Chapter 1  Easy to mature

 As to FS date
CASH & CASH EQUIVALENT  3 months maturity date as to purchase

If the problem is silent, daily, they are part of cash and cash
CASH
equivalents.
 Money
 Other negotiable instrument payable in money
 Immediately encashable Not Cash Equivalents:
 Unrestricted in use
- Current Assets
- Short term Investments
Cash on Hand

 Undeposited cash collections INVESTMENT OF EXCESS CASH

- Checks
- Currencies  May be invested in time deposits, money market instruments,
- Cash items and treasury bills
 Purpose of earning interest expense

 3 months or less – cash equivalents

Cash in Bank
 Unrestricted as to withdrawal
- Demand deposit / Checking account
- Savings deposit
Cash Fund
 Set aside for current purposes
- Operations (current)
- Current liabilities (due w/in 1 year)
MEASUREMENT OF CASH
 More than 3 months but within 1 year – short term assets
- temporary investment
- current assets
 More than 1 year – non-current assets
- long term investment
- if investments becomes due within 1 year from the end of the
reporting period, they are reclassified as current or temporary
investment.

 Face value
CASH EQUIVALENT o Foreign currency – current exchange rate
o Estimated realizable value – amount recoverable is
 Short term estimated to be lower than the face value.
 Highly liquid (easily converted to cash)
Bank Overdraft Stale Check

 Cash in bank, credit balance  Not encashed by the payee within a relatively long period of
 Current liability time
 Offset if: same bank & bal. not material  Not encashed within 6 months (banking)
 “Stop payment order” – after 3 months, cancellation of a
previously issued check
Compensating Balance
Immaterial:
 Minimum checking/demand deposit balance Cash X
 Must be maintained Miscellaneous Income X

Not legally restricted Material:

- Informal agreement Cash X
- Part of cash Accounts Payable X
Legally restricted
- Formal agreement
Cash Shortage
- Cash held as compensating balance
 Short term – current assets  cash less than the balance per book
 Long term – non-current investment Cash Shortage X
Cash X
When the custodian is held responsible
Undelivered/Unreleased Check
Due from Cashier X
 Drawn and recorded but not given to the payee before the end Cash shortage X
of the reporting period Loss from Cash shortage X
 No payment when pending delivery Cash Shortage X
Cash Overage
Cash X Cash Short or Over
Accounts Payable X  cash more than the bal per book Account

Cash X - Temporary suspense

Postdated Check delivered Cash Overage X account
No claim - Should be adjusted
 Drawn, recorded and already given to payee - Offsetting account
Cash Overage X
 Bears a date subsequent to the end of the reporting period
Miscellaneous Income X
Cash X Money of the cashier
Accounts Payable X Cash Overage X
Payable to Cashier X
Petty Cash Fund Fluctuating Fund System

 set aside to pay small expenses (w/c cannot be paid by  Petty cash disbursements are immediately recorded
check)  Checks drawn to replenish the fund do not equal the
 Two methods of handling: disbursement. (Replenishment checks drawn only upon request)
o Imprest fund system  Replenishment of the fund may or may not equal the petty cash
disbursement
o Fluctuating fund system
 No adjustment needed
 The fund balance may still be increased despite an increased
Imprest Fund System effect during replenishment

 Usually followed a. To establish the fund

 Disbursements are normally recorded upon replenishment of the Petty Cash Fund X
fund. (In effect, equal) Cash in Bank X
 Replenishment of the fund is usually equal to the petty cash
disbursements. (Only by means of drawing checks not from b. Disbursement of the Fund
undeposited collections) Expenses X
 Necessary to adjust the unreplenished expenses Petty Cash Fund X
c. Replenishment
a. To establish the fund Petty Cash Fund X
Petty Cash Fund X Cash in Bank X
Cash in Bank X
d. Adjustment to Petty cash fund
b. Disbursement out of the fund - No entry
- No entry
e. To increase the balance of the fund
c. Replenishment Petty Cash Fund X
Expenses X Cash in Bank X
Cash in Bank X
f. To decrease the balance of the fund
d. Adjustment to Petty Cash Fund Cash in Bank X
Expenses X Petty Cash Fund X
Petty Cash Fund X
e. To increase the balance of the fund
Petty Cash Fund X
Cash in Bank X
f. To decrease the balance of the fund
Cash in Bank X
Petty Cash Fund X
 Chapter 2 RECONCILING ITEMS

