at December 31, 2019. The compensating marked NSF 5,000
balance is not legally limited as to withdrawal by Los Check drawn by the company payable
Angeles Company.
to the order of Ms. Bobadilla, petty
What is the correct cash balance of Los Angeles
Company at December 31, 2019? cash custodian, representing her salary 16,000
SOLUTION: A sheet of paper with names of
Cash in bank 2,250,000 employees together with contribution
Petty cash fund (all expense vouchers for a birthday gift of a co-employee
of P18,000 were replenished on in the amount of 5,000
December 31, 2019) 30,000 Total 50,000
Total Cash 2,280,000 The petty cash ledger account has an imprest balance of
P50,000. What is the correct amount of petty cash on
December 31, 2019?
7. Rupees Inc’s checkbook balance on December 31, SOLUTION:
2019 was P21,200. In addition, Rupee held the following
items in its safe on December 31. Coins and currencies. 15,000
 A check for P450 from Peters, Inc. received Check drawn by the company. 16,000
December 30, 2019 which was not included in the
checkbook balance
 An NSF check from Garner Company in the
amount of 900 that had been deposited at the bank, but
was returned for lack of sufficient funds on December 29.
The check was to be redeposited on January 3, 2020. The
original deposit has been included in the December 31
checkbook balance.
 Coin and currency on hand amounted to P1,450.
The proper amount to be reported on Rupee’s statement
of financial position for cash at December 31, 219 is?
SOLUTION:
Balance per book 21,200
Customer’s check 450
NSF check (900)
Cash on hand 1,450
Total cash 22,200
8. The petty cash fund of Pound Company on December

31, 2019 is composed of the following:
Coins and currencies 16,000
Petty cash vouchers:
Handout: Notes Receivable, Loans Receivable & Receivable Financing FAR0_1st Sem_AY2019-20
Notes receivable refer to claims supported by formal promises to pay usually in the form of notes.
Measurement of Notes Receivable

Classification Initial Measurement Subsequent Measurement
1. Short-term note receivable Face amount Initially measured amount minus
principal repayment and reduction for
impairment or uncollectibility
2. Long-term, interest-bearing note Face amount Initially measured amount minus
receivable principal repayment and reduction for
3. Long-term, non-interest bearing Present value/ discounted value Initially measured amount minus
note receivable principal repayment, plus or minus
cumulative amortization of any
difference between the initial carrying
amount and the principal maturity
amount, minus reduction for
*Conceptually, notes receivable are initially measured at present value and subsequently measured at amortized cost.
Accounting for Long-term, Non-interest Bearing Notes

Present Value (PV) of the Unearned Interest Income
Particulars Method of Amortization
Note Receivable (NR) (UII) - Initial measurement
1. Note is payable in lump- PV of NR = cash equivalent UII = Face of NR – PV of Effective interest method
sum; cash equivalent price of the consideration NR
price for the received
consideration received is
available
2. Note is payable in lump- PV of NR = Face of NR UII = Face of NR – PV of Effective interest method
sum; cash equivalent multiply by the PVF of NR
price for the 1@rate for “n” periods
not available
3. Note is payable in equal PV of NR = cash equivalent UII = Face of NR – PV of Outstanding balance method
annual installments; cash price of the consideration NR
equivalent price for the received
available
4. Note is payable in equal PV of NR = annual UII – Face of NR – PV of Effective interest method
annual installments; cash installment multiply by the NR
equivalent price for the PVF of an ordinary annuity
consideration received is of 1@rate for “n” periods
not available
5. Note is payable in PV of NR = individual UII – Face of NR – PV of Effective interest method
uneven annual uneven installments multiply NR
installments; cash by the PVF of 1@rate for
equivalent price for the each “n” period
not available
*Amount to be credited to Sales (if item sold is inventory) or amount to be used as Selling Price in the determination of gain or
loss on sale (if item sold is other than inventory) = Down payment (if any) plus the PV of NR
Pro-forma entry on transactions involving long-term, non-interest bearing notes receivable:

Asset sold is an inventory; Asset sold is not an inventory; with a down payment
with a down payment Sale resulted to a gain on sale Sale resulted to a loss on sale
Entry to record the sale: Cash xx Cash xx
Cash xx Note receivable xx Note receivable xx
Notes receivable xx Accumulated depreciation xx Accumulated depreciation xx
Sales xx Depreciable asset xx Loss on sale xx
Unearned interest income xx Unearned interest income xx Depreciable asset xx
Gain on sale xx Unearned interest income xx
Entry to record subsequent collection:
Cash xx Entry to record subsequent collection: Entry to record subsequent collection:
Notes receivable xx Cash xx Cash xx
Notes receivable xx Notes receivable xx
Entry to record the amortization of Entry to record the amortization of Entry to record the amortization of
interest: interest: interest:
Unearned interest income xx Unearned interest income xx Unearned interest income xx
Interest income xx Interest income xx Interest income xx
Loans receivable refer to financial assets arising from a loan granted by a bank or another financial institution to a borrower or
client.
Measurement of Loans Receivable

Initial Measurement Subsequent Measurement
Fair value plus transaction costs Initially measured amount minus principal repayment, plus or minus cumulative
amortization of any difference between the initial carrying amount and the
principal maturity amount, minus reduction for impairment or uncollectibility
Effects of Amortization
Case Initial Carrying Amount (ICA) VS. Face Effects of Amortization
Amount (FA)
1. Origination fees charged to the ICA = FA Not applicable
borrower are equal to those
shouldered by the lender (bank)
2. Origination fees charged to the ICA < FA Increase in “Interest Income” and
borrower are more than those “Subsequent Carrying Amount” of the
shouldered by the lender (bank) *The difference is recognized as Loans Receivable
“Unearned Interest Income” subject to
periodic amortization
3. Origination fees charged to the ICA > FA Decrease in “Interest Income” and
borrower are less than those “Subsequent Carrying Amount” of the
shouldered by the lender (bank) *The difference is recognized as “Direct Loans Receivable
Origination Costs” subject to periodic
amortization
Credit Risk and Impairment of Loans Receivable

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.
An entity shall recognize a loss allowance for expected credit losses on financial assets measured at amortized cost. Credit
losses are the present value of all cash shortfalls over the life of the financial instrument.
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.
PRO-FORMA COMPUTATIONS: PRO-FORMA ENTRIES:

Face amount of the loan receivable xx Loan impairment loss xx
Add: Accrued interest (if previously recognized) xx Interest receivable (if accrued) xx
Total carrying amount xx Allowance for loan impairment xx
Less: Present value of future cash flows discounted
using the original effective rate xx Allowance for loan impairment xx
Loan impairment loss xx Interest income xx
RECEIVABLE FINANCING
It refers to the financial flexibility or capability of an entity to raise money out of its receivables other than from the usual
collection of the same.
Forms of Receivable Financing Transfer of Ownership Pro-forma entries

1. Pledging of accounts receivable 1. The borrower retains ownership Cash xx
over the accounts receivable which Discount on note payable xx
were pledged as collateral security Note payable – bank xx
for a loan.
2. Assignment of accounts receivable 2. The borrower retains ownership Entry to identify and segregate assigned
over the accounts receivable which accounts:
were assigned as collateral security Accounts receivable assigned xx
for a loan. Accounts receivable xx
a. Notification basis – customers *Unlike in pledging where all accounts

whose accounts are assigned as receivable are offered as collateral
security for a loan are advised security, assignment requires the
to pay directly to the assignee specific identification of accounts which
are assigned as security for a loan.
b. Nonnotification basis –
customers whose accounts are Entry to record the assignment:
assigned as security for a loan Cash xx
are not notified of the Service charge xx
financing arrangement; hence, Note payable - bank xx
the former still pays to the
assignor
3. Factoring of accounts receivable 3. Ownership over the factored Entry to record casual factoring:
accounts receivable is transferred to Cash xx
the factor. Allowance for doubtful accounts xx
Loss on factoring xx
a. Casual factoring - Loss on Accounts receivable xx
factoring, equal to the
difference between the selling Entry to record factoring as a
price and the net realizable continuing arrangement:
value of the factored accounts Cash xx
receivable, is recognized. Commission expense xx
Receivable from factor xx
b. Factoring as a continuing Accounts receivable xx
arrangement – No loss is
recognized. The fee charged by
the factor on the financing
arrangement is recorded as a
commission expense.
“Receivable from factor

(factor’s holdback)” – a
predetermined amount
withheld by the factor as a
protection against customer
returns and allowances and
other special adjustments.
4. Discounting of notes receivable 4. Transfer of ownership over the Entry to record discounting without
notes discounted is dependent on recourse:
the mode of discounting agreed Cash xx
upon by the parties. Loss on NR discounting xx
Note receivable xx
a. Discounting without recourse Interest income xx
–absolute derecognition of the
notes receivable account
Entry to record discounting with
b. Discounting with recourse, recourse – conditional sale:
accounted for as a Cash xx
conditional sale – the note Loss on NR discounting xx
receivable account is not Note receivable discounted xx
derecognized at the time of Interest income xx
discounting. A contra – asset
account, “Note Receivable
Discounted” account is Entry to record discounting with
recognized with disclosure of recourse – secured borrowing:
the contingent liability. Cash xx
Interest expense xx
c. Discounting with recourse, Liability for NR discounted xx
accounted for as a secured Interest income xx
borrowing - the note
receivable account is not
derecognized at the time of
discounting. An accounting
liability, “Liability for Note
Receivable Discounted”
account is recognized.
Computational Guidelines related to Note Receivable Discounting:

