Asset CASH AND CASH EQUIVALENTS History Barter System → Gold - informal cash / standard Cash → includes money and any other negotiable instruments that are payable in money and accepted by the bank for deposit and immediate credit. = Money → the standard medium of exchange. = currency and coins that are circulating and are legal tender. Presentation → Current Asset (unrestricted) Measurement → Face Value Measurement period Initially •—-------------------------• Subsequently (face value) (face value) or Estimated Recoverable Amount Foreign Currency → Convert (ex. dollar to peso in current exchange rate) Cash Items Cash on Hand → undeposited collections, customer’s check, manager’s check, cashier’s check, traveler’s check, bank draft and money order. Cash in bank → checking account (demand deposit) and savings deposit. Checks 1. Undelivered Checks → (initial entry: dr. A/P cr. Cash in bank TO REVERSE dr. Cash in bank cr. A/P 2. Post-dated Checks → need to reverse, same as #1 3. Stale Checks → (hindi pa na-withdraw nung inissuehan, napanis na yung check) Bank Overdraft = withdrawals that exceed deposits = not legal in the Philippines Cash Fund → change fund, tax fund, payroll fund, dividend fund Restriction = no restriction → cash = current operation → cash fund = cash Not included = long term - liability (ex. Sinking fund → loans/bonds) (NCC) / NCA = plant expansion - long term investment = informal restriction: Compensating Balance (when FORMAL not included in cash fund) When problem is silent: assume it is informal restriction Exercise 1: Solution: Cash and bills —------------------------- P 400,000 Cash in bank - demand deposit —--- 5,000,000 Cash in bank - savings deposit —---- 1,000,000 Cert. of time deposit - ignored (this is an investment) Postage stamps unused - ignored (this is a prepaid asset, not cash) Money order —------------------------------ 50,000 Manager’s check —------------------------ 100,000 Traveler’s check —------------------------- 1,000,000 Bank draft —--------------------------------60,000 Postdated customer check - ignored Change fund —-----------------------------Petty cash fund —--------------------------- 22,000 50,000 Emergency fund - assumption is long term restriction, hence, excluded Total ____________ P 7,682,000 Exercise 2: Solution: Cash in bank —------------------------- P 2,500,000 *600k compensating bal. is not deducted since it is NOT legally restricted Cash on hand —------------------------ 125,000 Cash restriction for plant - ignored (this is NCA, hence, a long term investment) ___________ Total Exercise 3: Solution: P 2,625,000 Solution: Cash on hand bal. 200,000 NSF (no sufficient fund) check (35,000) ← *cash #1 because as of 2021 the cash was insufficient Post-dated check (15,000) ← *cash #2 even though check was received, the check will only be valid on 2022 150,000 Petty cash fund Currency and coins Goodbank current account bal. Add. Undelivered checks Add. company post-dated checks 5,000 *IOUs from officers and unreplenished pc vouchers not included since they are not cash 5,000,000 25,000 *#1 45,000 5,070,000 Morning bank current acc. No. 1 4,000,000 Less. Morning bank current acc. No.2 (100,000) *overdraft 3,900,000 Afternoon bank savings account 250,000 Add. afternoon bank time deposit, 90days 2,000,000 2,250,000 Total cash and cash equivalents = P 11,375,000 Cash equivalents → short term and highly-liquid investments that are readily convertible into cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. = short term → three months or less [3-month rule] = highly-liquid investments → bank/company Ex. a. Three-month BSP Treasury bills b. Three-month time deposit c. Three-month money market instrument or commercial paper d. xxx-year BSP treasury bills/commercial paper/redeemable preference share purchased three-months before maturity date Excess cash investments ` 3-months → cash equivalent ` more than 3 months but not more than 12 months → short-term investment ` more than 12mos → long-term investment Exercise 1: Solution: Govt. treasury bills 2,000,000 *purchased 2 mos before maturity Commercial papers 1,500,000 *purchased 1 ½ mos before maturity Total cash equivalents = P 3,500,000 Petty Cash Fund → is money set aside to pay small expenses which cannot be paid conveniently by means of check. Cash in —-----> COMPANY —----------> Cash out Receipts disbursements - Bills - Coins Checks Bank draft Money order - Cash cash expenses ← check Imprest System → of petty cash means that the general ledger account Petty Cash will remain dormant at a constant amount. Accounting system: Imprest Fund System Fluctuating Fund System 1. Establishment of the fund Dr. petty cash fund Cr. cash in bank 1. Establishment of the fund Dr. petty cash fund Cr. cash in bank 2. Expenses No entry in journal *record in petty cash memorandum book 2. Expenses Dr. expenses Cr. petty cash fund 3. Replenishment Dr. expenses Cr. cash in bank 3. Replenishment Dr. petty cash fund Cr. cash in bank 4. Increase / Decrease Dr. petty cash fund Cr. cash in bank 4. Increase / Decrease Dr. petty cash fund Cr. cash in bank 5. End of Reporting Period Adjusting entries for petty cash fund if not yet replenished Dr. expenses Cr. petty cash fund 5. End of Reporting Period No entry *accounts are already updated 6. Cash Short/Over 6. Cash short/over Short Dr. cash shortage Cr. cash in bank Over Dr. cash in bank Cr. cash overage Short Dr. cash shortage Cr. petty cash fund Over Dr. petty cash fund Cr. cash overage Petty cash custodian Cash shortage / overage are temporary/suspense accounts that are subject to investigation Shortage - dr. receivables from custodian / miscellaneous expense / loss Overage - dr. cash overage cr. cash shortage cr. miscellaneous income / payable to custodian Exercise 1: Solution: Imprest Fund System May 01 30 Petty Cash Fund Cash in bank