BANK RECONCILATION Book Reconciling Items

a. Credit Memos
 Deposits credited by bank but not yet recorded as cash receipts
Demand Deposit – current/checking account  Increases book balance
- Notes receivable
 Covered by deposit slips
- Proceeds of bank loan
 Withdrawable on demand
- Matured time deposit
 Non-interest bearing
b. Debit Memos
Saving Deposit – passbook  Checks paid/debited by bank but not yet recorded as
disbursement
 May require notice of withdrawal  Decreases the bank balance
 Interest bearing - Non-sufficient fund checks (NSF)
Time Deposit – certificate of deposit - Technically defective checks
- Bank service charge
 Pre-terminated or withdrawn on demand - Reduction of loan
 Interest bearing c. Errors

Bank Reconciliation Bank Reconciling Items

 Statement that brings into agreement the cash balance per a. Deposit in Transit
book and per bank  Collections already recorded but not yet deposited to the bank
 Prepared monthly - Collections forwarded to the bank but too late to appear in the
bank statement
- Undeposited collections (Cash on hand)
b. Outstanding checks
Bank Statement – monthly report of bank
 Checks already recorded as disbursements but not yet reflected
a. Beg. Cash balance per bank at the bank statement
b. Deposits acknowledged by bank - Checks drawn and given to payee but not yet presented for
c. Checks drawn payment
d. Daily cash balance - Certified checks – accepted checks; deducted from O.C.
 Reciprocal accounts – equal/same balance c. Errors

Adjusting entries are only to Book Reconciling items.

Adjusted Balance Method Bank to Book Method

 The book balance and the bank balance are brought to a Bank Balance XX
correct cash balance that must appear on the balance sheet.
Add: Deposits in Transit XX

Debit Memos XX XX
Bal. per Book X Bal. per Bank X
Total XX
Add: Credit Memo X Add: Deposit in Transit X
Less: Outstanding checks XX
Less: Debit Memo (X) Less: Outstanding Checks (X)
Credit Memos XX (XX)
Errors +/- X Errors +/- X
Bank Balance XX
Adjusted Balance X Adjusted Balance X

PREPARATION OF ADJUSTING ENTRIES

a. To record the note collected by bank
Book to Bank Method Cash in bank X
Notes Receivable X
b. To record the NSF customer check
Book Balance XX Accounts Receivable X
Cash in bank X
Add: Credit Memos XX c. To record the bank service charge
Outstanding Checks XX XX Bank service charge X
Cash in bank X
Total XX

Less: Debit Memos XX SOME ERRORS AND THEIR CORRECTIONS

Deposits in Transit XX (XX) a. Understatement of cash receipts on the book of depositor

Cash in Bank X
Bank Balance XX Accounts Receivable X
b. Understatement of Checks drawn by depositor
Accounts Payable X
Cash in Bank X
c. Deposit of another entity is credited by the bank to the account
of depositor
- Deduction from the bank balance
d. Check of another entity charged to the account of depositor
- Addition to the bank balance
 Chapter 3 Computation of Deposit in Transit

PROOF OF CASH D.I.T – beg XX

Add: Cash receipts deposited XX

Two-date Bank Reconciliation
Total XX
a. Book Balance – beginning and ending
Less: Deposits acknowledged by bank (XX)
b. Bank Balance – beginning and ending
c. Deposits in Transit – beginning and ending Deposit in Transit – end XX
d. Outstanding Checks – beginning and ending

Computation of Outstanding Checks

Computation of Book Balance
O.C. – beg. XX
Balance per book – beg. XX
Add: Checks drawn by depositor XX
Book Debits – cash
Add: Book Debits XX
receipts Total XX
Total XX Book Credits –
Less: Checks paid by bank (XX)
cash disbursements
Less: Book Credits (XX)
Outstanding checks – end XX
Balance per book – end XX

PROOF OF CASH
Computation of Bank Balance
 Expanded reconciliation
Balance per bank – beg. XX Bank Credits –  Includes proofs of receipts and disbursements
deposits & credit  Useful in discovering possible discrepancies
Add: Bank Credits XX
memos
Total XX Bank Debits –
checks paid & Three Forms:
Less: Bank Debits (XX)
debit memos a. Adjusted Balance Method
Balance per bank – end XX
b. Book to Bank Method
c. Bank to Book Method
Adjusted Balance Method Book to Bank Method

PROOF OF CASH PROOF OF CASH

For the month of (Month 2) For the Month of (Month 2)
Month 1 Receipts Disbursement Month 2
Month 1 Receipts Disbursement Month 2
Bal. per Book XX XX XX XX
Bal. per Book XX XX XX XX Note Collected
Note Collected Month 1 XX (XX)
Month 2 XX XX
Month 1 XX (XX)
NSF Check
Month 2 XX XX Month 1 (XX) (XX)
NSF Check Month 2 XX (XX)
Service Charge
Month 1 (XX) (XX)
Month 1 (XX) (XX)
Month 2 XX (XX) Month 2 XX (XX)
Service Charge Deposits in Transit
Month 1 (XX) (XX) Month 1 (XX) XX
Month 2 (XX) (XX)
Adj. Book Bal. XX XX XX XX Outstanding Checks
Bal. per Bank XX XX XX XX Month 1 XX XX
Month 2 (XX) XX
Deposit in Transit
Bal. per Bank XX XX XX XX
Month 1 XX (XX)
Month 2 XX XX  Book receipts and disbursements are adjusted to equal the bank
balance.
Outstanding Checks
 Book reconciling items (Note collected, NSF, and service charge
Month 1 (XX) (XX) are treated in the same manner.
Month 2 XX (XX)  Bank reconciling items (DIT and OC) are treated in reverse.