1. Maturity value = Principal + Interest
*Interest = Principal X Original Rate X Original Term
2. Discount = Maturity value X Discount Rate X Discount Term
3. Net proceeds = Maturity value – Discount
4. Carrying amount of NR = Principal + Interest
*Interest = Principal X Original Rate X Expired Term at the time of discounting
5. Loss on NR discounting (Interest Expense) = Carrying Amount of NR – Net Proceeds
DISHONORED NOTES – A note is said to be dishonored if payment is not made at the time of maturity. Theoretically,
dishonored notes should be transferred to Accounts Receivable at an amount equal to the face amount of the note plus interest
and other charges.
Handout: Inventory Estimation FAR0_1st Sem_AY2019-20
Methods of Inventory Estimation

1. Gross profit method
2. Retail inventory method
GROSS PROFIT (GP) METHOD

1. This inventory estimation method assumes that the rate of gross profit remains approximately the same from period to
period.
2. Accordingly, the ratio of cost of sales to net sales is also assumed to be relatively constant from period to period.
3. Basic formula under the GP method:
Beginning inventory xx
Add: Net cost of purchases
Purchases xx
Freight in xx
Purchase returns & allowances (xx)
Purchase discounts (xx) xx
Total cost of goods available for sale xx
Less: Estimated cost of sales (see Item No. 4) xx
Estimated cost of ending inventory xx
4. The estimated cost of sales is computed as follows:

a. Gross profit rate is based on sales / selling price:
Estimated cost of sales = Net sales x (100% - GP rate)
b. Gross profit rate is based on cost:
Net sales
Estimated cost of sales =
100% + GP rate
5. The Net Sales, for purposes of inventory estimation, is equal to Gross Sales reduced by any Sales Return during the period.
Sales allowances and discounts, which do not result to physical reduction in units sold, are ignored (not deducted from
gross sales) in the determination of net sales.
RETAIL INVENTORY METHOD

1. This method is often used in the retail industry for measuring inventory of large number of rapidly changing items with
similar margin.
2. It is commonly employed by department stores, supermarkets and other retail concerns which maintain a wide variety of
goods in its inventory.
3. Required information to support the use of the retail inventory method:
a. Beginning inventory at cost and at retail price;
b. Purchases during the period at cost and at retail price;
c. Adjustments to the original retail price such as additional mark up, mark up cancelation, markdown and
markdown cancelation; and
d. Other adjustments such as departmental transfers, breakages, shrinkage, theft, damaged goods and employee
discounts.
4. Basic formula under the Retail Inventory Method:
Particulars Cost Retail

Beginning Inventory xx xx
Net purchases xx xx
Total goods available for sale (TGAFS) xx xx
*Cost ratio (TGAFS @cost divided by TGAFS @ retail)
Net sales (xx)
Ending inventory at retail xx
Ending inventory at cost [ EI @ retail multiplied by the cost ratio*] xx
Approaches in the use of retail inventory method

1. Conservative or conventional or lower of cost and net realizable value approach
 Lowest cost of ending inventory and highest cost of sales value.
 Includes net mark ups and excludes net mark downs for purposes of cost ratio computations
2. Average approach
 Higher cost of ending inventory and lower cost of sales value than the conservative approach
 Includes net mark ups and net mark downs for purposes of cost ratio computations
3. FIFO retail approach
 Disregards beginning inventory information in the determination of the cost ratio.
 Assumes that the cost of the ending inventory is reasonably sourced from the current purchases (FIFO)
 Includes net mark ups and net mark downs for purposes of the cost ratio computations
Handout: Inventories_Intro FAR0_1st Sem_AY2019-20
INVENTORIES refer to assets that are held for sale in the ordinary course of 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 (PAS 2).
Classes of Inventories
Type of Operation Class/ Account Title Brief Description
1. Service Supplies Inventory Unused portion of supplies available for use in the rendering
of services
2. Merchandising Merchandise inventories Goods held for sale by a trading concern
a. Finished goods Completed products which are ready for sale
b. Goods in process Partially completed products requiring further process before
they can be sold
3. Manufacturing c. Raw (Direct) materials Goods that are to be used in the production process and are
directly traceable to the finished product
d. Factory or manufacturing supplies Goods that are to be used in the production process but are
not directly traceable to the finished product
Goods Includible in Inventories

As a rule, all goods to which the entity has title (legal test) shall be included in the inventory, regardless of location.
Accordingly, an entity may be considered the legal owner of the goods even if the same are not yet physically held by the
former.
The following inventory items must be included in inventory:

1. Goods owned and on hand 4. Goods out on consignment
2. Goods in transit and sold FOB destination 5. Goods in the hands of salesmen or agents
3. Goods in transit and purchased FOB shipping point 6. Goods held by customers on approval or trial
Accounting for Freight Charge (buyer’s point of view)

Owner of the goods in transit/
Party that initially pays
Freight Terms Party liable to shoulder the cost Pro-forma entry
the cost of freight
of freight
FOB Shipping Point, Purchases xx
Freight Collect Freight in xx
Buyer Buyer
Accounts payable xx
Cash xx
FOB Destination, Purchases xx
Seller Seller
Freight Prepaid Accounts payable xx
FOB Shipping Point, Purchases xx
Freight Prepaid Buyer Seller Freight in xx
Accounts payable xx
FOB Destination, Purchases xx
Freight Collect Cash xx
Seller Buyer
Accounts payable xx
Other Shipping Terms

Maritime
Seller’s Responsibility Buyer’s Responsibility Point of Transfer of Ownership
Shipping Terms
FAS or free Seller bears all expenses and risk Buyer bears the cost of loading When the carrier takes possession
alongside related to delivering the goods to and shipment of the goods
the DOCK next to or alongside
the vessel
CIF or cost, Seller bears the cost of loading Buyer agrees to pay in lump-sum Upon delivery of the goods to the
insurance and the cost of the goods, insurance carrier
freight cost and freight charge
Ex-ship Seller bears all expenses and risk Buyer pays for the cost of the When goods are UNLOADED
of loss until the goods are goods from the ship
UNLOADED from the ship
CONSIGNMENT – an agreement whereby the owner of the goods, called the CONSIGNOR, transfers physical possession of
goods to an agent, called the CONSIGNEE, who sells them on behalf of the former.
Salient Features of Consignment

1. Consigned goods shall be included in the CONSIGNOR’s inventory and excluded from the CONSIGNEE’s inventory.
2. Freight and other handling charges on goods out on consignment are part of the cost of goods consigned.
3. Freight and other distribution costs incurred by the CONSIGNEE in selling the goods of the CONSIGNOR shall be treated
as selling expenses of the former. However, the parties may agree that the costs of distribution shall be reimbursed by the
CONSIGNOR to the CONSIGNEE, in which case, the costs shall be treated as selling expenses of the CONSIGNOR.
4. The CONSIGNOR shall recognize a sale only upon actual sale by the CONSIGNEE to customers which also triggers the
recognition of commission income by the latter.
Handout: Inventories_Intro FAR0_1st Sem_AY2019-20
ACCOUNTING FOR INVENTORIES

Transactions Periodic Method Perpetual Method
1. Purchase of merchandise on Purchases xx Merchandise inventory xx
account Accounts payable xx Accounts payable xx
2. Payment of freight on Freight in xx Merchandise inventory xx
purchase Cash xx Cash xx
3. Return of merchandise to Accounts payable xx Accounts payable xx
suppliers Purchase returns xx Merchandise inventory xx
4. Payment of accounts payable Accounts payable xx Accounts payable xx
within the discount period Purchase discounts xx Cost of sales xx
Cash xx Cash xx
5. Sale of goods to customers on Accounts receivable xx Accounts receivable xx
account Sales xx Sales xx
Cost of sales xx
Merchandise inventory xx
6. Return of merchandise from Sales return xx Sales return xx
account customers Accounts receivable xx Accounts receivable xx
Cost of sales xx
7. Collection of customer’s Cash xx Cash xx
account within the discount Sales discount xx Sales discount xx
period Accounts receivable xx Accounts receivable Xx
8. Adjustment at year – end Merchandise inventory, end xx Inventory shortage xx
Income summary xx Merchandise inventory xx
(To set-up the cost of unsold (To recognize the difference

goods at year-end) between the inventory per count and
per record, where RECORD >
COUNT)
Inventory overage xx
(To recognize the difference

between the inventory per count and
per record, where RECORD <
COUNT)
Methods of Recording Credit Purchases