Postage expense Supplies expense Transportation exp. Miscellaneous expense Cash in bank June 30 Supplies exp. Postage exp. Transportation exp. Petty cash fund Fluctuating Fund System 10,000 May 01 10,000 1,000 3,000 2,500 1,500 30 8,000 2,000 1,000 1,000 Petty Cash Fund Cash in bank Postage expense Supplies expense Transportation Miscellaneous expense Petty cash fund Petty cash fund Cash in bank 4,000 June 30 Supplies exp. Postage exp. 10,000 10,000 1,000 3,000 2,500 1,500 8,000 8,000 8,000 2,000 1,000 July 01 July 15 Petty cash fund Supplies exp. Postage exp. Transportation exp. 4,000 Petty Cash fund Cash in bank 5,000 Supplies exp. Postage exp. Transportation exp. Miscellaneous expense Cash in bank 3,500 1,500 1,500 500 2,000 1,000 1,000 5,000 July 15 Transportation exp. Petty cash fund 1,000 Supplies exp. Postage exp. Transportation exp. Miscellaneous expense Petty cash fund 1,500 500 500 500 Petty cash fund Cash in bank 12,000 12,000 4,000 3,000 7,000 BANK RECONCILIATION Bank Reconciliation — is a statement which brings into agreement the cash balance per book and cash balance per bank. Book reconciling items 1. Credit memos 2. Debit memos 3. Errors Bank reconciling items 1. Outstanding checks 2. Deposit in transit 3. Errors Bank deposits 1. Demand deposit 2. Savings deposit 3. Time deposit Forms of Bank Reconciliation 1. Adjusted Balance Method Unadjusted Book Balance Add. credit memos Total Less. debit memos Adjusted book balance BOOK RECONCILING ITEMS Credit Memos: 1. Proceeds of a Loan Dr. Cash Cr. Loans Payable xxx xxx xxx (xxx) π₯π₯π₯ Unadjusted Bank Balance Add. deposits in transit Total Less. outstanding checks Adjusted Bank Balance Debit Memos: 1. Service Charge Dr. Service Charge Expense Cr. Cash 2. Payment of Loans Dr. Loans Payable xxx xxx xxx (xxx) π₯π₯π₯ Interest expense Cr. Cash 2. Matured Time Deposit Dr. Cash Cr. Time Deposit 3. NSF (no sufficient fund) or DAIF (deposit against insufficient funds) or DAUF Dr. Accounts Receivable Cr. Cash 3. Collection of Notes Dr. Cash Cr. Notes Receivable 4. Technically Defective Checks Dr. Accounts Receivable Cr. Cash *No need for adjusting entries for bank reconciling items in the book of the company* *Adjusting entries are required if errors are made by book* *No adjusting entries required if errors are made by the bank* 2. Book to Bank Method Unadjusted book balance Add. credit memos Outstanding checks Total Less. debit memos Deposit in transit Unadjusted bank value 3. Bank to Book Method xxx xxx xxx xxx xxx xxx xxx (xxx) π₯π₯π₯ Unadjusted bank balance Add. deposit in transit Debit memos Total Less. outstanding checks Credit memos Unadjusted book value xxx xxx xxx xxx xxx xxx xxx (xxx) π₯π₯π₯ Problem Exercise: Requirement: Prepare a bank reconciliation statement. *start kay unadjusted book/bank balance Solution: Unadjusted book balance Add. credit memos Note collected Total Less. debit memos 50,000 15,000 65,000 Unadjusted bank balance Add. deposits in transit Total Less. outstanding checks Ck. #725 84,000 40,000 124,000 37,000 NSF check Service charge Adjusted book balance 5,000 1,000 (6,000) 59,000 Ck. #726 Adjusted bank balance 28,000 (65,000) 59,000 Journal entries: (Adjusting) Cash P 15,000 Notes Receivable P 15,000 Accounts Receivable Cash 5,000 Bank service charge Cash 1,000 5,000 1,000 Note * always beware of errors in future problems* Proof of Cash. Bank Reconciliation Proof of cash → is an expanded reconciliation in that it includes proof of receipts and disbursements. Book Beg. bal. Receipts xxx xxx Disbursements End. bal. Bank xxx π₯π₯π₯ Withdrawal End. bal. xxx π₯π₯π₯ Beg. bal. Deposit xxx xxx Deposit in Transit. Outstanding Checks. Bank Reconciliation Bank reconciling items Computation of Deposit in Transit Deposit in Transit, beg. Add. Cash Receipts deposited, this month Book Debits xxx Less. Credit Memos, last month (xxx) Total Deposits to be acknowledged by bank Less. Deposits acknowledged by bank, this month Bank Credit xxx Less. Credit Memos, this month (xxx) Deposit in Transit, end Problem Exercise: Computation of Outstanding Checks xxx xxx xxx (xxx) π₯π₯π₯ Outstanding Checks, beg. xxx Add. Checks disbursement, this month Book Credits xxx Less. Debit Memos, last month (xxx) xxx Total Checks to be paid by bank xxx Less. Checks actually paid by bank, this month Bank Debits xxx Less. Debit Memos, this month (xxx) (xxx) Outstanding Checks, end. π₯π₯π₯ Outstanding Checks at June 30: Outstanding Checks, beg. Checks issued by the book Total Less. checks cleared by the bank Outstanding checks, end Deposits in transit at March 31: 1,500 118,000 119,500 (115,000) 4,500 Deposits in transits, beg. Book deposits, this month Total Less. Bank Deposits reflected, this month Deposit in transit, end 1,700 49,000 50,700 (47,600) 3,100 RECEIVABLES ACCOUNTING Trade and Non-Trade Receivables Receivables → are financial assets that represent a contractual right to receive cash or other financial assets from another entity. 1. Trade Receivables → refers to claims arising from sale of merchandise or services in the ordinary course of business. 