Cash and Cash Equivalents

Cash - unrestricted and for use in current operations (12 months or less)
- includes undeposited bills and coins (local currency at face value; foreign currency translated to Php),
customers’ checks (not postdated and NSF), traveler’s checks, manager’s checks, bank drafts, money
orders, petty cash fund, change fund, payroll fund, dividend fund, tax fund, interest fund
- includes demand deposits and compensating balances that are not legally restricted
- includes checks undelivered to suppliers at balance sheet date, postdated supplier checks, and stale
supplier checks
- includes bank overdraft (bank accounts with credit balances) if from the same bank
- includes cash set aside for noncurrent operations if already current (to be used within 12 months) as
at balance sheet date

Excluded from cash: cash in closed banks/cash in banks having financial difficulty/cash in bank in
bankruptcy (receivable), postdated customer checks (receivable), NSF checks (receivable), postage
stamps (prepaid expense), IOUs/advance from officers and employees (receivable), bank overdraft
from another bank (current liability), compensating balances that are legally restricted, cash set aside
for noncurrent operations if noncurrent as at balance sheet date (such as plant expansion fund and
bond sinking fund), stale customer checks, portion of petty cash fund where expenses are not yet
replenished

Cash equivalents - highly liquid financial instruments (FVPL/money market investment and time
deposits) included if purchased with maturity of 3 months or less

Excluded from cash equivalents: financial instruments (FVPL, FVOCI, amortized cost, time deposits) if
purchased with maturity of more than 3 months but currently held with maturity of 3 months or less

Important Internal Controls on Cash Management

1. Segregation of duties: authorization (manager), recordkeeping (accountant), custody (cashier)
2. Imprest system: deposit daily all cash collections intact, use checks for major expenses, use petty
cash fund for minor expenses
3. Voucher system: make sure to match purchase orders (what has been ordered), receiving report
(what has been received), and sales invoice from supplier (what has been billed) before the accountant
prepares the voucher (proof that disbursement is approved) and the cashier signs the check; voucher is
recorded in the voucher register; check is recorded in the check register
4. Internal audit and bank reconciliation

Petty Cash Fund

Dr: establishing the fund, increasing the fund, reestablishing the fund (reversing entry)
Cr: expenses not yet reimbursed at balance sheet date (adjusting entry), decreasing the fund
No effect: actual disbursement of money from fund, replenishment of fund (unless to reestablish the
fund which decreased after adjustment), cash short and over (separate account)

Petty cash fund (unadjusted) = Expenses + IOUs + Cash on hand ± Cash short/over (balancing figure)
Petty cash fund (at balance sheet date) = Cash on hand
Cash on hand = Petty cash fund - Expenses - IOUs ± Cash short/over (balancing figure)
Cash short/over (balancing figure) = Petty cash fund - Expenses - IOUs - Cash on hand
Replenishment = Petty cash fund - Cash on hand
If there are coins and currencies that are not supposed to be there (e.g. cash in payment of an
employee salary or for a wedding or whatever purpose, but was erroneously absorbed by the petty
cash fund), it should be deducted from the total coins and currencies on hand. (See Exercise 3 Part C)

Bank Reconciliation / Proof of Cash

Last Month This Month This Month
Balance + Receipts - Disbursements = Balance
Unadjusted bank balance (per
xx xx xx xx
bank statement)
Deposit in transit last month
xx (xx)
but credited by bank this month
Deposit in transit this month
xx xx
but not yet credited this month
Outstanding checks last month
(xx) (xx)
but debited by bank this month
Outstanding checks this month
xx (xx)
but not yet debited this month
NSF check redeposited (xx) (xx)
Bank error (case to case basis) xx / (xx) xx / (xx) xx / (xx) xx / (xx)
Adjusted bank balance xx xx xx xx

Last Month This Month This Month

Balance + Receipts - Disbursements = Balance
Unadjusted book balance (per
xx xx xx xx
ledger)
Credit memo (e.g. note) last
xx (xx)
month but recorded this month
Credit memo this month but not
xx xx
yet recorded this month
Debit memo (BSC, NSF) last
(xx) (xx)
month but recorded this month
Debit memo this month but not
xx (xx)
yet recorded this month
Book error (case to case basis) xx / (xx) xx / (xx) xx / (xx) xx / (xx)
Adjusted book balance xx xx xx xx

