CASH AND CASH EQUIVALENTS

Cash – includes money or its equivalent that is readily available

for unrestricted use.
1. Cash on hand – undeposited collections awaiting deposit
and other current funds held as of the reporting date.
2. Cash in bank – deposits in banks that are available for
immediate withdrawal and unrestricted use.
Cash Equivalents – short-term, highly liquid investments that
are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value.
Debt instrument acquired 3 months or less before their
maturity can qualify as cash equivalents
Examples of Cash
1. Coins and currencies
2. Demand deposits
3. Unrestricted Checks and Bank drafts
4. Money orders
5. Petty cash fund minus the paid vouchers
6. Revolving fund
7. Payroll fund
8. Change funds
9. Dividend fund
10. Tax fund
11. Travel fund
12. Interest fund
13. Other types of imprest bank account used in current
operations
14. Unrestricted deposits in foreign banks
15. Sinking fund due within one year
Examples of Cash Equivalents
1. Treasury bills (acquired 3 months before maturity date)
- Short-term obligation issued by the government at
discount.
- Maturity of 90 days or less than a year
2. Treasury notes (acquired 3 months before maturity
date)
- Long -term obligation issued by the government.
- Maturity of 1 year to less than 10 years.
3. Treasury bonds (acquired 3 months before maturity
date)
- Long -term obligation issued by the government.
- Maturity of 10 years or more.
4. Money market instrument (acquired 3 months before
maturity date)
- Investments in portfolios of short-term securities.
5. Commercial paper (acquired 3 months before maturity
date)
- Short-term, unsecured, notes payable issued in large
denominations by large companies with high credit
ratings to other companies and institutional
investors.
- Maturity of less than 270 days.
- Traded in money markets, and, thus, is highly liquid.
6. 3 month time deposit (or “time deposit” word alone)
- Evidenced by certificate of deposit
7. Redeemable preference shares (acquired 3 months or
less before specified redemption)
 - Debt instrument
- With mandatory redemption
8. Any debt securities
- Acquired 3 months or less before its maturity
Examples NOT included in Cash and Cash Equivalents
1. Equity securities
– Investments in stocks, no maturity
2. Shares of Stock
3. Share investment actively traded in stock market
4. Cash maintained in bank undergoing bankruptcy
9. It is receivable and measured at NRV
5. Foreign bank deposit (restricted)
10. Noncurrent asset with adequate disclosure
6. Compensating balance that are legally restricted
11. Short-term related, current asset
12. Long-term related, noncurrent asset
7. Treasury shares
8. Unused credit line
9. Sinking fund
10. Bond Sinking Fund
13. Noncurrent asset
11. Deposit in escrow
12. Bank overdraft, except when offsetting is permitted
14. Current liability
13. Bank balance statement
14. Postdated customer check
15. Customer check outstanding for 18 months
16. Cash collected for the next year
17. Check drawn by the vice president (postdated check of
vice president to company)
18. Pension fund
19. Treasury notes and bonds, naturally long term (no
maturity)
20. Redeemable preference shares (no maturity)
Examples of internal controls over cash
1. Segregation of incompatible duties
2. Imprest system – cash receipts must be intact and cash
disbursements should be made through checks.
3. Bank reconciliation – reconcile on a timely basis
4. Cash counts – surprise counts should also be performed
5. Minimum cash balance – no excessive cash balance to
avoid risk of embezzlement
6. Lockbox accounts – cash collections intact
7. Non-encashment of personal checks from petty cash
fund – to discourage concealment of cash shortage.
8. Voucher system – disbursement is properly authorized.
Concealment of cash shortage
1. Lapping – concealing by applying the subsequent
collection from another customer.
2. Kiting – overstating the balance of cash through
exploiting the float period, often happens at month-end
3. Window dressing – books are not closed at year end and
transactions in the subsequent period are deliberately
recorded in the current period. Also called cooking the
books.
Petty Cash Fund
Money set aside to defray relatively small amounts of cash
disbursements.