2. Non-Trade Receivables → represent claims arising from sources other than the sale of merchandise or services in the ordinary course of business Classification Trade → Current (always) Non-Trade → a. 12 mos or less (current) b. More than 12 mos (non-current) What is a Current Asset? a. Cash and Cash Equivalents b. Part of operating cycle c. 12 months or less d. Held for the purpose of being traded Trade Receivables β Accounts Receivable → are open accounts arising from the sale of goods and services in the ordinary course of business and not supported by promissory notes. β Notes Receivable → are those supported by formal promises to pay in the form of notes. *if the problem is silent, Notes Receivable is assumed to be a trade receivables and a current asset* Non-Trade Receivables 1. “Advances to” or “receivables from” shareholders, directors, officers, or employees. *”to” is pautang ni company, “from” utang ni company* *if the problem is silent, this is a current asset (less than 12 mos)* 2. Advances to affiliates *companies affiliated to (e.g. parent/holding company)* *when the problem is silent this non-current asset* 3. Advances to suppliers *problem is silent = current asset* 4. Subscription Receivable *problem is silent = non-current asset treatment; presentation = deduction in the equity However, if stated that it is a current asset, addition in the equity* 5. Creditor’s account with debt balances *payable turned receivable* *silent problem = current asset* 6. Special deposits on contract bids *receivables after the contract bids* *silent problem = non-current asset* 7. Accrued Income *services/goods is already rendered/delivered but not yet paid* *silent problem = current asset* 8. Claims Receivable *silent problem = current asset* Accounts Receivable → are open accounts arising from the sale of merchandise or service in the ordinary course of business and not supported by promissory notes. How to measure Receivables Initially Subsequently Fair value + transaction cost Amortized cost A/R Face value or Original Invoice Price Net Realizable Value or recoverable account Accounts Receivable xxx Less. Allow. for sales discount xxx Allow. for sales return & allow. xxx Allow. for freight xxx Allow. for bad debts xxx (xxx) Net Realizable Value π₯π₯π₯ Discount → Trade Discount (not recorded) → Cash Discount - given to encourage prompt payment E.g. 2/10, n/30 Sales Return - physical transfer of merchandise and Sales Allowances - reduction of price because of damaged supplies Freight - transportation cost FOB → Free on Board → Destination(seller)/ Shipping Point(buyer) Who will actually pay the freight? Freight Prepaid(seller)/ Collect(buyer) Journal Entry for Receivables: 1. Gross Method → record receivables at gross amount then adjustments if there is any (acceptable in practice) 2. Net Method → recorded in the net amount initially Doubtful Accounts or Bad Debts Estimation of Doubtful Accounts Allowance Method → followed in making general Direct Writeoff Method → not accepted by the standar purpose financial statements - Set adjusting entries at the end of period to estimate how much of the receivables will never be collected (matching principle) Entries: Estimates. Doubtful Accounts xxx Allowance for Doubtful Accounts xxx but used in BIR Ruling Writeoff. Allowance for Doubtful Accounts Accounts Receivable xxx xxx xxx Writeoff. Doubtful Accounts Accounts Receivable Recovery. Accounts Receivable Allowance for doubtful accounts xxx xxx xxx Recovery. Accounts Receivable Doubtful Accounts xxx Cash Accounts Receivable Cash Accounts Receivable xxx Entries: Estimates. N/A xxx xxx xxx xxx Methods of Estimating Bad Debts 1. Percentage of Sales → Income Statement Approach → Doubtful Accounts Expense Sales → Credit Sales - Net *used in silent problem* - Gross 2. Percentage of Receivable → Financial Position Approach → Required Allowance Balance 3. Aging of Receivable → “ → “ (past due – complicated computation mas matagal na past due ng utang, mas less likely masingil) *doubtful accounts are under administrative expense Changes Accounting Estimate → treatment is currently and prospectively Effect is Now → and future Accounting Policy → treatment is currently and retrospectively Effect is past, present, future Notes Receivable → are claims supported by formal promises to pay usually in the forms of notes. *problem is silent = current asset* *more than 1 year = noncurrent* Negotiable promissory notes → is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed determinable future time a sum certain in money to order or to bearer. Measurement Notes Receivable . Initially Short Term → Interest Bearing → Non-Interest Bearing Long Term → Interest Bearing Subsequently Face Value Face Value Face Value Face Value Face Value Present Value Face Value Amortized Cost → Non-Interest Bearing *dishonored notes became accounts receivable Loans Receivable → is a financial asset arising from a loan granted by a bank or other financial institution to a borrower or client. Loan application: 1. Application 2. Processing 3. Approval - Cash out Measurement: L/R Initially Fair value, Face value (transaction price) + transaction cost Transaction Price Direct Origination Cost Origination Fees Received Initial Carrying Amount Transaction price Loans Receivable Cash xxx xxx (xxx) π₯π₯π₯ xxx xxx Direct origination fees Cash xxx Unearned Interest Income xxx Unearned Interest Income xxx Cash xxx Or Cash xxx Direct organization cost xxx Direct organization cost Cash xxx xxx Subsequently Amortized Cost Organization Fees a. Evaluating the borrower’s financial condition b. Evaluating guarantees, collateral, and other security c. Negotiating the terms of the loan d. Preparing and processing the documents related to the loan e. Closing and approving the loan transaction 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. Loan Impairment 1. Significant Financial Difficulty 2. Breach of Contract 3. Debt restructuring 4. Probable that borrower will enter bankruptcy 5. Disappearance of an active market 6. Observable data indicating that there is a measurable decrease in the estimated future cash flows Measurement The difference between the carrying amount and the present value of estimated future cash flows discounted at the original effective rate. Accounting Direct method Dr. impairment loss Cr. asset *loans receivable* Allowance method Dr. impairment loss Cr. allowance for impairment loss Three Stage Impairment Approach Stage 1 Stage 2 Stage 3 Recognition of expected credit losses 12-month expected credit losses Lifetime expected credit losses Interest Revenue Effective interest on gross carrying amount Effective interest net carrying amount (less allowances) Receivable is Performing (initial recognition) Underperforming (significant increase in credit risk) Non-Performing (credit impaired assets) Receivable Financing → is the capability or financial flexibility of the company to generate cash out of its receivable. Common Forms of Receivable Financing 1. Pledging → refer to borrowing of money from the bank or any financial institution in which receivables in general are used as collateral. 