1. Gross Method – The accounts payable and purchases accounts are recorded at the gross amount of the invoice (before
deducting any offered cash discount)
2. Net Method – The accounts payable and purchases account are recorded at the net amount of the invoice (after deducting
any offered cash discount). Any discount foregone shall be recorded as “Purchase Discount Lost” and classified among
other expense items.
Types of Discounts
1. Trade discounts – are offered to encourage transactions in high volume and/or to reward customer patronage
2. Cash discounts – are offered to encourage prompt collection/payment of accounts
COST OF INVENTORIES
1. Cost of purchase – comprises the purchase price, import duties and irrecoverable taxes, freight, handling and other costs
directly attributable to the acquisition of finished goods, materials and services.
a. Trade discounts, rebates and other similar items are deducted in determining the cost of purchase
b. Foreign exchange differences on inventory transactions denominated in foreign currency are excluded from
the cost of purchase
c. Financing costs (interest) related to the acquisition of inventories on a deferred settlement basis is excluded
from the cost of purchase and is recognized as interest expense over the period of financing
2. Cost of conversion – includes costs that are necessary in the conversion of materials into finished products such as direct
labor and systematic allocation of fixed and variable production overhead.
a. Direct labor pertains to the cost of labor of workers and employees who have a direct involvement in the
production of goods and/or services (e.g salary of workers in the factory)
b. Fixed production overhead refers to the indirect cost of production that remains relatively constant regardless of
the volume of production (e.g. rent of factory building). It is allocated based on the normal capacity of the
production facilities.
c. Variable production overhead refers to the indirect cost of production that varies directly with the volume of
production (e.g. indirect labor and indirect materials).It is allocated based on the actual use of the production
facilities.
3. Other costs incurred in bringing the inventories to their present location and condition.
Cost of Inventories of a Service Provider - consists of the labor and other costs of personnel directly engaged in the provision
of the service, including supervisory personnel and attributable overhead.
Handout: Inventories_CostFlow_LCNRV FAR0_1st Sem_AY2019-20
PAS 2, paragraph 9, provides that inventories shall be measured at the lower of cost and net realizable value (LCNRV).
Net realizable value or NRV is the estimated selling price in the ordinary course of business less the estimated cost of
completion and the estimated cost of disposal of inventories.
PAS 2, paragraph 25, further provides that the cost of inventories shall be determined by using either: [1] First in, First out
(FIFO) or [2] Weighted average
COST FORMULA MATRIX

Cost Formula Cost of goods sold Ending Inventory
1. First in, First out* Expressed in terms of earlier or old prices Expressed in terms of current or recent prices
2. Last in, First out** Expressed in terms of current or recent prices Expressed in terms of earlier or old prices
3. Weighted average* Expressed in terms of the average price Expressed in terms of the average price during the
during the period period
4. Specific Expressed in terms of specific costs Expressed in terms of specific costs attributed to
identification*** attributed to identified items of inventory identified items of inventory
5. Standard costs*** Expressed in terms of predetermined costs on Expressed in terms of predetermined costs on the
the basis of normal production levels basis of normal production levels
6. Relative sales price
method***
* GAAP ** Not generally accepted *** Accepted as an alternative costing method
Computational Guidelines
1. FIFO, whether applied on a periodic or perpetual method of accounting, yields the same amount of Cost of Sales (COS)
and Ending Inventory (EI).
2. LIFO periodic and LIFO perpetual result in different amounts of COS and EI.
3. A common average unit cost is applied to both sold and unsold units under the Weighted Average – Periodic costing
method in determining the amount of COS and EI. The average unit cost is computed by dividing the Total Cost of
Goods Available for Sale (in Php) during the period by the Total Units Available for Sale.
4. A new weighted average unit cost is computed after every purchase under the Weighted Average – Perpetual costing
method.
5. In a period of rising prices, FIFO yields the highest EI, lowest COS and highest Net Income (NI)
6. In a period of declining prices, FIFO yields the lowest EI, highest COS and lowest NI
7. In a period of rising prices, LIFO yields the lowest EI, highest COS and lowest NI
8. In a period of declining prices, LIFO yields the highest EI, lowest COS and highest Net Income (NI)
MEASUREMENT OF INVENTORIES – inventories shall be measured at LCNRV (PAS 2, par 9)

Accounting for Inventory Writedown
1. Inventories are usually written down to NRV on an item by item or individual basis.
2. A writedown is required if the NRV is lower than the cost of the inventory. Accordingly, the inventory is measured at
NRV and the decrease in value is appropriately recognized.
3. No writedown is recorded if the NRV of the inventory is greater than its cost.
Methods of Accounting for Inventory Writedown

1. Direct Method or Cost of Sales Method
a. The Inventory is measured at the LCNRV
b. Any loss on writedown or gain on subsequent reversal of the same is buried in the Cost of Sales; no separate
accounting for the loss is made
2. Allowance Method or Loss Method

a. The Inventory is measured at COST
b. Any loss on writedown or gain on subsequent reversal of the same is accounted for separately.
c. A valuation account, “Allowance for Inventory Writedown” is maintained
d. “Loss on Inventory Writedown” increases Cost of Sales while “Gain on Reversal of Inventory Writedown” decreases
Cost of Sales
e. The amount of gain on reversal of writedown cannot exceed the cumulative amount of losses on inventory writedown
previously recognized.
Accounting for Purchase Commitments

1. Purchase commitments are obligations of the entity to acquire certain goods sometime in the future at a fixed price and
fixed quantity.
2. No formal accounting entry is made upon signing of the purchase commitment. However, a note disclosure is required in
the notes to FS.
3. At year-end (FS preparation date), a Loss on Purchase Commitment and an Estimated Liability for Purchase Commitment
are recognized if the current price is lower than the committed price. No entry is recognized if it is otherwise.
4. At the time of actual delivery:
a. The “Purchases” account is debited at the lower of the committed price and the current price
b. The “Accounts Payable” account is credited always at the committed price
c. Additional “Loss on Purchase Commitment” is to be recognized if the current price at the time of delivery is lower
than the current price at year-end.
d. “Gain on Purchase Commitment” shall be recognized if the current price at the time of delivery is higher than the
current price at year-end. However, the amount of gain to be recognized should not exceed the losses previously
recognized.
Handout: Accounts Receivable FAR0_1st Sem_AY2019-20
Receivables are financial assets that represent a contractual right to receive cash or another financial asset from another entity.
Related Terms and Definitions

1. Financial Instrument – any contract that gives rise to a financial asset of one entity and a financial liability or an
equity instrument of another entity.
2. Financial Asset – any asset that is (a) cash; (b) a contractual right to receive cash or another financial asset from
another entity; (c) a contractual right to exchange financial instrument with another entity under conditions that are
potentially favorable; or (d) an equity instrument of another entity.
3. Financial Liability – a contractual obligation to (a) deliver cash or another financial asset to another entity; or (b) to
exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to
the entity
4. Equity Security – represents ownership interest in another entity in the form of ordinary shares, preference shares and
rights or options to acquire ownership shares.
Classification of Receivables
1. Trade receivables – pertain to claims arising from sale of merchandise or services in the ordinary course of business.
Trade receivables that are expected to be realized in cash (collected) within the normal operating cycle or one year,
whichever is longer, are classified as current assets.
2. Nontrade receivables – refer to claims arising from sources other than the sale of merchandise services in the ordinary
course of business. Nontrade receivables that are expected to be realized in cash (collected) within one year, the
length of the operating cycle notwithstanding, are classified as current assets.
Financial Statement Presentation of Receivables

Trade receivables that are expected to be realized in cash (collected) within the normal operating cycle or one year,
whichever is longer, and nontrade receivables that are expected to be realized in cash (collected) within one year, the length of
the operating cycle notwithstanding, shall be presented on the face of the statement of financial position as a single line item,
collectively referred to as “trade and other receivables”.
Classification Rules Related to Nontrade Receivables

Type of Nontrade Receivables Classification Rules
Advances to shareholders, officers Classified as current assets if collectible within 1 year from the end of the reporting
and/or employees period; noncurrent if otherwise.
Advances to affiliates Are usually realizable into cash beyond 1 year, hence are classified as long-term
investments; short-term investments if otherwise
Advances to suppliers for the Classified as current assets
purchase of merchandise
Subscriptions receivable Classified as current assets if collectible within 1 year; contra – equity if otherwise
Creditors’ accounts (accounts Normally classified as current assets. Alternatively, the same can be offset against
payable) with debit balances other creditors’ accounts with credit balances if the amount is immaterial.
Special deposits on contract bids Normally classified as noncurrent assets; current assets if collectible within 1 year
from the end of the reporting period
Accrued income Normally classified as current assets since they are usually collectible currently;
noncurrent assets if otherwise
Claims receivable Normally classified as current assets since they are usually collectible currently;
noncurrent assets if otherwise
Rules on customers’ accounts with credit balances

1. Customers’ credit balances resulting from overpayments, returns and allowances, and advance payments from
customers are classified as current liabilities and are not offset against customers’ accounts with debit balances.
2. Alternatively, the same can be offset against other customers’ accounts with debit balances if the amount is
immaterial.
Measurement of Accounts Receivable:

a. Initial – face amount or original invoice amount (fair value)
b. Subsequent – net realizable value (amortized cost)
Net realizable value

The net realizable value of accounts receivable is the outstanding face amount of the receivables reduced by (1) allowance for
freight charge; (2) allowance for sales return; (3) allowance for sales discount; and (4) allowance for doubtful accounts
Accounting for Freight Charge

Owner of the goods
Party that initially
in transit/ Party
Freight Terms pays the cost of Pro-forma entry (seller’s point of view)
liable to shoulder
freight
the cost of freight
FOB Shipping Point, Accounts receivable xx
Buyer Buyer
Freight Collect Sales xx
FOB Destination, Accounts receivable xx
Freight Prepaid Freight out xx
Seller Seller
Sales xx
Cash xx
Handout: Accounts Receivable FAR0_1st Sem_AY2019-20
Owner of the goods