Bank credit memo includes note and interest collected by bank and customers deposits made through
wire transfer. Bank debit memo includes bank service charges and NSF/DAIF checks.
Remember three things when it comes to errors: (1) who committed the error, (2) what type of
transaction (receipt or disbursement); (3) what nature of the error (overstatement or understatement)
Adjusting journal entries are made only for reconciling items for the month on the book side
(unrecorded credit and debit memos, book errors).

If reconciling items from the last month have already been recorded this month, no need for adjusting
journal entries. However, they must appear as reconciling item in the proof of cash since it happened
during the two months.

If reconciling items this months have been recorded this month before the bank reconciliation is made,
no need to prepare adjusting entries.

Beware: Some problems pertain only to the receipt side or the disbursement side of the proof of cash.
(e.g. questions about the DIT this month)

DIT this month (using algebra approach) = Unadjusted book receipts - Credit memo last month but
recorded this month + Credit memo this month but not yet recorded this month ± Book receipt error -
Unadjusted bank balance + DIT last month + NSF check redeposited ± Bank receipt error

Likewise, some problems ask for the unadjusted cash balance, whether book or bank. Use algebra
approach.

General warning on cash: If an item is included but should be excluded during that period, there should
be an adjusting entry. Likewise, if an item is excluded but should be included during that period, there
should also be an adjusting entries. However, adjusting entries are not need if there are items that are
included as it should be included, or if there are items that are excluded as it should be excluded.

Receivables

Trade receivables - receivables arising in the ordinary course of the business (i.e. sale of goods or
provision or services)
- considered current regardless of length of time (“within a year or operating cycle, whichever is longer”)
- include creditor’s account with debit balance

Non-trade receivables: receivables arising outside the ordinary course of the business (e.g.
loans/advances to third parties other than the customers, claims for interest/dividends/losses/insurance/
damages/refunds, etc.)
- considered current if collectible within one year; considered noncurrent if collectible beyond one year

Plot twist: I recently found a Valix question adopted from AICPA where the argument for the suggested
answer is: if the operating cycle is longer than one year (e.g. sale of real estate in the ordinary course
of the business) and if the portion collectible beyond one year represents a majority, then that portion is
considered non-current. This is a departure from the statement that all trade receivables, regardless of
length of operating cycle, are considered current.
Receivables (amortized cost) = Receivables (gross) - Allowance for sales returns - Allowance for sales
discount - Allowance for doubtful accounts

Gross Price Method Net Price Method Allowance Method

Sale of goods on account
A/R (gross) xx A/R (net) xx A/R (gross) xx
Sales (gross) xx Sales (net) xx Sales (net) xx
Cash xx Cash xx Cash xx
Allowance for disc. xx
Cash collection within the discount period
Cash (net) xx Cash (net) xx Cash (net) xx
Sales disc. xx A/R (net) xx Allowance for disc. xx
A/R (gross) xx A/R (gross) xx
Cash collection outside the discount period
Cash (gross) xx Cash (gross) xx Cash (gross) xx
A/R (gross) xx A/R (net) xx Allowance for disc. xx
Sales disc. forfeited xx A/R (gross) xx
Sales disc. forfeited xx
Adjustment at year-end for sales discounts to be granted
Sales disc. xx N/A N/A
Allowance for disc. xx
Subsequent cash collection within the discount period
Cash (net) xx N/A N/A
Allowance for disc. xx
A/R (gross) xx
Adjustment at year-end for sales discounts forfeited to be recognized
N/A A/R xx Allowance for disc. xx
Sales disc. forfeited xx Sales disc. forfeited xx
Subsequent cash collection within the discount period
N/A Cash (gross) xx Cash (gross) xx
A/R (gross) xx A/R (gross) xx

Option A Option B
Credit card sales Credit card sales. Company can deposit credit
card draft directly to its bank account.
A/R – Bank xx
Sales xx
Cash xx
Collection from bank, less service charge Credit card service change xx
Sales xx
Cash xx
Credit card service change xx
A/R – Citibank Visa xx
Notes Receivable
Note receivable - formal claim against another that is evidenced by a written promise, called promissory
note, or a written order to pay at a later time, called time draft (usually for international trade).