2. Assignment → is a more formal borrowing arrangement in which the specific receivables are identified and used as a security. 3. Factoring → involves the sale of receivables to a finance company, which is called a factor. The factor or buyer assumes the risk of collectivity and generally handles the billing and collection function. 4. Discounting of Notes Receivable → sale of the note to a 3rd part, usually a bank. Pledging of Accounts Receivable Pledging (hypothecating of receivables) → refers to borrowing of money from the bank or any financial institution in which receivables in general are used as a collateral or security for a loan. Since receivables in general are use as collateral, pledging is sometimes called general assignment. Accounting: Receivable Loans A/R Sales xxx Sales Return A/R xxx Sales Discount Cash A/R xxx xxx xxx xxx xxx 1. Borrowing of Loan a. Interest not deducted in advance Entry: Cash xxx Loans Payable xxx b. Interest deducted in advance Entry: Cash xxx Discount on Loans Pay. xxx Loans Payable xxx 2. Payment of Interest/Amortization of Disc. a. Interest Expense xxx Cash xxx b. Interest Expense Discount on L/P Assignment of Accounts Receivable xxx xxx Assignment → is a more formal borrowing arrangement in which the specific receivables are identified and used as security. The assignor or borrower transfers its rights in some of its accounts receivable to a lender or assignee inconsideration for a loan. Actually, assignment is a more formal type of pledging of accounts receivable. Assignment is secured borrowing evidenced by a financing agreement and a promissory note both of which the assignor signs. Customer → Debtor Borrower → Assignor Lender → Assignee Characteristics of Assignment 1. The loan is at a specified percentage of the face value of the collateral. Interest and service fees are charged to the assignor. 2. The debtors are occasionally notified to make payments to the assignee but most of the assignments are not on a notification basis. Non-Notification Entries: A/R - assigned A/R Notification Entries: xxx xxx Cash Service Fees Discount on Loans Payable Loans Payable xxx xxx xxx Sales Return A/R-assigned xxx Allow. For Bad Debts A/R-assigned xxx Cash Sales DIsc. A/R-assigned xxx xxx Interest Exp. Loans Payable Cash xxx xxx If may excess sa A/R-assigned* A/R A/R-assigned xxx xxx xxx xxx xxx L/P InterestExp. A/R xxx xxx xxx xxx xxx 3. Assigned accounts are segregated from other accounts. The Loans Payable should be deducted from the balance of A/R - assigned to determine the equity is assigned accounts receivable. Factoring of Accounts Receivable Factoring → involves the sale of receivables to a financing company, which is called the factor. The factor assumes the risk or collectivity and generally handles the billing and collection function. The sale of receivables is on without recourse, notification basis. Some agreement still includes *with recourse* Contingent liability → guarantor for the A/R Casual Factoring → not usually done, only in critical situations. *dapat may receivable na bago lumapit kay factor* Cash Allow. for doubtful accounts Loss on factoring *add here ung recourse liab. Receivable from factor Accounts Receivable *Recourse Liability xxx xxx xxx Sales Return and Allow. Receivable from factor xxx Cash Receivable from factor xxx Recourse liability Gain on recourse liability xxx Factoring as a continuing agreement → continuous agreement. xxx xxx xxx xxx xxx xxx xxx xxx Cash Allow. for doubtful accounts Interest expense Factoring fee Receivable from factor *Loss on recourse obligation Accounts Receivable *Recourse Liability Sales return and allow. Receivable from factor xxx xxx xxx xxx Cash Receivable from factor xxx xxx xxx xxx xxx xxx Discounting of Notes Receivable Discounting of Notes → is a sale of the note to a third party, usually a bank. The sale is usually on a with recourse basis which means that upon the default of the debtor, the seller of the note becomes liable for its maturity value. *general assumption is w/ recourse, however, it can still be without recourse if stated in the problem* Maker / Debtor (customer) → Payee / Endorser (company) → 3rd Party / Endorsee (bank) Term of the note o—-----------------------------------------o—---------------------------------------o (date of note) (date of discounting) (date of maturity) Formula: 1. Net Proceeds = Maturity Value - Discount 2. Maturity Value = Principal + Interest 3. Interest = Principal x Rate x Time 4. Discount = Maturity Value x discount rate x discount time (Discount Date → Maturity Date) 5. Carrying Amount = Principal + Accrued Interest 6. Accrued Interest = Principal x Rate x Time (up to Discount Date) 7. Gain (Loss) on Discounting = Net Proceeds - Carrying Amount Journal Entries: Without recourse: With recourse: Cash (net proceeds) Loss on N/R discounting Notes Receivable Interest Income (Accrued interest) xxx xxx xxx xxx 1. Conditional sale Cash (net proceeds) Loss on N/R discounting Notes Receivable - discounted Interest Income (Accrued interest) xxx xxx xxx xxx Honored note: N/R discounted N/R xxx Dishonored note: A/R Cash xxx 2. Secured borrowing Cash (net proceeds) Interest expense Liability on N/R discounted Interest Income (Accrued interest) xxx xxx xxx xxx xxx xxx Honored Note: Liability on N/R discounted N/R xxx