Party that initially
in transit/ Party
Freight Terms pays the cost of Pro-forma entry (seller’s point of view)
liable to shoulder
freight
the cost of freight
FOB Shipping Point, Accounts receivable xx
Freight Prepaid Buyer Seller Sales xx
Cash xx
FOB Destination, Freight Accounts receivable xx
Collect Freight out xx
Seller Buyer
Sales xx
Allowance for freight charge xx
Accounting for Allowances for Sales Return and Sales Discount

Type of Allowance Adjusting Entry at year-end Reversing Entry (optional)
1. Allowance for sales return Sales return xx Allowance for sales return xx
Allowance for sales return xx Sales return xx
2. Allowance for sales discount Sales discount xx Allowance for sales discount xx
Allowance for sales discount xx Sales discount xx
Methods of Recording Credit Sales

1. Gross Method – The accounts receivable and sales are recorded at the gross amount of the invoice (before deducting any
offered cash discount)
2. Net Method – The accounts receivable and sales are recorded at the net amount of the invoice (after deducting any offered
cash discount)
Types of Discounts
1. Trade discount – refer to discounts that are offered to encourage transactions in high volume (sales or purchases in bulk)
and/or to reward customer patronage
2. Cash discount – pertain to discounts that are offered to encourage prompt collection/payment of accounts
Accounting for Doubtful Accounts:

Particulars/ Transactions Allowance Method Direct Write – Off Method
1. Timing on the When accounts become doubtful of When accounts are proven worthless
recording of expense collection
2. Accounts become Doubtful accounts expense xx
No entry
doubtful of collection. Allowance for doubtful accounts xx
3. Accounts are Allowance for doubtful accounts xx Bad debts expense xx
eventually proven Accounts receivable xx Accounts receivable xx
worthless.
4. Recovery of accounts If recovery is made during the same accounting
Re-establishment entry:
previously written off: period where write-off was recognized:
Accounts receivable xx
Reversal entry:
Allowance for doubtful accounts xx
Collection entry: Accounts receivable xx
Bad debts expense xx
Cash xx Collection entry:
Cash xx
If recovery is made in subsequent accounting
period:
Cash xx
Miscellaneous income xx
Classification of Doubtful Accounts in the Income Statement

1. Distribution cost (selling expense) – if the credit and collection function is under the charge of the sales department
2. Administrative expense – if the credit and collection function is under the charge of a department other than the sales
department
Methods of Estimating Doubtful Accounts

Method Advantage Disadvantage
1. Percent of sales (income There is proper matching of cost The accounts may not be shown at estimated
statement approach) against revenue. realizable value because the allowance may
prove excessive or inadequate.
2. Percent of accounts receivable Presents fairly the accounts receivable There is no proper matching of cost against
(statement of financial position in the statement of financial position at revenue.
approach) net realizable value.
3. Aging of accounts receivable Presents fairly the accounts receivable There is no proper matching of cost against
(statement of financial position in the statement of financial position at revenue. Further, it is relatively more time
approach) net realizable value. consuming than Methods 1 & 2.
HANDOUT – FAR 0 (CASH AND CASH EQUIVALENTS)
PAS 1, paragraph 66 - “an entity shall classify an asset as current when the asset is cash or a cash equivalent unless it is
restricted from being exchanged or used to settle a liability for at least twelve (12) months after the end of the reporting period”
CASH
1. Cash on hand
2. Cash in bank
3. Cash fund set aside for current purposes
CASH EQUIVALENTS
PAS 7, paragraph 6 – “cash equivalents are short-term highly liquid investments that are readily convertible into cash and so
near their maturity that they represent insignificant risk of changes in value because of changes in interest rates”
Measurement rules for cash and cash equivalents:

1. Cash is measured at face value.
2. Cash in foreign currency is measured at the current exchange rate.
3. Cash of an entity held by a bank or financial institution in the brink of bankruptcy or financial difficulty is written down to
estimated realizable value if the same is lower than the face value.
Financial statement presentation:

1. “Cash and cash equivalents” line item is presented as the first item among the current assets, details comprising the same
should be disclosed in the notes to financial statements.
2. Deposits in foreign countries that are not subject to foreign exchange restriction are included as part of cash.
3. Deposits in foreign (bank) countries that are subject to foreign exchange restriction, if material, are classified separately
among noncurrent assets with the restriction clearly indicated.
Classification of excess cash invested in time deposits, money market instruments and treasury bills:
1. Term is three (3) months or less – cash and cash equivalents
2. Term is more than three (3) months but not over one (1) year – short term financial assets or temporary investments and
presented among current assets
3. Term is more than one (1) year – noncurrent or long term investment
Classification of cash fund set aside for a certain purpose:

1. Held for current operations or for the payment of a current obligation – cash and cash equivalents among current assets
2. Held for noncurrent purpose or for the payment of a noncurrent obligation – long term investment among noncurrent assets
3. Cash held for the payment of a liability should parallel the classification of the liability for which the related fund is
established.
Special cases and issues related to cash and cash equivalents:

1. Bank overdraft – a credit balance in the cash in bank account of the depositor
a. An overdraft should not be offset against other cash in bank accounts of the entity and shall be presented
separately among current liabilities
b. However, offsetting is allowed if (1) several cash in banks are maintained in the same bank; or (2) the amount of
overdraft is immaterial, even if the accounts are held in different banks
2. Compensating balance – minimum checking or demand deposit account balance that must be maintained in connection
with a borrowing arrangement with a bank.
a. Compensating balance is not legally restricted as to withdrawal – presented as part of cash
b. Compensating balance is legally restricted as to withdrawal:
i. Related loan or borrowing is short term – presented separately among current assets as “cash held as
compensating balance
ii. Related loan or borrowing is long term – presented as noncurrent investment
3. Checks written/drawn and recorded by the entity but are undelivered or unreleased as at end of the reporting period should
be added back to cash.
4. Checks written/drawn and recorded by the entity but are post-dated as at end of the reporting period should be added back
to cash.
5. Checks written/drawn and recorded by the entity but are long outstanding or stale should be treated as follows:
a. Amount involved is immaterial – Amount is reverted back to cash with a credit to miscellaneous income
b. Amount involved is material – Amount is reverted back to cash with a credit to accounts payable
6. Window dressing 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.
7. Lapping involves a series of postponements on the recording of the entries for collections from customers.
8. Kiting occurs when a check is drawn against a first bank and depositing the same check in a second bank to cover the
shortage in the latter bank. No entry is made for both drawing and deposit of the check.
9. Cash shortage occurs when the cash balance per book is higher than the cash actually counted. An overage occurs if it’s
otherwise. A suspense account, “cash short or over” is used upon discovery of the discrepancy pending investigation.
10. A petty cash fund is money set aside to pay small expenses which cannot be paid conveniently and practically by means of
check. The fund may be accounted for under any of the following methods:
a. Imprest fund system
b. Fluctuating fund system
PROBLEM NO. 1
The following balances and information were provided by La Cash Company as at December 31, 2017:
Petty cash fund 15,000 Sinking fund cash 1,500,000

Cash on hand 105,000 Investment in preference shares 500,000
BDO current account No. 14344 (100,000) BPI savings deposit 2,000,000
BDO current account No. 52534 420,000 MBTC savings account 200,000
Additional information:
1. The petty cash fund was replenished on December 31, 2017. Prior to the replenishment, the petty cash fund was composed
of the following items: coins and currencies – Php 2,000; employee check amounting to Php 3,000 dated December 31,
2017; and unreplenished vouchers – Php 10,000.
2. Cash on hand includes the following: postal money order – Php 10,000 and a customer check for Php 15,000 dated
January 06, 2018.
3. Included in the BDO current account No. 14344 are the following items: (a) a Php 40,000 check drawn for a supplier,
unrecorded as at year end, dated December 30, 2017, delivered to the payee on January 06, 2018; (b) a 30,000 check
drawn for a supplier, dated January 05, 2018, recorded and delivered on December 30, 2017; and (c) outstanding checks
amounting to Php 50,000, of which Php 15,000 has already been considered stale.
4. The BDO current account No. 52534 balance presented above was taken from the Company’s checkbook. The following
were presented in relation to the aforesaid account: (a) NSF check from a customer for Php 10,000 which was returned by
the bank December 26, 2017 redeposited by the customer on December 30, 2017 and cleared three days after date of
redeposit; (b) a check issued to a supplier amounting to Php 20,000, dated and delivered December 01, 2017, outstanding
as at year end; and (c) a check correctly drawn in the amount of Php 25,000, which already cleared the bank during the
year, was incorrectly recorded by the depositor in the amount of Php 52,000.
5. The BPI savings deposit pertains to the cash set aside by the management for the New Year’s bonus payment to its
employees which will be paid on January 03, 2018.
6. The sinking fund cash is earmarked for the payment of a 3-year liability which was availed by the company on March 31,
2015.
7. The investment in preference shares were acquired on December 1, 2017. The shares are redeemable at the option of the
issuing corporation within 3 months after date of acquisition.
8. The MBTC current account represents a 10% compensating balance of the face amount of a long – term loan availed by La
Cash from MBTC during 2016. The balance is not legally restricted as to withdrawal by La Cash.
Determine (prepare) the following items as at December 31, 2017:

1. Petty cash fund
2. Cash on hand
3. Cash in bank - BDO Accounts
4. Total cash
5. Total cash equivalents
6. Total Cash and cash equivalents
7. Adjusting journal entries
PROBLEM NO. 2
The cash account of Mappie Rah Company on December 31, 2017 includes the following:
Petty cash fund (imprest balance) 20,000

Bank of the Philippine Archipelago – Current Account 800,000
Near Western Bank – Current Account (50,000)
Tsina Bank savings account 300,000
Axis Bank time deposit, 90 days 500,000
Total 1,750,000
***Cash on hand includes:

 Traveler’s check 10,000
 Customer check for 30,000 dated January 10, 2018 received on December 22, 2017.
 Postal money order amounting to 5,000.
***The petty cash fund consists of the following items:

 Currency and coins 5,000
 Employees’ IOUs 1,500
 Currency in envelope marked “collections for Christmas party” 3,000
 Unreplenished vouchers for miscellaneous expenses 10,000
Total 19,500
 Efforts were made to disclose the reason for the cash shortage but the same was not established.
***Included among the checks drawn by Mappie Rah against its Bank of Philippine Archipelago current account and recorded
in December 2017 are:
 Check written and dated December 22, 2017 and delivered to payee on January 03, 2018, 30,000.
 Check written on December 26, 2017 and dated January 31, 2018 delivered to payee on December 26, 2017,
70,000.
 Checks written for 90,000 and dated December 24, 2017, delivered to payees on December 28, 2017. The checks
were not yet presented for encashment or payment in the bank as at December 31, 2017. However, 50,000 of the
total 90,000 checks were already certified by the bank.
 Check written on December 20, 2017 and dated on the same date for the correct amount of P6,000 was
erroneously recorded by the bank for P60,000. The check was issued to the supplier on December 22, 2017 and
cleared the bank on the same date.
***The credit balance in Near Western current account represents checks drawn and recorded on December 30, 2017
amounting to P60,000. The checks were delivered to the payees on January 15, 2018. The current account had a debit balance
of P10,000 immediately before the recording of the checks.
***The Tsina Bank savings account represents a sinking fund that has been set aside by the Board of Directors for the payment
of a liability which is due to be settled on May 1, 2019.
Determine the following as at December 31, 2017:

8. Cash on hand
9. Petty cash fund
10. The Bank of Philippine Archipelago current account
11. Near Western Bank – Current Account
12. Adjusted cash and cash equivalents
PROBLEM NO. 3
As at December 31, 2017, the company’s petty cash fund with an imprest balance of 10,000 showed the following breakdown
in the fund: Coins and currencies - 6,000; Charges for Supplies -2,000; Transportation - 1,250; and Miscellaneous- 750.
The fund was not replenished as at year end of 2017. On January 31, 2018, the fund was replenished. Immediately before the
replenishment, the fund is comprised of the following items: Coins and currencies - 1,000; Charges for Supplies - 6,000;
Transportation -1,800; and Miscellaneous - 1,000
The company’s policy is to treat any cash overage/shortage as miscellaneous income or loss on shortage if the amount is P500
and below.
13. How much total expense should the company recognize for the month of January 2018 in relation to the petty cash fund?
[a] 8,800 [b] 4,800 [c] 9,000 [d] 5,000
14. How much is the total debit to petty cash fund on the date of replenishment? [a] 9,000 [b] 8,800 [c] 5,000 [d] 0
15. Which of the following statements is true concerning the petty cash transactions in problem 30? [a] The company will
report the petty cash fund at its imprest balance of 10,000 in its statement of financial position as at December 31, 2017.
[b] The adjustment as at year-end on petty cash should include an entry crediting cash in bank for 4,000. [c] The reversing
entries as at the start of 2018 should include an entry debiting petty cash fund for 6,000. [d] none of the foregoing
statements
PROBLEM NO. 4
Angla-Cash Co.’s checkbook balance on December 31, 2017 was 5,000,000. In addition, Angla-Cash held the following in its
safe on December 31:
 Check payable to Angla-Cash, dated January 5, 2018, not included in the December 31
checkbook balance 500,000
 Check payable to Angla-Cash, deposited December, and included in the December
31 checkbook balance, but returned by bank on December 27, stamped
NSF. The check was redeposited December 28 and cleared on December 30 700,000
 Check payable to a vendor, dated December 31, unrecorded and unmailed
as at year end 300,000
16. The correct amount to be shown as cash in the statement of financial position on December 31, 2017 should be (a)
5,000,000 (b) 4,500,000 (c) 5,500,000 (d) 5,300,000
PROBLEM NO. 5
The following petty cash transactions transpired during the months of December 2017 and January 2018 for PITIK-ASH Corp.
DEC 2017
15 Established a petty cash fund in the amount of Php 20,000.
16-22 Charges for the week: Supplies – Php 1,500; Transportation – Php 2,000; Misc. – Php 1,000.
23-30 Charges to date: Supplies – Php 4,000; Transportation – Php 5,000; Employee IOUs – Php 5,000; Misc. – Php 2,000.
31 No further charge was made against the fund during the day. As at the end of the year, the fund was found to be
comprised of the following: Coins and currencies – Php 4,000; unpaid vouchers for charges amounting to Php 16,000.
The fund was not replenished as at year end.
JAN 2018
09 The fund was replenished, during which time, the fund was found to contain the following:
Coins and currencies – Php 1,350
Charges to date: Supplies – Php 7,000; Transportation – Php 8,000; Misc. – Php 3,500.
It is the Company’s policy to treat cash shortage amounting to Php 300 and below as loss on cash shortage.
The fund balance was also increased to Php 25,000.

FINANCIAL ACCOUNTING AND REPORTING 0
Bank Reconciliation – is a statement which brings into agreement the cash balance per book (depositor’s record) and cash
balance per bank as reflected in the bank statement.
Reconciling Items
1. Book Reconciling Items
a. Timing Difference
i. Credit memos – items not representing deposits credited by the bank to the account of the depositor but are not
yet recorded by the depositor as cash receipts as at cut-off date.
ii. Debit memos - - items not representing checks paid by the bank which are charged or debited by the bank to
the account of the depositor but are not yet recorded by the latter as cash disbursements as at cut-off date.
b. Book errors (errors committed, in good faith, by the depositor)
2. Bank Reconciling Items

a. Timing Difference
i. Deposits in transit – collections already recorded by the depositor as cash receipts but are not yet reflected on
the bank statement.
ii. Outstanding checks – checks already recorded by the depositor as cash disbursements but are not yet reflected
on the bank statement.
b. Bank errors (errors committed, in good faith, by the bank)
Forms of Bank Reconciliation:

Adjusted Balance Method Book to Bank Method Bank to Book Method
Book balance, unadjusted xx Bank balance, unadjusted xx Book balance, unadjusted xx Bank balance, unadjusted xx
Add: Credit memos (CM) xx Add: Deposits in transit (DIT) xx Add: CM and OC xx Add: DIT and DM xx
Total xx Total xx Total xx Total xx
Less: Debit memos (DM) xx Less: Outstanding checks (OC) xx Less: DM and DIT xx Less: OC and CM xx
Book balance, adjusted xx Bank balance, adjusted xx Bank balance, unadjusted xx Book balance, unadjusted xx
*Errors should be corrected by the same party which committed the same. The adjustment (added or deducted)shall depend on the nature
of the error and the form of bank reconciliation adopted by the Company.
Two – Date Bank Reconciliation:

This reconciliation attempts to reconcile the beginning and ending balances of the Company’s cash in bank account.
Guide computations for the following balances:

Ending Book and Bank Balances Deposits in transit, end Outstanding checks, end
Book balance, beginning xx Bank balance, beginning xx DIT, beginning xx OC, beginning xx
Add: Book debits (R) xx Add: Bank credits (R) xx Add: Current deposits per book xx Add: Checks issued per book xx
Total xx Total xx Total xx Total xx
Less: Book credits (D) xx Less: Bank debits (D) xx Less: Current deposits per bank xx Less: Checks paid per bank xx
Book balance, ending xx Bank balance, adjusted xx DIT, ending xx OC, ending xx
Proof of Cash
A proof of cash is an expanded reconciliation which attempts to reconcile the beginning cash in bank balance, current period receipts,
current period disbursements and cash in bank ending balance.
Guide computations for the following balances:

Adjusted Balance Method (Book) Book to Bank Method (Book)
Particulars BB R D EB Particulars BB R D EB
Book balance, unadjusted Xx xx xx xx Book balance, unadjusted xx xx xx xx
Credit memos: Credit memos:
Last month Xx (xx) Last month xx (xx)
Current month xx xx Current month xx xx
Debit memos: Debit memos:
Last month (xx) (xx) Last month (xx) (xx)
Current month xx (xx) Current month xx (xx)
Book balance, adjusted Xx xx xx xx Deposits in transit:
Last month (xx) xx
Adjusted Balance Method (Book) Current month (xx) xx
Particulars BB R D EB Outstanding checks:
Bank balance, unadjusted Xx xx xx xx Last month xx xx
Deposits in transit: Current month (xx) xx
Last month Xx (xx) Bank balance, unadjusted xx xx xx xx
Current month xx xx
Outstanding checks: Bank to Book Method (Book)
Last month (xx) (xx) *Bank reconciling items – same treatment as under adjusted balance method
Current month xx (xx) *Book reconciling items – reverse treatment
Bank balance, adjusted Xx xx xx xx
*Errors should be corrected by the same party which committed the same. The adjustment (added or deducted) shall depend on the nature
of the error and the form of bank reconciliation adopted by the Company.
Important notes on the preparation of Proof of Cash:

1. Book debits and bank credits pertain to cash receipts while book credits and bank debits refer to cash disbursements.
2. Proof of cash intends to cancel the effects of timing differences in the recording of cash in bank transactions.
3. Receipts and disbursements related to cash in bank must be recorded in the month where the actual collection or payment of cash has
taken place.
Handout – Bank Reconciliation & Proof of Cash

Answers to Problems 1-4: Handout on Cash and Cash Equivalents
Problem 1
1 Petty cash fund - adjusted 15,000
*The PCF was replenished at year-end, hence, the imprest balance
is also the adjusted balance.
2 Cash on hand - unadjusted 105,000

Cash on hand - adjusted 90,000
AJE:
Accounts receivable 15,000
Cash on hand 15,000
3 BDO - CA 14344 - unadjusted (100,000)

Post-dated check issued to a supplier 30,000
Long-outstanding checks issued to suppliers (stale) 15,000
BDO - CA 14344 - adjusted (55,000)
AJE:
Cash in bank - BDO CA 14344 30,000
Accounts payable 30,000

BDO - CA 52534 - unadjusted 420,000

NSF check received from a customer (10,000)
Overstatement in recording a check payment 27,000
BDO - CA 52534 - adjusted 437,000
AJE:

BDO - CA 14344 - adjusted (55,000)

BDO - CA 52534 - adjusted 437,000
BOD Accounts - adjusted 382,000
4 Petty cash fund - adjusted 15,000

BDO - CA 14344 - adjusted (55,000)
BDO - CA 52534 - adjusted 437,000
BPI savings deposit (current use - bonus payment) 2,000,000
Sinking fund cash (parallel treatment) 1,500,000
MBTC savings account (unrestricted compensating balance) 200,000
Total cash 4,187,000
5 Total cash equivalents -

*The redemption of the preference shares is not mandatory.
6 Total cash 4,187,000

Total cash equivalents -
Total cash and cash equivalents 4,187,000
Problem 2
8 Cash on hand - unadjusted 180,000
AJE:
Cash on hand 30,000
9 Petty cash fund - adjusted (currency and coins) 5,000
Petty cash fund - imprest balance 20,000

Employee IOUs (1,500)
Unreplenished vouchers (10,000)
Cash shortage (3,500)
Petty cash fund - adjusted 5,000
AJE:
Receivable from employees 1,500
Miscellaneous expenses 10,000
Cash short/over 3,500
10 BPA - CA, unadjusted 800,000

Undelivered check to supplier 30,000
Post-dated check issued to supplier 70,000
BPA - CA, adjusted 900,000
11 BPA - NWB, unadjusted (50,000)

Undelivered checks to supplier 60,000
BPA - NWB, adjusted 10,000
12 Cash on hand - adjusted 150,000

Petty cash fund - adjusted (currency and coins) 5,000
BPA - CA, adjusted 900,000
BPA - NWB, adjusted 10,000
Axis Bank - time deposit 500,000
Total cash and cash equivalents 1,565,000
Problem 3
13 Charges for supplies (6,000 - 2,000) 4,000
Charges for transportation (1,800 - 1,250) 550
Charges for misc exp (1,000 - 750) 250
Loss on cash shortage (10,000 - 9,800) 200
Total expenses for January 2018 5,000
Alternative computations:
PCF balance, December 31, 2017 6,000
PCF balance, January 31, 2018, before replenishment (1,000)
Total expenses/charges for January 2018 5,000
14 Total debit to PCF on the date of replenishment -

*The entry at the time of replenishment under the imprest fund system is as follows:
Miscellaneous expense 1,000
Loss on cash shortage 200
Cash in bank 9,000
15 Correct answer is letter choice "D"

A The PCF should be reported at P 6,000 as at 12/31/2017.
B The adjustment at the end of 2017 should include a credit to PCF for P 4,000.
C The reversing entry should include a debit to PCF for P 4,000.
Problem 4
16 Cash in bank - adjusted 5,000,000
* The post-dated check from customer was properly not included.
* The NSF check from customer was returned, redeposited and cleared during the same year, hence,
it is properly included in the cash in bank balance.
* The undelivered check to supplier is properly not included in the cash in bank balance.
Answer Key and Solutions: Page 1 of 2
Handout on Cash and Cash Equivalents - Problem No. 5
Date Particulars Imprest Fund System Fluctuating Fund System

Dec 15, 2017 Establishment of the fund Petty cash fund 20,000 Petty cash fund 20,000
Cash in bank 20,000 Cash in bank 20,000
Dec 16-22, 2017 Charges against the fund No entry Supplies expense 1,500
Dec 23-30, 2017 Charges against the fund No entry * Supplies expense 2,500
*Supplies expense (P4,000 - P1,500) ** Transportation expense 3,000
**Transportation expense (P5,000 - P2,000) *** Miscellaneous expense 1,000
***Miscellaneous expense (P2,000 - P1,000) Receivable from employees 5,000
Dec 31, 2017 Adjusting entry Supplies expense 4,000 No entry

Answer Key and Solutions: Page 2 of 2
Handout on Cash and Cash Equivalents - Problem No. 5
Date Particulars Imprest Fund System Fluctuating Fund System

Jan 1, 2018 Reversing entry Petty cash fund 16,000 No entry
Jan 2-8, 2018 Charges against the fund No entry * Supplies expense 3,000
*Supplies expense (P7,000 - P4,000) ** Transportation expense 3,000
**Transportation expense (P8,000 - P5,000) *** Miscellaneous expense 1,500
***Miscellaneous expense (P3,500 - P2,000) Receivable from employees 5,000
Jan 09, 2019 Replenishment and recognition Supplies expense 7,000 Loss on cash shortage 150
of loss on cash shortage Transportation expense 8,000 Petty cash fund 150
Loss on cash shortage 150 Petty cash fund 18,650
OR Loss on cash shortage 150

Cash in bank 18,650
Increase in the fund Petty cash fund 5,000 Petty cash fund 5,000
ANALYSIS:
PCF balance, per record - Dec 31, 2017 (P20,000 - P16,000) Php 4,000 PCF balance, per count - Jan 09, 2019 Php 1,350
Collection of "Receivable from employees" account 5,000 Charges for: Supplies 7,000
Charges against the fund from Jan 02 - 18, 2018 (7,500) Transporation 8,000
PCF balance, per record - Jan 09, 2019 1,500 Miscellaneous 3,500
PCF balance, per count - Jan 09, 2019 1,350 Total cash and unreplenished vouchers 19,850
Loss on cash shortage Php 150 Original amount established for PCF 20,000
Loss on cash shortage Php 150
CASH AND CASH EQUIVALENTS
PROBLEM NO. 1
On December 31, 2020, NO FERA Co. provided the following data:
Cash in bank 4,000,000.00

Time deposit – 30 days 3,000,000.00
Money market placement due on June 30, 2021 2,000,000.00
Saving deposit in a closed bank 100,000.00
Sinking fund for bond payable due on June 30, 2022 1,500,000.00
Petty cash fund 20,000.00
A. The cash in bank included customer check of P100,000 outstanding for 18-months.
B. Check of P200,000 in payment of accounts payable was dated and recorded on December 31, 2020 but mailed to creditors
only on January 15, 2021.
C. Check of P150,000 dated January 31, 2021 in payment of accounts payable was recorded and mailed on December 31,
2020.
D. The reporting period of the entity is the calendar year. The cash receipts journal was held open until January 15, 2021
during which time an amount of P500,000 was collected and recorded on December 31, 2020.
REQUIRED:
1. Prepare the adjusting entries related to the cash items on December 31, 2020.
2. Compute the total amount of cash and cash equivalents that should be reported on December 31, 2020.
3. Explain the presentation of the items excluded from cash and cash equivalents.
ANSWERS AND EXPLANATIONS (Problem No. 1):

1A Accounts receivable 100,000.00
Cash in bank 100,000.00
Explanation: When checks received from customers are not immediately deposited and have been outstanding for a
long period of time (hence, considered already as STALE), the same lose their character of being readily acceptable by
the bank for immediate deposit and credit, hence, are no longer considered cash but must be reverted back to Accounts
Receivable account (since the checks came from the customers).
1B Cash in bank 200,000.00

Accounts payable 200,000.00
Explanation: Check payments are considered as validly paid if they satisfy the following: (1) DATED - the check date is
either the date of issuance or an earlier date; (2) DELIVERED - the check must have been delivered to the payee as of
the cut-off date; and (3) IN GOOD FORM - the check does not contain any mark, must bear all required signature, must
not be dilapidated etc.. Since the check under Item B is undelivered as of cut-off date, no valid payment is made, hence,
the amount must be reverted back to cash in bank and the liability to the payee must be re-established.
1C Cash in bank 150,000.00