PV of interest bearing note (date of receipt) = Face value

PV of interest bearing note (date of maturity) = Face value + Interest
PV of non-interest bearing note (date of receipt) = Fair value of property/note or Face value - Discount
PV of non-interest bearing note (date of maturity) = Face value

PV of note with unrealistic interest = PV of installment + PV of diminishing interest (Case 4 and 5)

Interest Bearing Note with Non-Interest Bearing Note Non-Interest Bearing Installment
Realistic Interest (Case 1) (Case 2) Notes Receivable (Case 3)
Sale of asset on account
Cash xx Cash xx Cash xx
Notes receivable xx Notes receivable xx Notes receivable xx
Accum. depn. (if any) xx Accum. depn. (if any) xx Accum. depn. (if any) xx
Asset xx Asset xx Asset xx
Gain (or loss) on sale xx Discount xx Discount xx
Gain (or loss) on sale xx Gain (or loss) on sale xx
Periodic amortization
N/A Discount xx Discount xx
Interest revenue xx Interest revenue xx
Periodic cash collection
Cash xx N/A Cash xx
Interest revenue xx Notes receivable xx
Final cash collection at maturity date
Cash xx Cash xx Cash xx
Notes receivable xx Discount xx Discount xx
Interest revenue xx Notes receivable xx Notes receivable xx
Interest revenue xx Interest revenue xx

Non-Interest Bearing Note (Stated Rate is Lower Non-Interest Bearing Note (Stated Rate is Greater
than Market Rate of Interest) [Case 4] than Market Rate of Interest) [Case 5]
Sale of asset on account
Cash xx Cash xx
Notes receivable xx Notes receivable xx
Accum. depn. (if any) xx Premium xx
Asset xx Accum. depn. (if any) xx
Discount xx Asset xx
Gain (or loss) on sale xx Gain (or loss) on sale xx
Non-Interest Bearing Note (Stated Rate is Lower Non-Interest Bearing Note (Stated Rate is Greater
than Market Rate of Interest) [Case 4] than Market Rate of Interest) [Case 5]
Periodic amortization and cash collection / Final cash collection at maturity date
Cash (stated interest) xx Cash (stated interest) xx
Discount (difference) xx Notes receivable xx
Notes receivable xx Interest revenue (effective interest) xx
Interest revenue (effective interest) xx Premium (difference) xx
Impairment of Receivables

Reasons for impairment of receivables: default or delinquency in interest or principal payment,

significant financial difficulty of the debtor, or bankruptcy proceedings undertaken by the debtor.

Impairment loss on accounts receivable is recognized as follows.

Direct Write Off Method Allowance Method

Impairment on accounts receivable
N/A Doubtful accounts expense xx
Allowance for doubtful accounts xx
Write off an uncollectible account
Doubtful accounts expense xx Allowance for doubtful accounts xx
Accounts receivable xx Accounts receivable xx
Recovery of a specific account
Accounts receivable xx Accounts receivable xx
Bad debts recovery xx Allowance for doubtful accounts xx
Collection of accounts previously written off
Cash xx Cash xx
Accounts receivable xx Accounts receivable xx

Accounts receivable - Allowance for doubtful accounts = Amortized cost/Net realizable value

Accounts receivable
Debit (Normal Balance) Credit
1. Beginning balance 1. Cash collection
2. Credit sales 2. Sales discount (if not given, reconstruct)
3. Note dishonored 3. Sales returns and allowances
4. Recovery of written off accounts 4. Note received
5. Write off of accounts
Ending balance

Allowance for Doubtful Accounts / Uncollectible Accounts / Bad Debts

Debit Credit (Normal Balance)
1. Write off of accounts 1. Beginning balance
2. Provision
3. Recovery of written off accounts
Ending balance (based on aging of A/R)

Impairment of other receivables is recognized as follows:

Carrying value of receivables (note and interest, regardless if condoned/forgiven) xx
Present value of future cash inflows (based on new principal and interest arrangement) xx
Impairment loss xx

Journal entry: Impairment loss xx

Allowance for uncollectible accounts (if any) xx
Restructured notes receivable (new face value and interest) xx
Discount on restructured notes receivable xx
Notes receivable xx
Interest receivable xx

Receivable Financing

Pledging. General ‘assignment’ of receivables. It is a simple case of borrowing money from a financial
institution. Aside from the journal entries to record the receipt of the discounted note (interest is
deducted in advance), the discount amortization, and payment of note, no entries are needed as
regards the receivables. However, the pledged receivables must be disclosed in the notes to financial
statements.

Cash proceeds (pledging) = Notes payable - Discount

Assignment of Receivable. Specific ‘assignment’ of receivables. This time, the specific receivables
serve as collateral for the note issued to the financial institution. It may be on non-notification basis
(customers are not informed that the amount owed by him is used a collateral) or notification basis
(customers are instructed to pay directly to the financial institution).

Cash proceeds (assignment) = A/R or portion of A/R - (A/R or portion of A/R x % finance charge)

Discounting of Notes Receivable. Recourse means ‘the legal right to demand compensation or
payment.’ A note discounted with recourse (rekurso = pwedeng balikan ng bangko) means that if the
customer who issued the note does not pay the maturity value to the financial institution, the company
will have to pay the financial institution (i.e. the bank has legal right to demand payment from the
company if its customer fails to pay). As such, the receivable is not derecognized and a liability on
discounted note is recorded instead.

If the note is discounted without recourse, the company assumes no further liability; the financial
institution assumes the risk of collecting from the customer. As such, the receivable is derecognized.

Cash proceeds (discounted note) = Maturity value - (Maturity value x interest rate charged by bank x
remaining time or the time between the date of discount to the date of maturity of note)

Factoring. Sale or transfer of receivables. Factoring can also be done with or without recourse. If
without recoursed (as in example in the book), receivable is derecognized. If, however, with recourse
(no example given in the book), receivable is not derecognized.

Factored A/R xx
Allowance for doubtful accounts of that factored A/R (xx)
Factoring fee/Factoring commission (% of total receivables or receivables purchased) (xx)
Factor's holdback (% of purchase price/cash proceeds or total receivables) (xx)
Interest deducted in advance (based on the remaining time) (xx)
Cash proceeds (factoring) xx

Factoring fee/Factoring commission = Loss from factoring (expense)

Factor's holdback = Portion of receivables retained by the factor company (receivable from factor)
Interest deducted in advance = Similar to a discount (interest expense)

Investments in Debt Securities (Evidenced by bond indenture)

PV of bonds = PV(face value) + PV (coupon)
PV of bonds = Face value / (1 + r)^t + Coupon (based on stated rate) * (1 - 1/(1 + r)^t) / r

If face value of bonds > PV of bonds, the stated rate < effective rate, bonds are at a discount.
If face value of bonds < PV of bonds, the stated rate > effective rate, bonds are at a premium.
If face value of bonds = PV of bonds, the stated rate = effective rate, bonds are at par.

Clue: z = x/y or 3 = 6/2. If denominator y increases from 2 to 3, quotient z decreases from 3 to 2. If

effective rate (r) increases, PV of bonds decreases.

FVPL FVOCI (at discount) Amortized Cost (at discount)