Adj. Bank Bal. XX XX XX XX

Bank to Book Method

PROOF OF CASH
For the Month of (Month 2)
Month 1 Receipts Disbursement Month 2
Bal. per Bank XX XX XX XX
Deposit in Transit
Month 1 XX (XX)
Month 2 XX XX
Outstanding Checks
Month 1 (XX) (XX)
Month 2 XX (XX)
Note Collected
Month 1 (XX) (XX)
Month 2 XX (XX)
NSF Check
Month 1 XX XX
Month 2 (XX) XX
Service Charge
Month 1 XX XX
Month 2 (XX) XX
Bal. per Book XX XX XX XX

 Bank receipts and disbursements are adjusted to equal the book

balance.
 Bank reconciling items (DIT and OC) are treated in the same
manner.
 Book reconciling items (Note collected, NSF, and service charge
are treated in reverse.
 RECEIVABLES TRADE & OTHER RECEIVABLES:

Accounts Receivable X
RECEIVABLES
Allow. For Doubtful Accounts (X)
Notes Receivable X
Trade Non-Trade Accrued Interest on Notes Receivable X
Advances to Officers & Employees X
W/in 1 yr. or w/in O.C. W/in 1 yr. Beyond 1 yr. Dividends Receivable X
Total Trade & Other Receivables X
Current Assets Current Assets NCA

NON-TRADE RECEIVABLES
Trade & Other Receivables Separate line item
a. Advances to or receivables from shareholders, directors or
employees
 Within 1 year – current
 Beyond 1 year – non-current
Trade Receivables b. Advances to affiliate – long-term assets
c. Advances to suppliers for acquisition of merchandise – current
 Ordinary course of business assets
 Within 1 year or within the operating cycle (whichever is d. Subscription revenue – if silent, NCA
longer)
 Within 1 year – current
- Accounts receivable
 Beyond 1 year – deduction from subscribed share capital
- Notes receivable
e. Creditors account
 Debit bal. (overpayment) – Current
 Debit bal., not material – may offset
Non-trade Receivables f. Special Deposit on Contract bias – non-current asset
 Other than ordinary course of business  Collectible currently – current
o Within 1 year – current g. Accrued Income – current assets
o Beyond 1 year – non-current; separate line item - Dividend receivable
- Accrued rent receivable
- Accrued royalties receivable
- Accrued interest receivable
h. Claims receivable – current assets
 Chapter 4 Sales Return

ACCOUNTS RECEIVABLE Sales Return X

Allow. For Sales Return X

 Open accounts arising from the sale in the ordinary course of Allow. For sales Return X
business
 Not supported by promissory notes, “customer’s accounts,” Accounts Receivable X
“trade debtors”

Sales Discount
Initial Measurement
 Reduction from invoice price
- Face amount / original invoice amount  By prompt payment
 Part of seller
Subsequent Measurement

- Net realizable value a. Gross Method – commonly used

- Account receivables & sales @ Gross Amount

Gross Amount X 1. Sale : P100K, 5/10, n/30

Less: Account Receivable 100K
Allow. For Doubtful Accounts X Sales 100K
Freight Charges X 2. Collection w/in the Discount Period
Sales Returns X Cash 95K
Sales Discounts X (X) Sales Discount 5K
Net Realizable Value X Accounts Receivable 100K
3. Collection beyond the Discount Period
Cash 100K
AR Accounts Receivable 100K
Beg. X X Collections
Credit Sales X X SRDA
Recovery of prev. w/off X b. Net Method - @ Net Amount
_______________________________________________________ - Invoice Price – cash discount
1. Sale : 100K, 5/10, n/30
X X
Account Receivable 95K
(X)
Sales 95K
X 2. Collection within Discount Period
 Cash 95K
Accounts receivable 95K
3. Collection beyond the Discount Period
Cash 100K
Accounts Receivable 95K
Sales Disc. –forfeited 5K
Sales Discount-Forfeited – other income

Allowance for Sales Discount

Sales Discount X

Allowance for Sales Discount X

 ACCOUNTING FOR BAD DEBTS Chapter 5:

ESTIMATION OF DOUBTFUL ACCOUNTS

Allowance Method

 Uses the matching principle Accounts Receivable (Gross) X

 Accounts receivable would be properly recognized at Net
Realizable Value. Allow. For Doubtful Accounts (X)
1. Accounts are doubtful of Collection Net Realizable Value X
Doubtful Accounts X
Allow. For Doubtful Accounts X
2. Accounts are considered worthless Allowance for Doubtful Accounts
Allow. For Doubtful Accounts X
Accounts Receivables X  Contra-asset
3. Recoveries of previously written off
Accounts Receivable X
Allow. For Doubtful Accounts X
Cash X
ADA
Accounts Receivable X
Write Off X X Beg.

X Bad Debts Expense

Direct Write-off
X Recovery .
 Recognition of bad debts only when proved to be worthless.
1. Considered doubtful X X
- No entry
2. Accounts proven to be worthless (X)
Bad debts X X
Accounts Receivable X
3. Recovery of previous write-off
Accounts Receivable X
Bad Debts X
Cash X
Accounts Receivable X
 BAD DEBT EXPENSE

Balance Sheet Approach Income Statement Approach

% of AR Aging % of Sales

Ending Balance Total sales Credit sales

- consider existing balance
to get the bad debt Bad Debt Expense
expense.

Beg. X
Bad Debt Exp. (X)
End X
 Chapter 6 NOTES RECEIVABLE

NOTES RECEIVABLES  With promissory note

 From ordinary course of business
 Written contract in which the maker promises to pay the payee
Initial Measurement

NOTES RECEIVABLE Dishonored Notes

 Matures and not paid

Interest Bearing Non-interest Bearing - Transfers to account receivables

Short Term Long Term Short Term Long Term

Face amount – present value upon issuance
Face Amount Present Value
- Interest bearing & Short term non-interest bearing notes

Initial Carrying Amount X

Present Value – discounted value using effective interest rate
+/- Amortization X
- Long term non-interest bearing notes
- Principal (X)

- Impairment Loss (X)

Selling Price
X
 Cash Price Equivalent
Subsequent Measurement
In the absence of Cash price equivalent,
 Amortized Cost
Down Payment X

+ Present Value of Note X

Present Value of 1 (PV of 1)
(Revenue/Sale) Selling Price X
- Single lump sum payment
- (1+rate) ÷ =(no. of periods)

Ordinary Annuity of 1 (PV of OA of 1)

- Equal, series of payments

- (PV – 1) ÷ rate
Unearned Interest Income Non-interest bearing Note – 1
Face Amount X
Face Value X Cash Sale X
- Present Value (X)
Present Value (X) Cost (X)
X
Unearned Int. Income X Gross Income X

Gains
Note Receivable X
Selling Price X Sale X
- Carrying Amount (X) Unearned Interest Income X
X
Cash X
Carrying Amount / Amortized Cost Note Receivable X
Principal X
- Unearned Interest Income (X) Non-interest Bearing Note – 2
C.A. X
Face Value X Present Value X
Present Value (X) Downpayment X
Interest Bearing Note Unearned Int. Income X Selling Price X
N.R. X Face Value X Cost (X)
- Cost (X) x Interest Rate X% Gain X
Gain X Interest Income X Cash X
Note Receivable X
Equipment X
Notes Receivable X
Gain on Sale X
Gain X
Unearned Int. Income X
Cost X
Cash X
Accrued Interest Rec. X
Note Receivable X
Interest Income X
Unearned Int. Income X
Cash X Interest X
Note Receivable X
Accrued Int. Receivable X
Interest Income X
EFFECTIVE INTEREST METHOD

Annual Interest Present

Date Principal
Collection Income Value
Preceding
Annual
balance –
PV × rate collection –
principal
Int. Income
payment

Unearned
Date Interest Income Present Value
Interest
Preceding bal. Face Value –
PV × rate
– Int. income Int. Income

Shortcut for Present Value:

Present Value x (1+Rate) - Principal Payment
 Chapter 7 Interest Received

LOANS RECEIVABLE Principal X Nominal Rate

Initial Measurement Interest Income

 Fair Value (Transaction Price) Carrying Amount X Effective Rate

Loans Receivable X
Fair Value / Face Amount X Cash X Carrying amount is actually the Amortized Cost.
Unearned Int. Income X
+ Direct Origination Cost X Cash X
- Origination Fees Received (X) Cash X
Unearned Int. Income X
Initial Carrying Amount X

Loan Receivable (FA) X AMORTIZATION TABLE

- Unearned Interest (X) Interest Interest Carrying

Date Amortization
Received Income Amount
Carrying Amount, (FS date) X Carrying
Principal ×
Amount ×
Nominal
Effective
Rate
Subsequent Measurement Rate