Debit Petty Cash Fund

- Establishing the fund
- Increase the fund
Credit Petty Cash Fund
- Decrease the fund
- For adjustments
Replenishment
Miscellaneous expense
Cash shortage
Cash in bank
Miscellaneous expense
Cash overage
Cash in bank

ACCOUNTS RECEIVABLE (Pg.125)

Trade receivables – claims arising from sale of merchandise or
services in the ordinary course of business.
1. Accounts Receivable – open accounts arising from the
sale of goods and services in the ordinary course of
business and not supported by promissory notes.
Also called
o Customers’ accounts
o Trade debtors
o Trade accounts receivable
2. Notes receivable – supported by formal promises to pay
in the form of notes.
Nontrade receivables – claims arising from sources other than
the sale of merchandise or services in the ordinary course of
business.
Classification
Trade receivable
- Current asset - realized in cash within NORMAL
OPERATING CYCLE or ONE YEAR, whichever is longer.
Nontrade receivable
- Current asset – realized in cash within ONE YEAR, the
length of operating cycle
- Noncurrent asset – realized in cash BEYOND ONE YEAR.
Presentation
Trade and nontrade receivable that are currently collectible
- Presented on the face of the statement of financial
position one line item called as trade and other
receivable
Details of the total trade and other receivables
- Disclosed in the notes to financial statement
Examples
Trade receivables
1. Account receivables
2. Notes receivable
Nontrade receivable
Current assets
1. Advances to or receivables from shareholders,
2. Advances to or receivables from directors,
3. Advances to or receivables from officers or employees.
4. Advances to suppliers
 5. Creditors’ accounts with debit balances
6. Suppliers’ debit balances
7. Dividend receivable
8. Accrued rent receivable
9. Accrued royalties receivable
10. Accrued interest receivable
11. Claims receivable
Noncurrent assets
1. Advances to affiliates
o associates, subsidiaries, branches, etc.
2. Special deposits on contract bids
Deduction from subscribed share capital if collectible beyond
12 months or if the problem is silent
3. Subscription receivable
o Indicated that it is collectible within 12 months
4. Deduction from subscribed share capital if collectible
beyond 12 months
Customers’ credit balances – are credit balances in accounts
receivable resulting from overpayments, returns and allowances,
and advance payments from customers
- Current liabilities
- Not offset against the debit balances of other customers’
account – EXCEPT when the same is not material in
which case only the net accounts receivable may be
presented.
Initial measurement of accounts receivable
PFRS 9, 5.1.1 – financial asset shall be recognized initially at
fair value plus transaction costs that are directly attributable
to the acquisition.
Fair value
- It is usually the transaction price, meaning, the fair value
of the consideration given
Accounts receivable shall be
- measured initially at face amount or original invoice
amount.
Short-term receivables
- fair value is equal to the face amount or original invoice
amount
- cashflow relating to short-term receivables are not
discounted because it is usually immaterial
Subsequent measurement of accounts receivable
PFRS 9, 5.2.1 – after initial recognition, accounts receivable shall
be measured at amortized cost.
Amortized cost
- Is the net realizable value of accounts receivable
Net realizable value
- Is the amount of cash expected to be collected or the
estimate recoverable amount.
- Initial amount recognized for AR shall be reduced by
adjustments which in the ordinary course of business
will reduce the amount recoverable from the customer.
- Assets shall not be carried at above their recoverable
amount.
Estimating the net realizable value
Following deductions are made:
1. Allowance for freight charge
2. Allowance for sales return
 3. Allowance for sales discount
4. Allowance for doubtful accounts
Terms related to freight charge
FOB destination
- Ownership of the goods purchased is vested in the buyer
upon receipt thereof.
- Seller is responsible for the freight charge up to
destination
FOB shipping point
- Ownership of the goods purchased is vested in the buyer
upon the shipment
- Buyer is responsible for the transportation charge
Freight collect
- Freight charge is not yet paid. Common carrier shall
collect the same from the buyer. Thus, paid by the buyer.
Freight prepaid
- Freight charge is already paid by the seller.