Dishonored note: A/R Cash xxx xxx xxx INVENTORIES ACCOUNTING Inventories Accounting Inventories → are assets 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 rendering of services. Trading → Merchandise Inventory Manufacturing → a. Finished goods b. Goods in process c. raw materials d. Factory or manufacturing supplies Service → labor and other costs of personnel directly engaged in providing the service. Goods includible in the inventory a. Goods owned and on hand b. Goods in transit and sold FOB destination c. Goods in transit and purchased FOB shipping point d. Goods out on consignment e. Goods in the hand of salesmen or agents f. Goods held by customers on approval or on trial Exercise: Solution: Items counted in the bodega Items include in the count specifically segregated per sale contract Items in receiving department, returned by customer, in good condition Items ordered and in the receiving department, invoice not received Items ordered, invoice received, but goods not received. Freight is paid seller Items shipped today, invoice mailed, FOB shipping point Items shipped today, invoice mailed, FOB destination Items currently being used for window display Items on counter for sale Items in receiving department, refused by us because of damage Items included in count, damaged and unsalable Items in the shipping department Total inventory cost P 4,000,000 (100,000) 50,000 400,000 150,000 200,000 800,000 (50,000) 250,000 . P 5,700,000 *invoice ay hindi masyado relevant, arrival ng goods and freight mag-base sa ownership* Cost of Inventories Measurement : Inventories Initial —----------------> Subsequent Cost —---------------------> LCNRV Cost of Inventories 1. Cost of purchase 2. Cost of conversion 3. Other cost incurred in bridging the inventories to their present location and condition Exercise: Cost of Purchase + Purchase price + Import duties + Irrecoverable taxes + Freight cost + Handling cost + Other directly attributable cost - Trade discounts - Rebates o Foreign exchange differences o Interest expense over the financing period *o is ignored/excluded* Cost of Conversion + Direct labor + Overhead → factory expenses βfixed → indirect materials βvariable → indirect labor Other Cost Sample: cost incurred due to customer’s specification Excluded: 1. Abnormal wastages 2. Storage cost → finished goods 3. Administrative expenses 4. distribution/Selling expenses Solution: Finished goods in storeroom, at cost Including overhead of P400,000 Finished goods in transit, including freight charge of P20,000, FOB shipping point Finished goods held by salesman Goods in process, at cost of materials And direct labor Materials Materials in transit, FOB destination Defective materials returned Shipping supplies Production supplies Gasoline and oil for testing finished goods Machine lubricants Cost of Inventory Overhead = 400,000 Finished goods 2,000,000 Material and labor Overhead Production cost Net Realizable Value Measurement : Inventories % 80% 20% 100% P 2,000,000 100,000 900,000 1,000,000 110,000 60,000 4,170,000 overhead rate = 20% amount 720,000 180,000 900,000 (720k/80%) Initial —----------------> Subsequent Cost —---------------------> LCNRV on item by item basis LCNRV → Lower of Cost and Net Realizable Value Net Realizable Value → is the estimated selling price in the ordinary course of business less estimated cost of completion and the estimated cost of disposal. NRV = Selling Price - cost to complete - cost to sell *occasion selling price is lower than the cost:* 1. Inventories are damaged 2. Inventories have become wholly or partially obsolete 3. The selling price have declined 4. Estimated cost of completion / cost of disposal has increased Accounting Rule: Cost > NRV → with inventory writedown Cost < NRV → no inventory writedown Accounting Method Direct (Cost of Goods Sold) Inventory, end Income Summary Allowance Method xxx xxx Presentation Inventory, beg Net purchases Total goods available for sale Inventory, end Cost of goods sold Exercise problem: Loss on inventory writedown Allowance on inventory writedown xxx xxx Presentation xxx xxx xxx (xxx) π₯π₯π₯ Inventory, beg Net purchases Total goods available for sale Inventory, end Cost of goods sold, before writedown Loss on inventory writedown Cost of goods sold, after writedown xxx xxx xxx (xxx) xxx xxx π₯π₯π₯ Solution: *selling price - selling cost* Category 1 Units Cost NRV A 25,000 105 115 B 20,000 85 80 Category 2 C 40,000 D 30,000 50 65 40 60 Category 1 A B Total Cost 2,625,000 1,700,000 Total NRV 2,875,000 1,600,000 LCNRV 2,625,000 1,600,000 Category 2 C 2,000,000 1,600,000 1,600,000 D Total 1,950,000 8,275,000 1,800,000 7,875,000 1,800,000 7,675,000 TC = units x cost T NRV = units x nrv LCNRV = lowest value per item Trade and Cash Discounts Trade discounts → are deductions from the list/catalog price in order to arrive at the invoice price which is the price actually charged to the buyer. Its purpose is to encourage trading or increase sales. Cash discounts → are deductions from invoice price when the payment is made within the discount period. Its the purpose is to encourage prompt payment. Solution: List price Trade discount (20%) Balance 2nd Trade discount (10%) Invoice Price Freight charge Total cost of purchase Entries: Purchase Freight-in Accounts payable 600,000 (120,000) 480,000 (48,000) 432,000 15,000 447,000 432,000 15,000 Accounts payable Cash Purchase discount 447,000 447,000 438,360 8,640 Returns and Allowances. Merchandising Business Returns and Allowances - Buyers may be dissatisfied with the merchandise received either because the goods are damaged or defective, of inferior quality or not in accordance with their specifications. Returns → decrease the amount and physical volume of the goods sold. Allowances → decrease the amount but not the physical volume of the goods sold. Credit