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Lesson 1 AP: Minimum Composition of the SFP and Some Audit Notes

Statement of Financial Position

Assets

Current Assets

  • 1. Cash and Cash Equivalents

  • 2. Financial Assets at Fair Value (Trading Securities)

  • 3. Trade and Other Receivables

  • 4. Inventories

  • 5. Prepaid Expenses

Non-Current Assets

  • 1. Property, Plant and Equipment

  • 2. Long Term Investments

  • 3. Intangible Assets

  • 4. Other Non-Current Assets

Liabilities

Current Liabilities

  • 1. Trade and Other Payables

  • 2. Current Provisions

  • 3. Short Term Borrowing

  • 4. Current Portion of Long Term Debt

  • 5. Current Tax Liability

Non-Current Liabilities

  • 1. Non-Current Portion of Long Term Debt

  • 2. Finance Lease Liability

  • 3. Deferred Tax Liability

  • 4. Long Term Debt to Entity Officers

  • 5. Long Term Deferred Revenue

Shareholder's Equity

  • 1. Paid-in / Contributed Capital

  • 2. Other Comprehensive Income or Losses / Unearned Capital

  • 3. Accumulated Profits or Retained Earnings

Essential Characteristics of an Asset

  • 1. Controlled by the entity

  • 2. Result of past transaction

  • 3. Provides future economic benefits

  • 4. Can be measured reliably

Essential Characteristics of a Liability

  • 1. Present obligation of the entity

  • 2. Result of past transaction

  • 3. Requires an outflow of entity's resources

Some Audit Notes:

Counterbalancing Errors (IPADA)

  • 1. Inventories

  • 2. Prepayments

  • 3. Accrued Expenses

  • 4. Deferred Income

  • 5. Accrued Revenue

Change in Accounting Policy and Prior Period Errors

*Retrospective except when impracticable

Change in Accounting Estimate

*Prospectively

Accounting Estimates (FWIBU)

  • 1. Fair Value of Financial Asset or Liability

  • 2. Warranty

  • 3. Inventory Obsolescence

  • 4. Bad Debts

  • 5. Useful Life

Lesson 2 AP: Audit of Cash and Cash Equivalents - Notes

Assertions (COVER)

  • 1. Completeness (Cut-off, Proof of Cash)

  • 2. Obligations

  • 3. Valuation (Face Value, Exchange Rate, NRV)

  • 4. Existence (Cash Count, Bank Reconciliation, Interbank Transactions)

  • 5. Rights

Composition of Cash

  • 1. Cash on Hand = includes undeposited currency and coins, undeposited checks (payable to the entity or

bearer), bank drafts and money orders.

  • 2. Cash in Bank = demand deposit, checking account and saving deposit that are NOT legally restricted.

  • 3. Cash Fund = are set aside for CURRENT purposes such as petty cash fund, payroll fund and dividend fund.

Composition of Cash Equivalents

*Commercial Paper / Money Market Instrument / Time Deposit / Treasury Bills

acquired at MOST three months before maturity.

Initial Valuation

*Face Value

Subsequent Valuation

*General Rule = Face Value

*Except:

  • a. Foreign Currency *at Current Exchange Rate

  • b. Cash in Financial Institutions with Financial Difficulty or in Bankruptcy *lower of NRV or Face Value

Necessary Disclosures:

  • 1. Temporary Placements of Excess Cash (Predetermined)

  • 2. Cash Compensating Balance

Other Things to Remember:

  • 1. Bank overdrafts are liabilities. Offset it only against other existing accounts in the same bank to reflect the

total balance of your account in that bank.

  • 2. Post-dated checks are not yet part of cash receipts or disbursements because before the date written on the

check, the holder of such CANNOT encash it yet.

  • 3. Commercial Paper / Money Market Instrument / Time Deposit / Treasury Bills with 3 months left until

maturity but purchased more than 3 months before maturity are still classified as short-term investments because the standard says so. The standard does not consider it as "highly liquid".

  • 4. Undelivered checks are still part of cash and removed from cash disbursements because the payment of a

check requires its delivery to the payee.