Accounting for freight charge

-
Note: Collection excluding recoveries means that recoveries given
are not included in computation of accounts receivable
NOTES RECEIVABLE
- Is claim supported by a formal promise to pay a certain
sum of money at a specific future date usually in the
form of a promissory note.
- Can be a negotiable instrument that a maker signs in
favor of a designated payee who may legally and readily
sell or otherwise transfer the note to others
- Fairly liquid even if long-te rm, although a fee might be
paid to do so.
- Notes contain an interest element because of the time
value of money, entities classify notes as either interest-
bearing or noninterest-bearing.
Interest bearing notes
- Have stated interest rate - the contracted interest rate
stated on the promissory note.
o Also called as nominal rate
o Coupon rate
o Face rate
Noninterest-bearing notes
- Do not have stated interest rate because they include the
interest element as part of the face amount.
- The face amount of noninterest-bearing note represents
o Unspecified principal
o Unspecified interest
- Present value computation is needed to separate the
interest element from the principal element.
Trade and non-trade notes receivables
- Notes received obtained from sale of goods or services in
the ordinary course of business are classified as trade
notes receivable
- Notes received from other sources are non-trade notes
receivable like loans to employees and affiliates and
sales of PPE on credit.
Initial Measurement
 - Initially recognized at fair value plus transaction costs.
Classification
For measurement purposes, receivables are classified into:
1. Short-term receivable
2. Long-term receivable that bears a reasonable interest
rate
3. Long-term receivable that bears no interest (noninterest
bearing)
4. Long-term receivable that bears an unreasonable
interest rate (below-market interest rate)
A short-term receivable matures 1 year or less
A long-term receivable matures beyond 1 year
Short-term receivable
The fair value of a short-term receivable may be equal to its face
amount. However, if the transaction contains a significant
financing component, the fair value of the short-term receivable
is equal to its present value
Exceptions on trade receivable
o Trade receivable that do not have a significant
financing component shall be measured at their
transaction price.
o A trade receivable may not be discounted if it is
within 1 year
Long-term receivable
The fair value of a long-term receivable that bears a reasonable
interest rate is equal to the face amount. An interest rate is
deemed ‘reasonable’ if it approximates the market rate at
transaction date.

The fair value of a long-term receivable that bears no interest

(long-term noninterest bearing receivable) is equal to the
present value of the future cash flows from the receivable
discounted using an imputed interest rate

The fair value of a long-term receivable that bears an

unreasonable interest rate is also equal to the present value of
the future cash flows from the receivable discounted using an
imputed interest rate.

Situation 1.
Northwest company received a 10% promissory note on July 1,
2022, with a face amount of 300,000. The principal amount of the
note is due to be collected on June 30, 2025 while the interest
due annually every June 30 starting June 30, 2023. Market rate
10%
1. How much is the interest income for the year ended
December 31, 2022? 15,000 year 2022
2. How much is the interest income for the year ended
December 31, 2023? 30,000 for the year 2023
3. What amount should be reported as current assets in
relation to the note on December 31, 2023? 15,000
4. What amount should be reported as non-current assets
in relation to the note on December 31, 2023? 300,000
5. What amount should be reported as current assets in
relation to the note on December 31, 2024? 315,000
 6. What amount should be reported as non-current assets
in relation to the note on December 31, 2024? 0
Situation 2.
Southwest company has a 12% note receivable dated July 1, 2022
in the original among of 900,000. Payments of 300,000 in
principal plus accrued interest are due annually on July 1, 2023,
2024, and 2025. The market rate of interest of this kind of note is
12%.

Cash – Bank Recon

1. C
2. B
3. C
4. A
5. B
6. B
7. D
8. C
9. D
10. C
11. B
12. C
13. B
14. D
15. D
16. C
17. C
18. D
19. A
20. A
21. B
22. A
23. C
24. D
25. B
26. C
27. B
28. A
29. B
30. A
31. B
32. D
33. C
34. A
35. B
36. B
37. A
38. D
39. B
40. B

INVENTORY