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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
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.
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
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.
Bank Reconciliation
1. Book reconciling items:
a. Credit memos
b. Debit memos
c. Book errors
In lieu with your audit of Bonne Chance Company for the year ended December 31, 20x1, you gathered the
following information:
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:
Bonjour Company
General and Petty Cash Count
Audit Year: 20x1
Date of Count: January 5, 20x2, 10:00am
Checks
Maker Payee Date Amount
Tissot - Customer Bonjour Company 12/30/20x1 P 23,840
Castro - Customer Bonjour Company 12/26/20x1 25,010
Allez - Customer Bonjour Company 1/2/20x2 11,414
Petra - Customer Bonjour Company 12/21/20x1 26,700
Bonjour Company Bonne Chance Corp. 12/27/20x1 29,000
Salut - Officer Bearer 1/5/20x2 620
Bueno* Cash 12/29/20x1 520
*Amount is for a return of travel advance made to the employee in an earlier period.
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
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.
*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).
You obtained the following information in connection with the audit of Bonsoir Company cash account as of
December 31, 20x1:
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
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)
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
9. 137,000
10. 26,500
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
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
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)
* In casual factoring, any commission of the factor will be part of loss on factoring.
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:
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.
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
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.
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
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
will reflect the intended selling price
(Cash discounts) =are recorded by the buyer or seller as sales/purchase discount.
Invoice Price =is the net cost/sale price of the item.
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.