Memorandum → formal acknowledgement that the seller has reduced the amount owed by the Customer. Goods in Transit FOB → Free on board FOB Shipping Point → ownership is transferred upon shipment of the goods FOB Destination → ownership is transferred only upon the receipts of goods by the buyer Freight Prepaid → freight is actually paid before shipment Freight Collect → freight charge on the goods shipper is not yet paid. FAS / Free alongside → transfer ownership when the goods are alongside the carrier CIF / Cost, Insurance, Freight → buyer assumes the CIF Ex-ship → seller transfers the title after the goods are unloaded Accounting for Freight “Who owns the goods, shoulders the freight !!!” Exercise: Answer: Inventory beg. P 4,410,000 Merchandise sold in transit, FOB destination 380,000 Merchandise purchase in transit, FOB SP 510,000 Inventory, Dec. 31, 2019 P 5, 300,000 Consignment - Is a method of marketing goods in which the owner called the consignor transfers physical possession of the goods to an agent called the consignee who sells them on the owner’s behalf. Consignor —-- (goods) —----> Consignee —--- (goods) —------> Customer (owner) (agent) Income: sales income: commission Periodic / Perpetual System Periodic System - Calls for the physical counting of goods on hand at the end of the accounting period to determine quantities. β low value β high volume β updated only when FS are prepared 1. Purchase of Merchandise: Purchases A/P xxx 2. Payment of Freight Freight In Cash xxx Perpetual System - Requires the maintenance of records called stock cards that usually offer a running summary of the inventory inflow and outflow. β high value β low volume β with stock card β always updated Inventory A/P xxx xxx Inventory Cash xxx xxx A/P Inventory xxx xxx xxx xxx 3. Discount, Return, and Allowances A/P Purchase disc. / return & allow. xxx 4. Sale of Merchandise A/R Sales xxx 5. Return of Merchandise sold Sales return A/R xxx 6. Inventory at year end Inventory, end Income Summary xxx A/R Sales xxx Sales return A/R xxx xxx xxx xxx cost of goods sold → COGS xxx Inventory → xxx Inventory COGS xxx xxx No entry unless there is shortage / overage. xxx xxx xxx Periodic System Perpetual System 1. A/R Sales 10,000 10,000 2. Sales return A/R 500 500 3. Cash Sales discount A/R 9,310 190 9,500 4. Purchases A/P A/R Sales 10,000 → 10,000 Sales return A/R 500 → 500 COGS 8,000 Inventory 8,000 Inventory COGS 400 400 Cash Sales discount A/R 9,310 190 Inventory A/P 6,000 Inventory Cash 200 A/P Inventory 300 A/P Inventory Cash 5,700 9,500 6,000 6,000 5. Freight in Cash 6,000 200 200 6. A/P 200 300 Purchase return 300 7. A/P 300 5,700 Purchase discount Cash 114 5,586 8. Income summary 250,000 Merchandise inventory, beg 250,000 No entry 9. Merchandise inventory, end Income summary No entry 114 5,586 231,500 231,500 10. No entry Cost of goods sold Inventory FIFO Method - Inventory Cost Flow (accounting measurement) 360 360 FIFO (First In, First Out) - This method assumes that “the goods first purchased are first sold” and consequently the goods remaining in the inventory at the end of the period are the most recently purchased or produced. FIFO - Perpetual ← — — Purchase — — → Date Jan. 28 Jan. 29 Units 100 350 Unit cost 5 10 Total cost 500 3,500 Jan. 30 Jan. 31 100 15 ← — — — Sales — — — → ← — — — Balance — — — → Units Unit cost Total cost 100 150 5 10 500 1,500 1,500 Ending Inventory Units 100 100 350 Unit cost 5 5 10 Total cost 500 500 3,500 200 200 100 300 10 10 15 2,000 2,000 1,500 3,500 FIFO - Periodic From Jan. 29 purchase From Jan. 31 purchase Ending inventory FIFO - Periodic Beg. balance 5,000 Purchase 21,000 Purchase return (2,000) Units 200 100 300 Unit cost 10 15 sales sales return net sales Total cost 2,000 1,500 3,500 7,000 (1,000) 6,000 Total goods available 24,000 Tgas Net sales Ending inventory 24,000 (6,000) 18,000 Ending inventory Jan 10 purchase (4,000 x 250) = 1,000,000 Cost of Goods Sold jan 1 balance (5,000 x 200) = 1,000,000 jan 10 purchase (1,000 x 250) = 250,000 COGS 1,250,000 Jan 30 purchase (14,000 x 150) = 2,100,000 Ending inventory 3,100,000 FIFO - Perpetual ← — — Purchase — — → Date Jan. 01 Jan. 10 Units Unit cost Total cost 5,000 250 1,250,000 Jan. 15 Jan. 16 Jan. 30 16,000 150 2,400,000 Jan. 31 (2,000) 150 (300,000) ← — — — Sales — — — → ← — — — Balance — — — → Units Unit cost Total cost Beg. bal. 5,000 2,000 200 250 1,000,000 500,000 (1,000) 250 (250,000) COGS = 1,250,000 Ending inventory = Units 5,000 5,000 5,000 Unit cost 200 200 250 Total cost 1,000,000 1,000,000 1,250,000 3,000 250 750,000 4,000 4,000 16,000 4,000 14,000 18,000 250 250 150 250 150 1,000,000 1,000,000 2,400,000 1,000,000 2,100,000 3,100,000 Weighted Average - Inventory Cost Flow Accounting measurement Weighted Average - This method allows the company to mingle the cost of similar items purchased and use weighted averages to measure inventories held, either on a periodic basis or as each shipment is received. Weighted average → Periodic Jan. 28 Jan. 29 Jan. 31 Total goods Units 100 350 100 550 Unit Cost 5 10 15 Total 500 3,500 1,500 5,500 Formula: Weighted average = Total goods avail. for sale Unit cost unit Avail. for sale avb. for sale Weighted average unit cost = 5,000/550 = 10 Inventory, end = 300 x 10 = 3,000 Moving Average → Perpetual ← — — Purchase — — → ← — — — Sales — — — → ← — — — Balance — — — → Date Jan. 28 Jan. 29 Jan. 30 Jan. 31 Units 100 350 Unit cost 5 10 Total cost 500 3,500 100 15 1,500 Cost of goods sold Inventory, beg. Net purchases TGAS Inventory, end COGS Units Unit cost Total cost 250 5 500 Units 100 450 200 300 ↑ ending Unit cost 5 8.8889 8.8889 10.9259 ↑ inventory Total cost 500 4,000 1,777.78 3,277.78 ↑ xxx xxx xxx (xxx) π₯π₯π₯ Exercise: Answer: 1. Weighted average - periodic Units Jan. 1 - beg. Bal. 5,000 Jan. 10 - purchase 5,000 Jan. 30 - purchase 14,000 Totals 24,000 unit cost 200 250 150 total cost 1,000,000 1,250,000 2,100,000 4,350,000 Weighted average unit cost = 4,350,000 / 24,000 = 181.85 TGAS Net sales Inventory, end 24,000 (6,000) 18,000 inventory, end unit cost inventory, end 18,000 * 181.25 3,262,500 . units sold 6,000 unit cost * 181.25 COGS 1,087,500 . 