 Amortized Cost
Cash X
Interest Income X
Initial Carrying Amount X Unearned Int. Income X
- Principal Payment (X) Interest Income X

+/- Amortization X
Cash X
- Impairment Loss (X) Interest Income X

Amortized Cost X Unearned Int. Income X

Interest Income X
Cash X
Loan Receivable X
 Impairment Loss X
IMPAIRMENT LOSS
Allow. For Impairment Loss X

Allow. For Impairment Loss X

Level 3: Objective evidence of Impairment
Accrued Interest Receivable X
 Loans as imputed
 Actual loss (fails to pay on time)
Cash X

Impairment Testing Loans Receivable X

- Comparing the carrying Amount of the loan Allow. For Impairment Loss X

Face Amount X Interest Income X

- Present Value of Cash Flows (X)

Impairment Loss X Shortcut for Carrying Amount:

Carrying Amt. x (1+Disc. Rate) - Principal Payment

Period – number of dates from impairment testing

P.V. of 1 – not equal payments

O.A. of 1 – equal payments

Use the original effective rate to discount for the present value factor.

IMPAIRMENT LOSS

Carrying Amount X (Loan Rec. + Acc. Int. Income)

Present Value (X)

Impairment Loss X
 Chapter 8-9 Pledge of AR

RECEIVABLE FINANCING  When loans are obtained, accounts receivables may be pledged
as collateral security for the payment of loan
 No necessary entry
 General. (all AR serve as collateral security)
Receivable Financing

 Capability of an entity to raise money out of its receivables o Recording of Loan

Cash X If the loan is
Discount on NP X discounted, the
Note Payable X interest for the
FORMS:
loan is deducted
o Subsequent Payment of Loan in advance.
a. Pledge of Accounts Receivable
Note Payable X
b. Assignment of Accounts Receivable
Cash X
c. Factoring of Accounts Receivable
d. Discounting of Notes Receivable o Amortization of Discount
Interest Expense X
Discount on NP X
RECEIVABLE FINANCING When it comes to pledged accounts, no entry is necessary. Only
disclosure.
Accounts Receivable Notes Receivable

Pledge Assignment Factoring Discounting Assignment of AR

- As collateral - Formal - sells AR - endorsement

 Assignor (borrower) transfers rights in some accounts receivable
security pledging - transfers to the assignee (lender) in consideration for a loan.
- General - secured ownership  Secured borrowing evidenced by a financial agreement and a
- no - specific Without recourse
necessary - retains promissory note. (Formal type of pledging)
Avoids future liab.
entry ownership Without There is loss. Immediate  Specific (specific AR serves as collateral security)
recourse recog of NR  Assignor retains ownership of the accounts receivable
No obli in the
Non-notification future. Only  Receivable are not actually sold to the assignee
Still pays to the expense as loss With recourse  The amount loaned is usually a percentage of the outstanding
assignor then remits
to the assignee
accounts receivables in the accounts assigned
Conditional sale
With recourse (if silent)
Contains obli.  Non-notification basis
Notification Both expense &
Payments directly liab as loss
Secured Borrowing
- Customers are not informed that their accounts have been
to the assignee
assigned
 - Customers continue to make payments to the assignor, and  Notification basis
the assignor remits to the assignee - Customers are notified to make their payments directly to the
assignee
o To separate assigned accounts
AR – assigned X o To separate assigned accounts
Accounts Receivable X AR – assigned X
o To record the Loan Accounts receivable X
Cash X o To record the loan
Service Charge X Cash X
Note payable – bank X Service Charge X
o Issued credit memo for sales return to a customer whose Note payable – bank X
account was assigned o Received notice from bank that assigned accounts were
Sales Return X collected, less discount
AR – assigned X Note Payable - bank X
o Collection of assigned account less discount Sales Discount X
Cash X AR – assigned X
Sales Discount X o Received notice from bank that assigned accounts were
AR – assigned X collected
o Assigned account proven worthless Cash X
Allow. For DA X Interest Expense X
AR – assigned X Note payable – bank X
o Remitted to the bank AR – assigned X
Note payable – bank X o Uncollected assigned accounts
Interest Expense X Accounts receivable X
Cash X AR – assigned X
o Transfer remaining balance of assigned account
Accounts Receivable X
In non-notification basis, you would need to dr. cash, cr. AR-
AR – assigned X
assigned when you collected the payment, then make another
entry with dr. NP, cr. Cash when you remit it to the bank.
In notification basis, you would just dr. NP, cr. AR-assigned
Total AR – assigned XX
when the bank gave a notice that the assigned accounts were
Less: Collections collected.
Sales discount XX
Sales return XX
Worthless account XX (XX)
Balance XX
Factoring of AR o If all accounts are collected
RO X
 Entity sells AR to a factor (bank/finance entity)
Loss on RO X
 Transfers ownership of the AR to the factor
For interest:
 Without Recourse Obligation Weighted Ave. time to maturity – 365 days
- Disposes assets immediately If silent, Banker’s rule – 360 days
Cash – initially
- No more assets to be collected received from the
- No obligation in the future factor
- Only the expense is recorded as loss Factor’s Hold
o Initial entry Back (FHB) –
Receivable from
Cash X Discounting of NR
the Factor. Not a
Factor’s Hold Back X
loss. Only
Service Fee X  When a note is negotiable, the payee may obtain cash before
withheld for the
ADA X meantime. maturity by discounting the note at a bank
AR X  To discount the note, the payee must endorse it
Loss in Factoring
o To record the collection of FHB  Payee becomes an endorser, and the bank becomes an
– Only expenses;
Cash X (service fee, endorsee
Factor’s Hold Back X interest expense)