  • 5. Returned checks are restored back to its corresponding receivable or payable because there was no

encashment made by the payee.

  • 6. Stale checks are restored back to its corresponding receivable or payable because the negotiability of the

check expired. Banks usually don't honor checks that are not encashed within a "reasonable time" (normally within six months) after the indicated issue date. If the amount of the stale check is immaterial, it is normally accounted as miscellaneous income or expense.

  • 7. Legally restricted compensating balances carries the classification of its related loan (either short-term or

long-term investment). It is not classified as cash because you cannot withdraw such amount immediately.

  • 8. NSF or DAIF checks are debit memos from the bank because no amount was collected from such check.

Therefore, the corresponding receivable of such check is restored.

Cash Short or Over

*Accountability = the amount of cash that MUST BE present. *Accounted for = the amount of cash COUNTED. *Cash Shortage if Accountability > Accounted for *Cash Overage if Accountability < Accounted for In computing for the cash shortage or overage, do not account for cash that you did not include in the accountability.

Bank Reconciliation

  • 1. Book reconciling items:

    • a. Credit memos

    • b. Debit memos

    • c. Book errors

  • 2. Bank reconciling items:

    • a. Deposits in transit

    • b. Outstanding checks

    • c. Bank errors

  • Problem:

    In lieu with your audit of Bonne Chance Company for the year ended December 31, 20x1, you gathered the following information:

    Current account at BDO

    P 1,500,000

     

    Current account at Landbank

    (75,000)

    Payroll account

    375,000

    Foreign bank account - restricted (in USD)

    15,000

    Postage stamps

    750

    Employee's post dated check

    3,000

    IOU from a key officer

    7,500

    Credit memo from a vendor for a purchase return

    15,000

    Traveler's check

    37,500

    Customer's not-sufficient-funds check

    11,250

    Money Orders

    22,500

    Petty cash fund (P3,000 in currency and expense vouchers for P4,500)

    7,500

    Treasury bills, due 3/31/20x2 (purchased 12/31/20x1)

    150,000

    Treasury bills, due 1/31/20x2 (purchased 1/1/20x1)

    225,000

    Change fund

    2,500

    Bond sinking fund

    250,000

    The current exchange rate as of December 31, 20x1 is at P50 for every 1 USD.

     

    What is the total cash and cash equivalent to be reported by the company in its December 31, 20x1 Statement of Financial Position?

    Solution:

    Current account at BDO

    P 1,500,000 Cash in Bank

    Current account at Landbank

     

    Payroll account

     

    (75,000) Current Liability 375,000 Current Fund

    Foreign bank account - restricted (in USD)

     

    15,000

    Legally Restricted

     

    750

    Office Supplies

    Postage stamps

    Can't encash it yet

    Employee's post dated check

    3,000

    Receivable from Officers

     

    7,500

    Purchase Returns

    IOU from a key officer Credit memo from a vendor for a purchase return

    15,000

    Traveler's check

    37,500

    Undeposited Check

    Restore Receivable

    Customer's not-sufficient-funds check

    11,250

    Money Orders

    22,500 Good as Cash

    Petty cash fund (P3,000 in currency and

    expense vouchers for P4,500)

    Treasury bills, due 3/31/20x2 (purchased 12/31/20x1)

    Petty Cash on Hand 7,500 Record as Expenses 150,000 Acquired 3 months

    Treasury bills, due 1/31/20x2 (purchased 1/1/20x1)

    before maturity 225,000 Short-term Investments

     

    2,500

    Current Fund

    Change fund Bond sinking fund

    250,000

    Long-term Investments

    Adding up the amounts in bold format, we will arrive at P 2,090,500. Refer to: http://nerdtayo.blogspot.com/2014/01/lesson-2-ap-audit-of-cash-and-cash.html

     

    Lesson 2 AP: Audit of Cash - Problem B

     

    Problem:

    Bonjour Company

    General and Petty Cash Count Audit Year: 20x1 Date of Count: January 5, 20x2, 10:00am

     

    Bills and Coins

    Denomination Pieces

     