2. Moving Average → Perpetual ← — — Purchase — — → Date Jan. 1 Jan. 10 Units Unit cost Total cost 5,000 250 1,250,000 ← — — — Sales — — — → Units Unit cost Total cost ← — — — Balance — — — → Units 5,000 10,000 Unit cost 200 225 Total cost 1,000,000 2,250,000 Jan. 15 Jan. 16 Jan. 30 Jan. 31 7,000 (1,000) 16,000 (2,000) 150 150 225 225 1,575,000 (225,000) COGS = …………. 1,350,000 2,400,000 (300,000) 3,000 4,000 20,000 18,000 225 225 165 166.6667 675,000 900,000 3,300,000 3,000,000 ending inventory = 3,000,000 Relative Sales Price Method - This method is used to abortion the cost of commodities purchased at a lump sum using their respective sales price. Illustration - Products Browny, Blackie, and Muning are purchased at a basket price of 3,000,000. Assume that the said beauty products have the following sales price: Brownie → 500,000 Blackie → 1,500,000 Muning → 3,000,000 Browny Blackie Muning Sales price 500,000 1,500,000 3,000,000 5,000,000 Compute for the inventory cost of each product. fraction 5/50 15/50 30/50 allocated cost 300,000 900,000 1,800,000 3,000,000 Allocation Asset & Asset → Fair Value Lia & Lia → Fair Value equity & equity → fair value Lia & equity → Residual Method (meaning: 1st priority is the liability, residue is for equity) Exercise: Answer: Raw land Appraiser’s fee Development cost Total cost Sales price Highland 20,000,000 Midland 30,000,000 Lowland 50,000,000 Total 100,000,000 18,000,000 500,000 41,500,000 60,000,000 Fraction 2/10 3/10 5/10 Allocated cost 12,000,000 18,000,000 30,000,000 60,000,000 Purchase Commitments - Are obligations of the entity to acquire certain goods sometime in the future at a fixed price and fixed quantity. Illustration - ABC company entered into a commitment to purchase 100,000 barrels of aviation fuel from XYZ company. Price 2020 November 15: Content Date 500,000 no entry December 31: End of Period 500,000 no entry 2021 January 15: Purchase Date 500,000 dr, purchase 500k cr, A/P 500k Case 2: November 15: Content Date December 31: End of Period January 15: Purchase Date Exercise: Price 500,000 450,000 420,000 2020 no entry (50k) (50k) dr. loss on purchase commitment; cr. estimated lia from purchase commitment 2021 dr. purchases 420k estimated lia from purchase com. 50k loss on purchase com. 30k cr. A/P 500k Answer: Nov 15, 2021 = 5,500,000 Dec 31, 2021 = 5,000,000 March 31, 2022 = 5,400,000 2021 Nov 15 No entry Dec 31 Loss on purchase com. 500,000 Estimated lia fr. purchase com. 500,000 2022 March 31 Purchases 5,400,000 Est. lia fr. pur. com. 500,000 Gain on pur. com. 400,000 A/P 5,500,000 *if the problem is silent: purchase commitments are non cancellable* Inventory Estimation: Gross Profit Method. Inventory Estimation 1. The inventory is destroyed by fire and other catastrophe, theft of the merchandise has occurred and the amount of inventory is required for insurance purposes. 2. Physical count of goods on hand is made and it is necessary to prove the correctness or reasonableness of such count by making an estimate. 3. Interim financial statements are prepared and a physical count of the goods on hand is not necessary either because it may take time to do the same or because only an estimate thereof is required to fairly present the financial position and performance of the entity. Two Approaches 1. Gross profit method 2. Retail inventory method Cost of Goods Sold Statement Beg. Inventory Purchases xxx Purchase discount (xxx) Purchase return & allow Freight-in Net purchases TGAS Ending inventory COGS (xxx) xxx xxx TGAS COGS Ending inventory xxx (xxx) π₯π₯π₯ . xxx xxx (xxx) π₯π₯π₯ Gross Profit Method - Based on the assumption that the rate of gross profit remains approximately the same from period to period therefore the ratio of cost of goods sold to net sales is relatively constant from period to period. Formula : Based on Sales Net Sales (Sales - SRA) 100% - Cost of goods sold 60% = Gross profit 40% Exercise: Based on Cost 140% 100% 40% Answer: 2020 Sales 7,500,000 Cost of sale 5,475,000 Gross profit 2,025,000 100% 73% 27% 2021 4,500,000 3,285,000 1,215,000 2020 1,260,000 6,450,000 (90,000) (120,000) (20,000) 350,000 . 6,570,000 (2,355,000) 5,475,000 Beg. inventory Purchases Purchase disc. Purchase return Purchase allow. Freight in Net purchases Ending inventory Cost of sale Gross profit / sales = 27% 2021 3,355,000 3,180,000 (45,000) (40,000) (15,000) 220,000 . 3,330,000 ? (2,370,000) 3,285,000 2021 ending inventory = 2,370,00 2021 sales x 27% = 1,215,000 Sales Cost of sales Gross profit 2020 6,000,000 4,500,000 1,500,000 Beg. inventory Purchases Purchase returns Ending inventory Cost of sale 2020 5,600,000 (100,000) (1,000,000) 4,500,000 Ending inventory Undamaged merchandise Damaged merchandise Fire loss Retail Inventory Method : Inventory Estimation 100% 75% 25% 2021 9,000,000 6,300,000 2,700,000 100% 70% 30% 2021 1,000,000 8,000,000 (500,000) (2,200,000) 6,300,000 2,200,000 (350,000) ← (500k x 70%) (10,000) 1,840,000 Gross Profit Method TGAS at cost xxx COGS (xxx) Inventory end at cost π₯π₯π₯ Retail Inventory Method TGAS at retail xxx Net sales (xxx) . Inventory end at retail xxx Cost ratio Inventory end at cost Retail Inventory Method: Treatment of Items Cost Beginning inventory xxx Purchases xxx Purchase return (xxx) Purchase allowance (xxx) Purchase discount (xxx) Freight in xxx Departmental transfer in/debit xxx Departmental transit out/credit (xxx) Abnormal losses (xxx) Markup (add'l) Markup cancellation Markdown Markdown cancellation TGAS π₯π₯π₯ Methods in Computing the Cost Ratio Beg. Inv. Markup