Purchase of debt investments
Debt investments xx Debt investments xx Debt investments xx
Transaction cost xx I/Receivable (if any) xx I/Receivable (if any) xx
I/Receivable (if any) xx Cash xx Cash xx
Cash xx
Collection of bond coupon (and amortization of discount)
Cash (stated interest) xx Cash (stated interest) xx Cash (stated interest) xx
Interest revenue Debt investments* xx Debt investments* xx
(stated interest) xx Interest revenue Interest revenue
I/Receivable (if any) xx (effective interest) xx (effective interest) xx
I/Receivable (if any) xx I/Receivable (if any) xx
Change in fair value
Debt investments xx FV adjustment xx N/A
Unrealized gain (PL) xx Unrealized gain (OCI) xx
Recognition of interest receivable prior to sale of debt investments in between receipt dates
Interest receivable xx Interest receivable xx Interest receivable xx
Interest revenue xx Debt investments* xx Debt investments* xx
Interest revenue xx Interest revenue xx
Recognition of impairment loss
N/A Impairment loss xx Impairment loss xx
Debt investments xx Debt investments xx
Reversal of impairment loss (limited to the investment carrying value prior to impairment recognition)
N/A Debt investments xx Debt investments xx
Impairment loss xx Impairment loss xx
Sale of debt investments if sold (and amortization of discount)
Cash xx Cash xx Cash xx
Debt investments xx Debt investments xx Debt investments xx
Interest receivable xx Interest receivable xx Interest receivable xx
Gain on sale xx Gain on sale xx Gain on sale xx
Unrealized gain xx
FV adjustment xx

Impairment of debt investment is recognized as follows:

Carrying value of investment (amortized cost and coupon, regardless if condoned/forgiven) xx
Present value of future cash inflows (based on new principal and coupon arrangement) xx
Impairment loss xx

Cash proceeds from sale of investment xx

Carrying value of investment (xx)
Gain (or loss) on sale of investment xx

Cash Surrender Value

Life Insurance Expense

Debit (Normal Balance) Credit
1. Premium Amortization 1. Cash dividends
(if asset method: debit LIE, credit Prepaid LI) 2. Change in CSV (CSV end - CSV beginning)
(if expense method: debit LIE, credit Cash) 3. Periodic adjustment of unused portion
(if expense method: debit: Prepaid LI, credit LIE)
Ending balance

Investment in Equity (Evidenced by stock certificates)

1. Holdings of less than 20% (no control or significant influence); under IFRS 9: FVPL if trading, FVOCI
if non-trading (irrevocable)
2. Holdings between 20% to 50% (with significant influence); use equity method (IAS 28)
3. Holdings more than 50% (with control); consolidate (IFRS 10)

FVPL FVOCI Equity Method

Purchase of equity investments
Equity investments xx Equity investments xx Equity investments xx
Transaction cost xx D/Receivable (if any) xx D/Receivable (if any) xx
D/Receivable (if any) xx Cash xx Cash xx
Cash xx
Change in fair value
Equity investments xx Equity investments xx N/A
Unrealized gain (PL) xx (or FV adjustment xx)
Unrealized gain (OCI) xx
Reporting of net income for the year
N/A N/A Equity investments xx
Share in profit xx
Receipt of dividends
Cash xx Cash xx Cash xx
Dividend revenue xx Dividend revenue xx Equity investments xx
(or D/Receivable xx) (or D/Receivable xx)
Amortization of excess of cost
N/A N/A Share in profit xx
Equity investments xx
Sale of equity investments
Cash xx Cash xx Cash xx
Equity investments xx Equity investments xx Equity investments xx
Dividend receivable xx Dividend receivable xx Dividend receivable xx
Gain on sale xx Unrealized gain xx Gain on sale xx
(Unrealized gain xx
Retained earnings xx)

Footnote from Kieso/Weygandt/Warfield (modified): “Once FVOCI equity investments are sold,
companies may transfer the balance of unrealized holding gains or losses in accumulated other
comprehensive income to retained earnings. … Some contend that these unrealized gains or losses
should be “recycled”; that is, these amounts should be recorded in net income when a non-trading
investment is sold. The IASB rejected this approach because it would increase the complexity of the
accounting for these investments.”

Share Split (Memo Entry Only)

Carrying value of investment No effect
Number of shares held by the company Increase
Cost per share Decrease
Net income / Retained earnings No effect

Note: A 2-for-1 share split means that you get 2 shares for every 1 share that you give up. In the case
of reverse share split, for example, a 1-for-2, you get 1 share for every 2 shares that you give up; as
such, the effect will be the opposite of an ordinary share split.