    P 500

    218

    100

    454

    50

    610

    20

    1,008

    10

    20

    5

    608

    1

    1,040

    0.25

    4,032

    Checks

    Maker

    Payee

    Date

    12/30/20x1

    12/26/20x1

    1/2/20x2

    12/21/20x1

    12/27/20x1

    1/5/20x2

    12/29/20x1

     

    Amount

    Tissot - Customer

    Bonjour Company

    P 23,840

    Castro - Customer

    Bonjour Company

     

    25,010

    Allez - Customer

    Bonjour Company

    11,414

    Petra - Customer

    Bonjour Company

    26,700

    Bonjour Company

    Bonne Chance Corp.

    29,000

    Salut - Officer

    Bearer

    620

    Bueno*

    Cash

    520

    *Amount is for a return of travel advance made to the employee in an earlier period.

    Vouchers and IOUS

     

    Paid to

    Date

    Amount

    BWD

    1/2/20x2

    P

    70

    BENECO

    12/20/20x1

    300

    Eurotel - Christmas Party

    12/23/20x1

    12,580

    Vina - IOU

    12/27/20x1

    600

    Additional Notes: (mga ebidensya ng cash transactions ukol sa binilang)

     
    • 1. Cash sales invoice (all currencies, No. 17903 to 18112), P 201,000.

    • 2. Official Receipts

    Number

    Amount

    Form of Collection

    • 31250 P 1,120

    Cash

    • 31251 25,010

    Check

    • 31252 2,404

    Cash

    • 31253 23,840

    Check

    • 31254 26,700

    Check

    • 3. Stamps of various denomination amounted to P 160.

    • 4. A notation on an envelope is "Proceeds from employee contribution for Christmas Party, P 19,000".

    • 5. Petty cash per ledger, P 30,000.

    Questions:

    • 1. How much is the petty cash shortage as of January 5, 20x2?

    • 2. What is the credit adjustment to correct the petty cash fund?

    • 3. What is the adjusted petty cash fund as of December 31, 20x1?

    Solution:

    • 1. Accountability: (ano ang dapat na meron)

    Cash receipts, undeposited

    P 201,000

    from sales invoice No. 17903 to 18112

    Cash and Check receipts, undeposited

    79,074

    from OR No. 31250-31254

    Check of Allez - Customer, undeposited

    11,414

    unrecorded check

    Check of Salut - Officer, undeposited

    620

    in payment of an IOU

    Check of Bueno - Employee, undeposited

    520

    to reimburse the entity's unused fund

    Petty cash per ledger

    30,000

    must account the fund's disbursements

    Proceeds for Christmas Party

    19,000

    the amount must be intact

    Total Accountability

    P

    341,628

    Accounted for:

    (yung nabilang na cash, at kung saan napadpad yung cash sa general and petty cash fund)

    Bills and Coins

    P

    210,348

    Checks

    88,724

    Vouchers and IOUS

    13,550

    Amount Accounted for

    P

    312,622

    *In counting for checks, we did not include the following:

    Bonjour Company

    Bonne Chance Corp.

    12/27/20x1

    because it is an undelivered check

    Accountability less Accounted for equals P 29,006 Cash Shortage as of January 5, 20x2.

    *The Accountability and Accounted for amount are not absolute amounts. You may eliminate items that are surely the same in both accountability and accounted for for shorter solutions.

    • 2. Vouchers and IOUS

    P

    970

    Cash Shortage

    29,006

    Credit to Petty Cash Fund

    P

    29,976

    *The voucher paid to Eurotel for the Christmas Party was not included in the vouchers because the related amount disbursed came from the proceeds from employee contribution for the Christmas party and not from the petty cash fund.

    *The total amount of the cash shortage is to be credited to the petty cash fund because the petty cash fund custodian is the one primarily responsible for the shortage. The receivable from petty cash custodian will be debited for this entry, and this account will be reversed when paid by such custodian or proven that it was not the fault of the custodian(it will be transferred to a loss or receivable from another employee).