Endorsement – transfer of right to a negotiable instrument by simply

 With Recourse Obligation signing at the back of the instrument
- Contains obligations related to the AR
- Recognize fair value @ value attached
- Both expense and liability are recorded as loss  Net Proceed – discounted value of the note received
Net Proceed = MV – Disc.
Loss on Recourse
o Initial entry  Maturity Value – amount due on the note at maturity
Obligation – not
Cash X MV = Principal + Interest
waived in the
Loss on RO X initial entry  Maturity Date – date on which the note should be paid
Service Fee X Recourse  Principal – amount appearing on the face of the note (Face
Interest Exp. X Obligation – Value)
FHB X liability  Interest – amount of interest for the full term
AR X Int = Principal × Int. rate × Time (Expired)
Loss in Factoring
RO X – Liability (RO) &  Interest rate – rate appearing on the face of the note
o To record the collection of FHB expenses (service  Time – period within which interest shall accrue
Cash X fee, int. exp.)  Discount – amount of interest deducted by the bank in advance
FHB X Discount = MV × Disc. rate × Disc. Period (Unexpired)
  Discount rate – rate used by the bank in computing the  Without Recourse
discount. (If not given, use the interest rate) - Endorser avoids future liability
 Discount period – period of time from date of discounting to - There is loss
maturity date. (Unexpired term of the note) - Immediate recognition of Note Receivable
Disc. Period = Term of note – Expired portion
Cash XX
Loss XX
Note Receivable XX
Maturity Value
Interest Income XX
Principal XX
+ Full Interest XX
Maturity Value XX  With Recourse

Discount Unexpired portion  Conditional Sale

Maturity Val × Disc. Rate × Disc. Period Remaining term of - There is gain or loss
the note at the time - Uses Note Receivable Discounted
it was discounted.
Net Proceeds Cash XX
Maturity Value XX Loss XX
- Discount (XX) NR discounted XX
Net Proceeds XX Interest Income XX

Interest Income FS PRESENTATION

Expired
Principal × Interest Rate × Time Note Receivable XX
portion
NR discounted (XX)
Carrying Amount XX
Principal XX
Acc. Int. Rec. (II) XX
 Secured Borrowing
Carrying Amount XX
- No gain or loss
- Recognizes Interest Expense, instead of loss
Gain or Loss on Note Discounting
- Uses Liability for Note Receivable discounted
Net Proceeds XX
Carrying Amount (XX) Cash XX
Gain or Loss XX Int. Expense XX
Always credited
Liab. For NR discounted XX
@ FV
Int. Income XX
 Chapter 10 SHIPPING TERMS

INVENTORIES  FOB Shipping Point – upon shipment

 FOB Destination – upon receipt

Shipping supplies
INVENTORIES
INVENTORIES
- To acquire materials – part
- To deliver – not part; selling/delivery expense
Finished Goods/ Work in Factory
Raw
Marchandise Process Supplies
Materials
Inventory (WIP) (Overhead) DM XX
Period Cost
DL XX
Conversion Cost
- Completed - Partially - To be
OH XX
products - Indirect
completed used in the
materials Cost XX
- Goods for sale - In the production
Process process

Based on Cost Based on Selling Price

As a rule, all goods to which the entity has title shall be Cost XX – 100% Cost XX
included in the inventory. Mark-up (GP) XX Mark-up (GP) XX