Dividends
Important Dates:
1. Date of declaration: the investee declares the dividends to be paid to shareholder as of record
2. Date of record: the cut-off date; the investee company determines who should be given the
dividends; the shareholders who hold the securities as of this date (point in time, not period of time) will
be paid dividends; if the shareholders have sold the securities before or after this date, they will not be
entitled to dividends
3. Ex-dividend date (immediately after date of record) (used only as reference)
4. Date of payment: the investee pays the dividends to shareholders who hold the securities as of date
of record

Types of Dividends:
1. Cash dividends = dividends declared x (number of shares held by the company / total number of
shares outstanding). Journal entries are prepared on date of declaration and date of payment; no entry
on date of record.
2. Share dividends: if same class, memo entry only and effect is similar to share split; if from different
company, treat as property dividends
3. Property dividends = market value of property x (shares held by the company x (1 property declared /
number of shares entitled to receive 1 property)
4. Liquidating dividends (special type of cash dividends): occurs if total accumulated net income < total
dividends declared and paid; excess dividends is considered as a return or reduction of invested capital

Share Rights
Share rights give their holders the right (not the obligation), to buy the shares of the investee that
issued the share rights, at a specific exercise price for a designated period of time.

Receipt of share rights

- memo entry -
Exercise of share rights
Investment in equity securities (at selling price) xx
Cash (at exercise price) xx
Investment income (difference) xx
Sale of share rights
Cash xx
Investment income xx
Share rights yet exercised
Investment in share rights xx
Investment income xx

Theoretical fair value per share rights = (FV of shares ex-rights - Subscription price) / Number of rights
needed to buy one share

Investment in Associates / Joint Venture

Investment in Associates / Joint Venture
Debit (Normal Balance) Credit
1. Purchase price and transaction costs 1. Dividends declared x % of ownership
2. Net income of the associate x % of ownership x 2. ((Fair value of investee asset - carrying value of
n/12 if purchased during the year investee asset) / useful life if any) x % of
3.** ((Carrying value of investee asset - Fair value ownership x n/12 if purchased during the year
of investee asset) / useful life if any) x % of 3. Sale of investment
ownership x n/12 if purchased during the year **
Ending balance
Net assets = Assets - Liabilities = Equity = Ordinary shares + Retained earnings = Partners’ capital

Note: If the asset was undervalued (kulang sa balor o value), it means the carrying value is lower than
the current fair value as of transaction date, as such, that asset has fair value in excess of the carrying
amount (Fair value of investee asset - carrying value of investee asset).

(Going back to Robles page 221, inventories were undervalued by P20,000 while building had fair
values in excess of carrying value of P400,000. If these inventory are sold during the year when the net
income was declared by the investee, the related cost of sales for this inventory is going to be also
undervalued, gross profit is overvalued, and net income is overvalued. To correct this, we need an
adjustment on the income from associates. That is why debit Share in Profit of Associate and credit
Investment in Associates. Same case with the building, since the building is also undervalued,
depreciation expense is also undervalued and net income is overvalued. We also need an adjustment
for the income from associates. BUT, if the assets are overvalued, then it will be the opposite and **
debit Investment in Associates and credit Share in Profit of Associate.)

Undervalued Asset → Fair value > Carrying value → Asset has fair value in excess of
carrying value
Overvalued Asset → Fair value < Carrying value → Asset has carrying value in excess of
fair value

Ignore land and other assets (and inventories), UNLESS they was also sold during the year when the
net income was declared by the investee. (In Robless page 221, inventories were all sold in 2019, land
is not yet sold.) Ignore also liabilities.
Share in Profit of Associates
Debit Credit (Normal Balance)
1. ((Fair value of investee asset - carrying value of 1. Net income of the associate x % of ownership x
investee asset) / useful life if any) x % of n/12 if purchased during the year
ownership x n/12 if purchased during the year 2.** ((Carrying value of investee asset - Fair value
of investee asset) / useful life if any) x % of
ownership x n/12 if purchased during the year **
Ending balance

Share in Profit of Associates = Share in net income (unadjusted) - Amortization of undervalued assets +
Amortization of overvalued assets.

Dividends received is not part of the computation of share in profit of associates; it is a reduction of the
carrying value of investment.

Inventory (IAS 2)