    • 3. Petty Cash Fund, per ledger

    P

    30,000

    Credit to Petty Cash Fund

    29,976

    Adjusted Petty Cash Fund, 12/21/20x1

    P

    24

    Lesson 2 AP: Audit of Cash - Problem C

    Problem:

    You obtained the following information in connection with the audit of Bonsoir Company cash account as of December 31, 20x1:

    Outstanding checks, 11/30/20x1

    P

    16,250

    Outstanding checks, 12/31/20x1

    12,500

    Deposit in transit, 11/30/20x1

    12,500

    Cash balance per general ledger, 12/31/20x1

    37,500

    Actual company collections from its customers during December

    152,500

    Company checks paid by bank in December

    130,000

    Bank service charges recorded on the company books in December

    2,500

    Bank service charges per December bank statement

    3,250

    Deposits credited by bank during December

    145,000

    November bank service charges recorded on company books in December

    1,500

    The cash receipts book of December is underfooted by P 2,500. The bank erroneously charged the company's account for a P3,750 check of another depositor. This bank error was corrected in January 20x2.

    Questions:

    • 1. How much is the deposit in transit on December 31, 20x1?

    • 2. What is the total unrecorded bank service charges as of December 31, 20x1?

    • 3. What is the total book receipts in December?

    • 4. What is the total amount of company checks issued in December?

    • 5. What is the total book disbursements in December?

    • 6. What is the book balance on November 30, 20x1?

    • 7. What is the bank balance on November 30, 20x1?

    • 8. What is the total bank receipts in December?

    • 9. What is the total bank disbursements in December?

    10. What is the bank balance on December 31, 20x1?

    Solution:

    Bonsoir Company Proof of Cash For the month ended December 31, 20x1

    November 30

    Receipts

    Disbursements

    December 31

    Book Balances

    16,250

    +

    150,000

    -

    128,750

    =

    37,500

    Bank Service Charge November 30 DM

    (1,500)

    (1,500)

    December 31 DM

     

    2,250

    (2,250)

    Underfoot of CRJ

     

    2,500

    2,500

    Adjusted Book Balances 14,750

     

    152,500

    129,500

    37,750

    Bank Balances

    18,500

    145,000

    137,000

    26,500

    Outstanding Checks November 30

    (16,250)

     

    (16,250)

    December 31 Deposit in Transit

    12,500

    (12,500)

    November 30

    12,500

    (12,500)

    December 31

    20,000

    20,000

    Bank Error

    (3,750)

    3,750

    Adjusted Bank Balances

    14,750

     

    152,500

    129,500

    37,750

    *The items in Black were already given. *The items in Green were computed from the given. *The items in Red were squeezed from the proof of cash table.

    *Magkatabi, different signs; magkalayo, same signs

    ..

    except

    for the balances =)

    *DM=Debit Memo; CRJ=Cash Receipts Journal *Receipts and Disbursements relates to December transactions. *A line item always affects two columns in the Proof of Cash.

    Let's start with first line item in the problem.

    • 1. Outstanding checks, 11/30/20x1, 16,250 These are considered as disbursements for the month of November that's why you subtract 16,250 from the

    November 30 Bank Balance. Subsequently, you also subtract 16,250 from the bank disbursements of December because the checks are presumed to be encashed in the bank during December unless otherwise specified.

    • 2. Outstanding checks, 12/31/20x1, 12,500

    These are considered as disbursements for the month of December so add 12,500 in the Disbursements and deduct 12,500 in the December 31 Bank Balance. These checks are not yet presented for encashment by the payee that's why it is not reflected as a disbursement in the bank statement but reflected as a disbursement in the book balance.

    • 3. Deposit in transit, 11/30/20x1, 12,500

    The deposit in transit is added to the November 30 Bank Balance since they are rightfully receipts from November but are not yet received by the bank. Subsequently, it is subtracted from the receipts of December

    because the bank only received your November Receipts in December.

    • 4. Cash balance per general ledger 12/31/20x1, 37,500 This represents the unadjusted book balance for December 31.