Selling Price XX Selling Price XX – 100%

PRESENTATION OF INVENTORIES
If silent, recorded based on cost.
Legal Test

 Goods owned and on hand

 Goods in Transit and sold FOB destination
 Goods in Transit and purchased FOB shipping point
 Goods out on consignment
 Goods in the hands of salesmen or agents
 Goods held by customer on approval or trial
Exception, Goods sold on installment are included in the inventory of
the buyer, and excluded from that of the seller.
CONSIGNED GOODS
 Consignor (owner) transfers physical possession of consigned
goods to the consignee (agent), who sells them in the owner’s
behalf
Who has possession? Consignee
Legal Title (declare inventories) – Consignor
ACCOUNTING FOR INVENTORIES TRADE DISCOUNT & CASH DISCOUNT

 Periodic System Trade Discount

- Physical counting of goods at the end of the accounting period
 Deductions from the list/catalog price to arrive at the invoice
- Gives actual or physical inventories
price
- To encourage trading or increase sales
- Not recorded
 Perpetual System
- Requires the maintenance of records (stock cards) Cash Discount
- Running summary of the inventory inflow and outflow
- Deductions from the invoice price when payment is made
- Gives book or perpetual inventories
within the discount period
- To encourage prompt payment
- Recorded
PERIODIC PERPETUAL

1. Purchase of merchandise on account

Purch XX Merch Inv. XX List Price XX
AP XX AP XX
Trade Discount (XX)
2. Payment of Freight on Purchase
Freight-in XX Merch. Inv. XX Invoice Price XX
Cash XX Cash XX
3. Return of merchandise purchased to supplier Cash Discount (XX)
AP XX AP XX Payment w/in disc per. XX
Purch Return XX Merch Inv. XX
4. Sale of Merchandise on account
AR XX AR XX METHODS OF RECORDING PURCHASES
Sales XX Sales XX
COGS XX  Gross Method
Merch Inv. XX - Discounts are recorded only when taken
5. Return of merchandise sold from customer - Violates the matching principle
Sales Ret. XX Sales Ret. XX - Supported in practice
AR XX AR XX - More convenient
Merch Inv. XX
COGS  Net Method
6. Adjustment of Ending Inventory - Theoretically correct
MI - end XX Not Adjusted - Represents the cash equivalent price on the date of payment
Inc Summary XX
 Chapter 11  Perpetual
- Requires preparation of a stock card
INVENTORY COST FLOW
DATE PURCHASES SALES BALANCE
Units UC TC Units UC TC Units UC TC
1 X X XX
Beg. XX 2 X X X X X XX
Purchases XX 3 X X X X X XX
X X XX
Goods avail. for sale XX
4 X X X
Ending Inventory (XX) X X X X X XX
5 X X X X X XX
Cost of Goods Sold XX
X X XX
Add each purchases, deduct each sales. Get the balance after
each transaction.
A. Specific Identification
- Specific costs are attributed to identified items of inventory COST OF GOODS SOLD
- Units on hand × Actual unit cost (Date 2) Sale XX
(Date 4) Sale XX
COGS XX
B. First in, First out (FIFO)
o Cost of Sale – earlier prices Under FIFO-periodic & FIFO-perpetual, the inventory costs are the
o Ending Inventories – latest prices same.

 Periodic

PURCHASES UNIT UNIT COST TOTAL COST C. Weighted Average

1 XX XX XXX
2 XX XX XXX  Periodic
TOTAL XX XXX - Weighted Average
- Average cost at the end of the year
COST OF GOODS SOLD
UNITS UNIT COST TOTAL COST
Inventory – beg. XX Beg. Bal X X XX
Purchases XX Purchase 1 X X XX
Goods avail. For sale XX Purchase 2 X X XX
Inventory – end (XX) TG avail. For sale X X XX
COGS XX
UNIT COST Relative Sales Price Method
Total cost of Goods avail. for sale
- Allocate joint costs based on the prices at which products
Total no. of units avail. for sale
would be sold.
INVENTORY COST
COMPUTATION OF COST OF EACH PRODUCT
Ending Inventory × WA Unit Cost
Sales Price × Total Cost (basket price)
COST OF GOODS SOLD
Total Sales Price
Beg. Inventory XX
Purchases XX
Goods avail. for sale XX
Ending Inventory (XX)
COGS XX

 Perpetual
- Moving Average
- Average unit cost is computed after every purchase and
purchase return.