Explanation: Since the check under Item C is post-dated, no valid payment is made, hence, the amount must be
reverted back to cash in bank and the liability to the payee must be re-established. (See explanation under Item No. 1B)
1D Accounts receivable 500,000.00

Explanation: Item D is an example of window dressing where the books of the Company are deliberately held open until
the first few days of the immediately succeeding period. Transactions made in the succeeding period are recorded in the
current year,as if the same transpired during the current year to provide a favorable picture of the Company's financial
performance and/or position.
2 Cash in bank [ 4,000,000 - 100,000 + 200,000 + 150,000 - 500,000 ] 3,750,000.00

Time deposit - 30 days 3,000,000.00
Total cash and cash equivalents 6,770,000.00
Explanations:
a) The time deposit is included since the term of the deposit is only 30 days ("3 months or less" rule).
b) The money - market placement was not acquired within 3 months before date of maturity, hence, it does not qualify as
a cash equivalent.
c) The savings deposit is excluded from cash since it pertains to a deposit that is held in a closed bank, hence, not
available for current use.
d) The savings deposit is excluded from cash since the liability to which it pertains is classified as a noncurrent liability as
at December 31, 2020. Accordingly, applying the rule on "parallel treatment", the sinking fund will follow the
classification of the related liability.
e) The PCF is included since it is available for current use.
3 The money - market placement is reported as a short-term investment (holding period over 3 months but not over 1 year).
The saving deposit in a closed bank is reported as other noncurrent asset.
The sinking fund is classified as a noncurrent investment and is presented among noncurrent assets.
PROBLEM NO. 2
Cash on hand 500,000.00
Security bank – current account 3,000,000.00
PNB - current account 1,200,000.00
BDO – current account (overdraft) (300,000.00)
BSP – treasury bill (120 days) 1,000,000.00
BPI – time deposit 500,000.00
Bond sinking fund 1,500,000.00
A. The cash on hand included a customer post-dated check of P150,000 and postal money order of P40,000.
B. The petty cash fund included unreplenished petty cash vouchers for P10,000 and an employee check for P5,000 dated
January 31, 2021.
C. The BPI – time deposit is set aside for the acquisition of land to be made in early January 2021.
D. The bond sinking fund is set aside for the payment of bond payable due on December, 31, 2021.
REQUIRED:
1. Prepare the adjusting entries related to the cash items on December 31, 2020.
2. Compute the total amount of cash and cash equivalents that should be reported on December 31, 2020.
3. Explain the presentation of the items excluded from cash and cash equivalents.
1A Accounts receivable 150,000.00
Explanation: Checks received from customers that are post-dated lose their character of being readily acceptable by the
bank for immediate deposit and credit, hence, are not considered cash yet but must be reverted back to Accounts
Receivable account (since the checks came from the customers). The postal money order, if silent is assumed to be
dated, hence part of cash since it is readily acceptable by the bank for deposit.
1B Expenses 10,000.00
Receivable from employees 5,000.00
Explanation: The fund was not replenished at year-end. Under the imprest fund system of accounting for PCF, an
adjusting entry is required in order to reflect the actual balance of the fund at year-end and to record the charges made
against the fund. The unreplenished petty cash vouchers are assumed to pertain to various expenses while the
employee check that is post-dated (accomodation check) is debited to Receivable from employees, a nontrade
receivable account. The accomodation check is a check issued to a third-party which was endorsed and encashed out of
the petty cash fund. The accomodation check, if DATED, is part of petty cash fund.
1C No adjusting entry is necessary. The BPI - time deposit is not a cash equivalent item since it is set aside for the
purchase of land, a noncurrent asset. Regardless of the timing of disbursement, a fund set aside for the acquisition of a
noncurrent asset remains to be classified as a noncurrent fund.
1D No adjusting entry is necessary. The bond sinking fund is presented among cash items since the liabllity, for which it was
established, is classified as a current liability as at end of the year. The "parallel treatment" rule is applied for Item D -
liability is current, hence the fund is also classified as current and presented among cash items.
2 Cash on hand ( 500,000 - 150,000 ) 350,000.00

Petty cash fund ( 50,000 -10,000 - 5,000 ) 35,000.00
Security bank - current account 3,000,000.00
PNB - current account 1,200,000.00
Bond sinking fund 1,500,000.00
3 The BDO - current account (overdraft) is not offset against the other current accounts since it is maintained in another
bank. It should be presented as a current liability.
The BSP - treasury bill is not a cash equivalent item since its holding period is more than 3 months (120 days). It should
be classified as a short-term investment (holding period or maturity date of more than 3 months but not over 1 year)
The BPI - time deposit is not a cash equivalent item since it is set aside for the purchase of land, a noncurrent asset.
Regardless of the timing of disbursement, a fund set aside for the acquisition of a noncurrent asset remains to be
classified as a noncurrent fund.
PROBLEM NO. 3
Cash on hand 2,000,000.00

Cash in bank 5,000,000.00
Savings deposit 3,000,000.00
Time deposit (90 day - term) 1,500,000.00
A. The cash on hand included the following:

(1) Customer check of P100,000 returned by bank on December 26, 2020 due to insufficient fund but subsequently
redeposited and cleared by bank on January 05, 2021.
(2) Customer check for P150,000 dated January 20, 2021, received on December 23, 2020.
(3) Postal money orders received from customers, P250,000.
B. The petty cash fund is comprised of the following items as at end of the year:
Currency & coins 2,000.00
Employees’ IOUs 10,000.00
Currency in envelope marked “collections for Christmas party” 5,000.00
Check drawn by NO FERA payable to the PCF cashier 33,000.00
Total petty cash fund 50,000.00
C. A check written, dated and delivered to the payee on December 23, 2020 amounting to P200,000 in payment of accounts
payable was recorded during 2020 and was found to lack one of the required signatures.
REQUIRED:
(1) Adjusting entries related to the cash items on December 31, 2020
(2) Total cash on December 31, 2020
1A.1 Accounts receivable 100,000.00

Explanation: Checks previously received from customers and other parties which were deposited and subsequently
returned by the bank due to insufficiency of fund (NSF checks) should be reverted back to receivables since the same
are not yet considered collected because the checks are not acceptable by the bank for immediate credit. No adjusting
entry is made if NSF checks returned by the bank are subsequently redeposited and cleared the bank during the same
accounting period.

1A.3 No adjusting entry is required. The postal money order is readily acceptable by the bank for immediate deposit and
credit, hence, the item is properly reported as part of cash.
1B Receivable from employees 10,000.00

Cash short/over 5,000.00
Explanation: The check drawn before year-end payable to the petty cash custodian represents the replenishment check
for the period. However, the Employee IOUs charged to the PCF are not considered cash as at year-end but must be
reported as receivables. Further, the collections for the Christmas Party which were reflected as part of the PCF should
be excluded from the fund and a cash shortage must be recognized at year-end.
1C Cash in bank
Accounts payable
Explanation: No valid payment was made since the check lacks one of the required signatures. Accordingly, the entry
for the payment must be reversed.
2 Cash on hand ( 2,000,000 - 100,000 - 150,000 ) 1,750,000.00

Petty cash fund ( 50,000 -15,000 ) 35,000.00
Cash in bank ( 5,000,000 + 200,000 ) 5,200,000.00
Savings deposit 3,000,000.00
Total cash as at December 31, 2020 9,985,000.00
NOTE: The time deposit is a cash equivalent item (90-day term). However, since the requirement at year-end is TOTAL
CASH only, cash equivalent items are therefore not considered. Should the problem require the total cash and cash
equivalents at year-end, the answer would then be P 11,735,000 ( 9,985,000 + 1,750,000 )
PROBLEM NO. 4
NO FERA Co. reported the following accounts on December 31, 2020:

CDO current account 5,000,000.00
Tsinabank current account No. 1 4,000,000.00
Tsinabank current account No. 2 (overdraft) (100,000.00)
Waterbank savings account 250,000.00
Waterbank time deposit - 90 days 2,000,000.00
A. Cash on hand included the following items:

(1) Customer check for P30,000 returned by bank on December 26, 2020 due to insufficient fund but subsequently
redeposited and cleared by the bank on January 10, 2021.
(2) Customer check for P20,000 dated January 15, 2021, received on December 22, 2020.
B. The petty cash fund consisted of the following items:

Currency and coins 5,000.00
IOUs from employees 2,000.00
Unreplenished petty cash vouchers 12,000.00
Total 19,000.00
C. Included among the checks drawn by NO FERA against the CDO current account and recorded in December 2020 were the
following:
(1) Check written and dated December 21, 2020 and delivered to payee on January 07, 2021, P 100,000.
(2) Check written on December 27, 2020 dated January 08, 2021, delivered to payee on December 28, 2020, P75,000.
REQUIRED:
1. Prepare the adjusting entries related to cash and cash equivalents on December 31, 2020.
2. Compute the total cash and cash equivalents as at December 31, 2020.

Explanation: Checks previously received from customers and other parties which were deposited and subsequently
returned by the bank due to insufficiency of fund (NSF checks) should be reverted back to receivables since the same
are not yet considered collected because the checks are not acceptable by the bank for immediate credit. No adjusting
entry is made if NSF checks returned by the bank are subsequently redeposited and cleared the bank during the same
accounting period.