    • 5. Actual company collections from its customers during December, 152,500

    This represents part of the receipts (in the books) during December. Other possible receipts are notes collected by the bank (CM). However, no other items in the problem affect the cash receipts in the books. Therefore, it is safe to presume that 152,500 is the amount of December Book Receipts. We can't presume that this is the amount of the unadjusted December Book Receipts because of the existence of a book error affecting receipts.

    • 6. Company checks paid by bank in December, 130,000 This represents part of the bank disbursements during December. However, paid checks are not the only

    disbursements reflected in the bank statement. Other disbursements reflected in the bank statement are the bank service charge and bank errors. Other disbursements not reflected in the bank statement are outstanding checks. The following solution reflects the computation for the unadjusted bank disbursements:

    Company checks paid by bank in December

    130,000

    Bank service charges per December bank statement

    3,250

    Bank error (erroneously charged check)

    3,750

    (will later be adjusted)

    Unadjusted Bank Disbursements

    137,000

    • 7. Bank service charges recorded on the company books in December, 2,500 Bank service charges per December bank statement, 3,250 November bank service charges recorded on company books in December, 1,500

    These items reflect that the bank service charges recorded on the company books in December includes the November bank service charge plus an estimate of the December bank service charge.

    The following solution reflects the existence of unrecorded bank service charges.

    Bank service charges recorded on the company books in December

    2,500

    November bank service charges recorded on company books in December

    (1,500)

    Bank service charges per December bank statement

    (3,250)

    Unrecorded bank service charge

    (2,250)

    • 8. Deposits credited by bank during December, 145,000 This represents the unadjusted Bank Receipts.

    • 9. The cash receipts book of December is underfooted by 2,500

    This represents a book error in December. The unadjusted book balances are referenced from the totals of the cash books. Since the underfooting unjustly reduces the total of the cash books, it must be corrected.

    Therefore, we add the deficiency of 2,500 to the cash book receipts and December 31 book balance.

    10. The bank erroneously charged the company's account for a 3,750 check of another depositor. This bank error was corrected in January 20x2. Since the bank error was corrected the following month, we must correct our December bank balances to reconcile with our book balances. Hence, we subtract the bank disbursements and add it back to the December 31 bank balance.

    By filling up the black and green items in the proof of cash, you can now solve for the answers.

    Answers:

    1. 20,000 2. 2,250 3. 150,000 4. 126,250 5. 128,750 6. 16,250 7. 18,500 8. 145,000
    1.
    20,000
    2.
    2,250
    3.
    150,000
    4.
    126,250
    5.
    128,750
    6.
    16,250
    7.
    18,500
    8.
    145,000
    9.
    137,000
    10. 26,500

    Lesson 3 AP: Audit of Receivables - Notes

    Assertions (OROCAVE)

    • 1. Occurence (Confirm, Aging, Inspection, Analytical Procedures)

    • 2. Rights (Confirm, Aging, Inspection, Analytical Procedures)

    • 3. Obligations (Confirm, Aging, Inspection, Analytical Procedures)

    • 4. Completeness (Analytical Procedures, Cut-Off)

    • 5. Allocation (Aging, Collectibility)

    • 6. Valuation (Aging, Collectibility)

    • 7. Existence (Confirm, Aging, Inspection, Analytical Procedures)

    Classification of Receivables

    • 1. Trade Receivables - arise from sale of goods or services

    • 2. Non-trade Receivables - residual definition; includes advances/receivables from officers, advances to affiliates (usually long-term), advances to supplier (current), subscription receivable collectible within one year (current), claims receivable (current).

    Initial Valuation

    *Fair Value (plus directly attributable Transaction Costs)

    Subsequent Valuation

    *at Amortized Cost *Accounts Receivable: Amortized Cost=NRV

    NRV of Accounts Receivable includes the following deductions:

    • 1. Allowance for freight charge

    • 2. Allowance for sales return

    • 3. Allowance for sales discount (gross or net method)

    • 4. Allowance for doubtful accounts (impairment) (allowance or direct write-off method)

    Estimating Doubtful Accounts

    • 1. Aging of Accounts Receivable (gives the ending balance of allowance for doubtful accounts)

    • 2. Percent of Accounts Receivable (gives the ending balance of allowance for doubtful accounts)

    • 3. Percent of Sales (gives the doubtful accounts expense)

    Modes of Financing

    • 1. Pledge is a promise attached to a loan. This is part of the general Accounts Receivable and is disclosed.