UNITS UNIT COST TOTAL COST

Beg. Balance X X XX
Sale (X) X (XX)
Balance X X XX
Purchase X X XX
Total X X New UC XX
Sale (X) X (XX)
Balance X X XX
Purchase X X XX
Total X X New UC XX

UNIT COST (After every purchase & purchase return)

Total Cost
No. of Units
COST OF GOODS SOLD
Sale XX
Sale XX
COGS XX
 Chapter 12 ACCOUNTING FOR INVENTORY WRITEDOWN

LOWER OF COST AND NET REALIZABLE VALUE Cost is lower than NRV

Initial Measurement Subsequent Measurement
Sold (COGS) – Income Statement
Cost
Ending Inventory (Cost) – Balance Sheet
- No accounting problem
- Measured at cost
- Increase in value is not recognized
NRV is lower than Cost
- Measured at NRV
- Decrease in value is recognized

PAS 2, paragraph 9
METHODS OF ACCOUNTING FOR THE INV. WRITEDOWN
Inventories shall be measured at the lower of cost and net
realizable value (LCNRV). a. Direct Method
- Cost of Goods Sold Method
You can never record your asset above its recoverable amount.
- recorded at the LCNRV
- Loss on inventory writedown (difference) is not accounted for
separately, but is buried in the COGS
Net Realizable Value (NRV)
Inventory XX Increases the
Estimated Selling Price XX Income Summary XX COGS
Est. Cost to Complete (XX)
Est. Cost to Sell (XX)
Net Realizable Value XX b. Allowance Method
- Loss Method
Principle of Conservatism - recorded at cost
- any loss on inv. Writedown is accounted for separately
- Treatment that does not overstate your asset/income and
Inventory XX
does not understate your liabilities/expense.
Income Summary XX
Loss on Inv. Writedown XX
Allow. For Inv. Writedown XX
a. LCNRV – Individual Basis (Item by item) – lowest possible
amount Inventory XX
b. LCNRV by Category Allow. For Inv. Writedown (XX)
c. LCNRV by Total Net Realizable Value XX

If silent, use Individual Basis

 J9Loss on Writedown  Increase in Price – Gain (limited to the extent of the prev. loss)
Liab on PC XX
Req. Allowance (EI) XX
Gain on PC XX
Allowance – Beg. (BI) (XX)
Required Allowance XX As the price decline, so will you recognize additional loss. No
limit as to loss.
- If required allowance decreases, a gain on reversal of inventory
Recognize a gain if you have recognized a loss. Gain is limited
writedown is recorded. (But limited only to the extent of the
to previous loss.
allowance balance).
 Purchases
Allowance for Inv. WD XX
- Recognized at actual price or fixed price, whichever is lower.
Gain on reversal of Inv. WD XX

Cost XX  AP/Cash
NRV (XX) - Fixed price.
Req. Allowance XX
Allow. Balance (XX) Presented as deduction
Decrease in allowance XX from COGS

Either Allowance Method or Direct Method, it must be the

same.
Allowance Method, required by the Standard.

PURCHASE COMMITMENTS

 Obligations of an entity to acquire certain goods in the future

at a fixed price and fixed quantity.

Principle of Conservatism

- Recognize all losses and recognize limited gain.

 Date of Purchase commitment

NO ENRTY
 Decrease in Price – Decline. (No max amount)
Loss on PC XX
Liab on PC XX
 Chapter 13-14 GROSS PROFIT METHOD

ESTIMATES IN INVENTORY VALUATION

Based on Sales Based on Cost

Common Reason for making an Estimate:

a. Inventory is destroyed by fire or other catastrophe Net Sales × Cost Ratio Net Sales ÷ Sales Ratio
b. Gross Profit Test
c. Interim FS are made Net sales

Interim Financial Statement - Only include sales return

- Do not include sales allowances & discounts (does not represent
- At a date other than FS date
physical outflow of goods)
- Not required to make physical count
- If they are only in one account (SRAD) and cannot be
- Estimates may be allowed
determined individually, deduct all.
- Only in presenting estimates (EI)

Gross Profit Method

Approximating
Value of Inventory
RETAIL INVENTORY METHOD
Retail Inventory Method
 All at selling price

GROSS PROFIT METHOD

Goods avail. for sale (@ Selling price) XX
 Rate of gross profit remains approximately the same from
Net Sales (Gross Sales – Sales Return) (XX)
period to period.
 Ratio of COGS to Net Sales is relatively constant. Ending Inventory (@ SP) XX
 COGS is computed through the use of GP rate. × Cost Ratio X%
Estimated Inventory (@ Cost) XX
Beg. Inventory XX Purchases XX
Net Purchases XX Freight in XX Cost Ratio
PRAD (XX)
Avail. for Sale XX Net Purchases XX Goods avail for sale @ Cost
Ending Inventory (XX)
Goods avail for sale @ Selling Price
Cost of Goods Sold XX
 RETAIL INVENTORY METHOD

Conservative/Conventional Average Cost FIFO

- Lower of Cost & - considered/used - excludes beginning

NRV Approach by the standard inventory
- Lowest amount of
inventory balance

GAFS @ Cost GAFS @ Cost Net Purchases @ Cost

GAFS @ SP + NMU GAFS @ SP + NMU - NMD NP @ SP + NMU - NMD