x% . π₯π₯π₯ Retail xxx xxx (xxx) xxx (xxx) (xxx) xxx (xxx) (xxx) xxx . π₯π₯π₯ Markdown Net Sales Sales xxx 1. FIFO x β β Sales Return (xxx) 2. Average β β β Employee discount xxx 3. Conservative β β x Normal Losses xxx . π₯π₯π₯ Cost Ratio = TGAS at cost . TGAS at retail Exercise: Answer: Cost Beg. inv. 650,000 Purchases 9,000,000 Pur. return (300,000) Pur. allow. (150,000) Freight in 200,000 Dep. transfer in 200,000 Net markup Net markdown TGAS 9,600,000 Retail 1,200,000 14,700,000 (500,000) 300,000 300,000 (1,000,000) 15,000,000 Sales 9,500,000 Employee disc. 500,000 Est.shoplift losses 600,000 Est.normal shrinkage 400,000 TGAS at cost/ TGAS at retail = cost ratio 1. Average Cost approach = 9,600,000/ 15,000,000 = 64% Inv, end at retail : 4,000,000 cost ratio: * 64% Inv,end at cost 2,560,000 (11,000,000) Inventory, end at retail 4,000,000 2. Conservative approach = TGAS at cost / TGAS at retail without markdown 9,600,000 / 15,000,000 + 1,000,000 = 60% Inv, end at retail 4,000,000 Cost ratio * 60% . Inv, end at cost = 2,400,000 3. FIFO Retail approach = TGAS at cost without beg.inv. / TGAS at retail without beg.inv. 9,600,000 - 650,000 / 15,000,000 - 1,200,000 = 8,950,000 / 13,800,000 = 64.86% Inv.end at retail 4,000,000 Cost ratio * 64.86% . Inv.end at cost = 2,594,400 INVESTMENT ACCOUNTING Business Property Stocks / Bonds Expenses Investments - Are assets held by an entity for the accretion of wealth through distributions such as interest, royalties, dividends, and rentals, for capital appreciation or for other benefits to the investing entity such as those obtained through trading relationships. → Investments are assets not directly identified with the operating activities of an entity and occupy only an auxiliary relationship to the central revenue producing activities of the entity. Purposes of Investments 1. Accretion of wealth 2. Capital appreciation 3. Ownership control 4. Meeting business requirements 5. Protection Example of Investments 1. Trading Securities or Financial Asset at Fair Value through profit/loss. 2. Financial Asset at Fair Value through other comprehensive income 3. Investment in non-trading equity securities 4. Investment in bonds or Financial Asset at amortized cost 5. Investment in Associate 6. Investment in Subsidiary 7. Investment Property 8. Investment in Funds 9. Investment in Joint Venture Financial Asset / Financial Instruments \ Financial Asset → Financial Liability or Equity Instrument Financial Instrument - Any contract that gives rise to both financial assets of one entity and a financial liability or equity instrument of another entity. Characteristics: a. There must be a contract b. There are at least two parties to the contract c. The contract shall give rise to a financial asset of one party and financial liability or equity instrument of another party. Financial Asset → is 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 instruments with another entity under conditions that are potentially favorable. d. An equity instrument of another entity. Financial Liability → s any liability that is a contractual obligation: a. To deliver cash or other financial asset to another entity. b. To exchange financial instruments with another entity under conditions that are potentially unfavorable. Equity Instruments → is any contract that evidences a residual interest in the assets of an entity after deducting all of the liabilities. Classification of Financial Assets 1. At fair value through profit or loss. 2. At fair value through other comprehensive income. 3. At amortized cost. Business Model: 1. To hold investment in order to realize fair value changes 2. To hold investment in order to collect contractual cash flows 3. To hold investment in order to collect contractual cash flows and sell the investment. Financial Asset at Fair Value through Profit or Loss (FVPL) Fair Value → is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Best Evidence of Fair Value (descending hierarchy) 1. Quoted price of identical asset in active market 2. Quoted price of similar asset in active market 3. Quoted price of identical and similar asset in inactive market Business Model for Managing Financial Assets a. To hold investments in order to realize fair value changes → Financial Asset at FVPL b. To hold investments in order to collect contractual cash flows → FA at Amortised cost c. To hold investments in order to collect contractual cash flows and sell the investment → FA at FVOCI Fair Value through profit of loss / (Trading Securities) Equity 1. Held for trading → by requirement Debt β β β n/a n/a β n/a β 2. All other investments in quoted equity instruments → by consequence 3. Irrevocably designated on initial recognition → by irrevocable designation / option 4. All debt investments that do not satisfy the requirements for measurement At amortized cost and FV-OCI → by default Measurement: Initially Fair Value + Transaction cost Entries Acquisition: Trading Securities Cash Subsequently Fair Value (changes through P/L whether temporary or permanent) xxx Changes in FV: Trading Securities xxx Unrealized gain/ trading securities xxx xxx Actual Sale: Cash xxx Trading Securities Gain on Sale xxx xxx Securities Security - Is an interest or share in a debt or equity of another entity that is represented in a financial instrument, which is being dealt on capital markets. Equity securities - Represent ownership interests such as ordinary and preference shares. These also include rights such as warrants, put options, and call options, which gives the holder certain rights to acquire or dispose of any ownership interest, at an agreed or determinable price. Debt securities - Are financial assets that represent the terms of loan between the creditor and the lender. These typically include the maturity value, interest rate payments, and a maturity date.