    • 2. Assignment is a transfer of right to collect. This is part of the specific Accounts Receivable - Assigned

    account.

    • a. Notification Basis

    • b. Non-notification Basis

    2. Assignment is a transfer of right to collect. This is part of the specific Accounts
    • 3. Factoring is the sale of receivables. Therefore, there is transfer of ownership. Receivable is derecognized.

      • a. Casual Factoring = immediately recognize gain or loss

      • b. Continuing Agreement = includes factor's holdback (current asset)

    2. Assignment is a transfer of right to collect. This is part of the specific Accounts

    * In casual factoring, any commission of the factor will be part of loss on factoring.

    • 4. Discounting is the sale of receivable, including interest. There is transfer of ownership.

      • a. With Recourse *Conditional Sale = Notes receivable discounted is deducted from total notes receivable. Note is not derecognized. *Secured Borrowing = Note is derecognized. Liability for note receivable discounted is recognized.

      • b. Without Recourse = Note is derecognized.

    *Discount = Maturity Value x Discount Rate x Remaining Term of the Note *Net Proceeds = Maturity Value - Discount

    Impairment

    *is the difference between the carrying amount of the loan and the present value of estimated future cash flows

    discounted at the original effective rate of the loan.

    Other Notes:

    2. Assignment is a transfer of right to collect. This is part of the specific Accounts
    • 1. Customer credit balances are current liabilities. The customer paid in excess of his account so it is rightful

    for the company to return it to the customer.

    • 2. Origination fees received from borrower are recognized as unearned interest income.

    • 3. Direct origination costs are recognized as deferred expense attached to the loan receivable.

    • 4. Amortized Cost of Loan Receivable=Principal - Discount + Premium - Impairement

    • 5. Dishonored notes are removed from notes receivable and transferred to accounts receivable.

    Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards

    Lesson 3 AP: Audit of Receivables - Problem A

     

    Problem:

    The following data were gathered during your audit:

     

    Allowance for doubtful accounts, Jan 1, 20x1

    P 300,000

     

    Provision for doubtful accounts during 20x1 (3% of 5M Sales)

     

    150,000

    Bad debts written off during 20x1

    187,500

    Recovery of bad debts written off during 20x1

    50,000

    Estimated doubtful accounts per aging of accounts, Dec 31, 20x1

    350,000

    Accounts Receivable, Dec 31, 20x1

    1,187,500

    As per company policy, the allowance for doubtful accounts must be adjusted to equal the estimated amount required based on aging of accounts receivable.

    Questions:

    1.

    What is the correct doubtful accounts expense for the year 20x1?

     

    2.

    What is the correct net book value of the receivables as of December 31, 20x1?

     

    Solution:

    1.

    Allowance for doubtful accounts, Jan 1, 20x1

    P 300,000

     

    begbal

    Bad debts written off during 20x1

     

    (187,500)

     

    Recovery of bad debts written off during 20x1

    50,000

    Unadjusted allowance for doubtful accounts, Dec 31, 20x1

    P 162,500

    Estimated doubtful accounts per aging of accounts, Dec 31, 20x1

    (350,000)

     

    endbal

    Doubtful accounts expense to be recognized

    P(187,500)

     

    *It is easier to use a t-account.

     

    Allowance for doubtful accounts

    Begbal

    |

    Write-off

    Recovery

    |

    Expense

    |

    Endbal

    2.

    Accounts Receivable

     

    P 1,187,500

     

    Allowance for doubtful accounts

     

    (350,000)

    Net Book Value of Accounts Receivable

     

    837,500

     

    Lesson 4 AP: Audit of Inventories - Notes

    Assertions (OROCA CAVE)

    1.

    Occurence

    2.

    Rights

    3.

    Obligation

    4.

    Completeness

    5.

    Accuracy

    6.

    Cut-Off

    7.

    Allocation

    8.