1.B Receivable from employees 2,000.00
Expenses 12,000.00
Cash short/over 1,000.00
Explanation: The Employee IOUs charged to the PCF are not considered cash as at year-end but must be reported as
receivables whie the unreplenished PC vouchers are assumed to be related to expense charges, hence, are debited to
Expenses. Further, the difference between the should be balance of the fund of P6,000 (P20,000 - P2,000 - P12,000)
and the balance of P5,000 as reported by the custodian should be initially recognized as a cash shortage at year-end.
1.C.1 Cash in bank 100,000.00

Explanation: Check payments are considered as validly paid if they satisfy the following: (1) DATED - the check date is
either the date of issuance or an earlier date; (2) DELIVERED - the check must have been delivered to the payee as of
the cut-off date; and (3) IN GOOD FORM - the check does not contain any mark, must bear all required signature, must
not be dilapidated etc.. Since the check under Item C.1 is undelivered as of cut-off date, no valid payment is made,
hence, the amount must be reverted back to cash in bank and the liability to the payee must be re-established.
1.C.2 Cash in bank 75,000.00

Explanation: Since the check under Item C.2 is post-dated, no valid payment is made, hence, the amount must be
reverted back to cash in bank and the liability to the payee must be re-established. (See explanation under Item No. 1.C1)
2 Cash on hand ( 200,000 - 30,000 - 20,000 ) 150,000.00

Petty cash fund ( 20,000 - 15,000 ) 5,000.00
CDO current account ( 5,000,000 + 100,000 + 75,000) 5,175,000.00
Tsinabank current accounts, net of overdraft (4,000,000 - 100,000 ) 3,900,000.00
Waterbank savings account 250,000.00
Waterbank time deposit - 90 days 2,000,000.00
The overdraft in Tsinabank current account No. 2 is offset against the balance of Tsinabank current account No. 1 since
the two accounts are maintained in the same bank.
The Waterbank savings account and time deposit (90 days) account are cash and cash equivalent items since they both
satisfy the qualification requirements for cash (savings account) and cash equivalents (time deposit).
PROBLEM NO. 5
NO-FERA Co. provided the following transactions related to its petty cash fund for the year-ended June 30, 2020:
May 2 - The entity established a petty cash fund amounting to P10,000.
29 - The fund is replenished. The petty cash fund included the following items prior to replenishment:
Postage 1,000.00
Supplies 3,000.00
Transportation 2,500.00
Miscellaneous expense 1,500.00
Total 10,000.00
June 30 - The fund was not replenished. The fund is composed of the following items:
Supplies 2,000.00
Postage 1,000.00
Total 10,000.00
July 15 - The fund is replenished and increased to P15,000.
REQUIRED:
1. Journal entries under the imprest fund system.
2. Journal entries under the fluctuating fund system.
IMPREST FUND SYSTEM: FLUCTUATING FUND SYSTEM:

2020 May
Establishment of the fund
2 Petty cash fund 10,000.00 Petty cash fund 10,000.00
Cash in bank 10,000.00 Cash in bank 10,000.00
Explanation:
A check is issued upon establishment of the PCF. A check is issued upon establishment of the PCF.
Charges against the fund

2-29 No entry Postage 1,000.00
Supplies 3,000.00
Explanation:
No entry is required when charges are made against the A formal entry is made to record the charges made against
PCF. However, the charges must be accompanied by a the fund and to reduce the amount of the fund equal to the
PC voucher and an update must be made in the PC Book. total amount of charges.
Replenishment of the fund

29 Postage 1,000.00 Petty cash fund 8,000.00
Supplies 3,000.00 Cash in bank 8,000.00
Explanation:
A formal entry is made to record the charges made A formal entry is made to bring back what was charged
against the fund along with a credit to the cash in bank against the fund through a debit to the Petty cash fund
account in order to bring the fund balance back to its account and a credit to Cash in bank account.
imprest balance.

2020 May 30 to June 30
No entry Supplies 2,000.00
Postage 1,000.00
Explanation:
No entry is required when charges are made against the A formal entry is made to record the charges made against
PCF. However, the charges must be accompanied by a the fund and to reduce the amount of the fund equal to the
PC voucher and an update must be made in the PC Book. total amount of charges.
2020 June
Adjustment at year-end
30 Supplies 2,000.00 No adjusting entry
Postage 1,000.00
Explanation:
An adjusting entry is prepared at year-end to record the No adjusting entry is required since the fund is updated after
charges previously made against the fund and to reflect each disbursement. However, should there be any overage or
the actual balance of the fund at year-end. shortage, the PCF should be adjusted to reflect the actual
fund balance.
2020 July
Reversing entry at the start of the new accounting period
1 Petty cash fund 4,000.00 No entry is necessary
Supplies 2,000.00
Postage 1,000.00
Explanation:
A reversing entry is made in order to restore the usual No reversing entry is necessary since no adjustment is made
recording of PCF transactions under the imprest fund at year-end under the fluctuating fund system of accounting
system of accounting. for PCF.

1-15 No entry Supplies 1,500.00
Postage 500.00
Transportation 500.00
Miscellaneous expense 500.00
Explanation:
No entry is required when charges are made against the The charges recorded pertain to the difference between the
PCF. However, the charges must be accompanied by a cumulative amounts of the disbursements and the balances
PC voucher and an update must be made in the PC Book. at year-end (e.g. Supplies = P3,500 - P2,000)
Replenishment of the fund and increase in the fund balance

15 Supplies 3,500.00 Petty cash fund 12,000.00
Postage 1,500.00 Cash in bank 12,000.00

Alternative entry:
Supplies 3,500.00
1,500.00
Explanation:
The charges were recorded based on their cumulative The increase in PCF and the replenishment of the charges
balances which will be netted against the amounts made against the fund are debited to the PCF account and
reflected in the reversing entry. Hence the supplies credited to Cash in bank account (P7,000 + P5,000).
expense for July would amount to P1,500 only (P3,500-
P2,000). The increase in PCF is debited to the PCF
account and credited to Cash in bank account together
with the replenishment amount (P7,000 + P5,000).

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TARLAC STATE UNIVERSITY – COLLEGE OF BUSINESS AND ACCOUNTANCY

FAR 0: FINANCIAL ACCOUNTING AND REPORTING WITH

CASH AND CASH EQUIVALENTS CASH EQUIVALENTS

General Rule: Classified as current 3. If silent, time deposits, money market

Compensating Balance – Minimum deposit Cash in bank - BDO 2,500,000

Additional information: 2. What amount should be reported as

Cash 12,770,000 4. Petty cash fund 5,000

3. Petty cash fund 9,000

The petty cash ledger account has an

Payroll account 500,000  A check of 200,000 dated January 15, 2020 in

Traveler’s check 300,000 SOLUTION:

NSF check 150,000 Cash in bank - unadjusted 5,000,000

PCF (all reimbursed as of Compensating balance - restricted (300,000)

December 31, 2019) 50,000 Post-dated check delivered 200,000

Money order 200,000 Cash in bank - adjusted 4,900,000

T-Bills, 90 days due Jan. 20, 2019 1,000,000

SOLUTION: A sheet of paper with names of

Cash in bank 2,250,000 employees together with contribution

of P18,000 were replenished on in the amount of 5,000

December 31, 2019) 30,000 Total 50,000

8. The petty cash fund of Pound Company on December

Measurement of Notes Receivable

Accounting for Long-term, Non-interest Bearing Notes

Pro-forma entry on transactions involving long-term, non-interest bearing notes receivable:

Measurement of Loans Receivable

Credit Risk and Impairment of Loans Receivable

PRO-FORMA COMPUTATIONS: PRO-FORMA ENTRIES:

Forms of Receivable Financing Transfer of Ownership Pro-forma entries

a. Notification basis – customers *Unlike in pledging where all accounts

“Receivable from factor

Computational Guidelines related to Note Receivable Discounting:

Methods of Inventory Estimation

GROSS PROFIT (GP) METHOD

4. The estimated cost of sales is computed as follows:

Estimated cost of sales = Net sales x (100% - GP rate)

b. Gross profit rate is based on cost:

RETAIL INVENTORY METHOD

Particulars Cost Retail

Approaches in the use of retail inventory method

Goods Includible in Inventories

The following inventory items must be included in inventory:

Accounting for Freight Charge (buyer’s point of view)

Other Shipping Terms

Salient Features of Consignment

ACCOUNTING FOR INVENTORIES

(To set-up the cost of unsold (To recognize the difference

(To recognize the difference

Methods of Recording Credit Purchases

COST FORMULA MATRIX

MEASUREMENT OF INVENTORIES – inventories shall be measured at LCNRV (PAS 2, par 9)

Methods of Accounting for Inventory Writedown

2. Allowance Method or Loss Method

Accounting for Purchase Commitments

Related Terms and Definitions

Financial Statement Presentation of Receivables

Classification Rules Related to Nontrade Receivables

Rules on customers’ accounts with credit balances

Measurement of Accounts Receivable:

Net realizable value

Accounting for Freight Charge

Owner of the goods

Accounting for Allowances for Sales Return and Sales Discount

Methods of Recording Credit Sales