    Valuation

    9.

    Existence

    *physical count, test count, test cut-off procedures, trace test counts, analytical procedures

    Inventory Classifications:

     

    1.

    Held for sale in the ordinary course of business; (Finished Goods Inventory)

    2.

    In the process of production for such sale; (Work-in-Process (WIP) Inventory)

    3.

    In the form of materials or supplies to be consumed in the production process or in the rendering of

    services. (Raw Materials, Office Supplies, etc.)

    Initial Valuation:

     

    *at Cost

    Subsequent Valuation:

    *lower of Cost or Net Realizable Value

    Net Realizable Value:

     

    1.

    NRV of Finished Goods/Merchandise Inventory = Est. Selling Price less Est. Cost to Sell

    2.

    NRV of WIP Inventory = Est. Selling Price less Est. Cost to Complete less Est. Cost to Sell

    3.

    NRV of Raw Materials and Supplies = Current Replacement Cost or Current Purchase Price

    Freight Terms:

     

    1.

    FOB destination: "Free on Board until destination" goods in transit=seller is owner ; freight=should be paid by seller

    2.

    FOB shipping point: "Free on Board until shipping point ONLY" goods in transit=buyer is owner ; freight=should be paid by buyer

    3.

    Freight collect: freight=was paid by buyer (not necessarily shouldered by the buyer)

    4.

    Freight prepaid: freight=was paid by seller

    5.

    FAS (free alongside): "Free Alongside to the dock ONLY" freight up to the dock=seller; cost of loading and shipment=buyer

    6.

    CIF (cost, insurance, freight): "Free until loading to the ship ONLY" freight up to the dock and cost of loading=seller; CIF and shipment=buyer

    7.

    Ex-ship: "Free until the goods exited the ship" freight until unloading=seller;

    Inventory Systems:

     

    1.

    Periodic: physical count at year end to determine COS and Inventory, End; inventory balance updated at

    year-end

     

    2.

    Perpetual: flow of goods is recorded every transaction; inventory balance always updated

    List Price

    =is not the intended selling price of the seller

    (Trade discounts)

    =are not recorded by the buyer or seller. Its deduction from the list price

    (Cash discounts)

    will reflect the intended selling price =are recorded by the buyer or seller as sales/purchase discount.

    Invoice Price

    =is the net cost/sale price of the item.

    Special Sale/Purchase Agreement

    • 1. Goods on Consignment: inventory of consignor/seller

    • 2. Sale on Approval: inventory of seller unless information identified that manifestation of approval has been

    made

    • 3. Inventory financing/Park sale/Product financing: inventory of seller

    • 4. Sale with right of return: inventor of seller unless right of return is considered normal in the industry (e.g.

    retail) or time for right of return has already lapsed

    • 5. Installment sales: inventory of buyer

    • 6. Segregated goods: mere segregation of goods does not exclude the same from the seller's inventory unless

    identified that sale is covered by a special sale agreement (BILL AND HOLD) as in when goods were already

    billed and awaiting the pick-up of the customer

    Inventory Valuation:

     
    • 1. Specific Identification Method (SIM) - specific costs are attributed to identified items of inventory.

    • 2. First-in, first-out (FIFO) - assume that items purchased first are sold first, and consequently, items at the

    end of the period are those most recently purchased or produced.

    • 3. Weighted Average Cost - cost of each item is determined from the weighted average of the cost of similar

    items at the beginning of a period and the cost of similar items purchased or produced during the period

    Other Notes:

    • 1. Purchase or sale of goods with right of repossession are still the inventory of the one who contains the right

    to repossess. Although there was a transfer of ownership, the goods can be bought back without restriction

    even if the present owner does not want to part with the goods.

    • 2. The standard requires that all purchases must be recorded at net (Net Method, net of all discounts).

    Discounts that were not taken are attributable to the management.

    • 3. Abnormal amounts of wasted materials, labor and other production costs are excluded from the cost of

    inventories and recorded as expense. Normal wastage are part of cost of sales.

    • 4. Storage costs relating to finished goods are expensed, while those relating to WIP are capitalized.