CHAPTER 1 – CASH AND CASH EQUIVALENTS

Assets – economic resources controlled by the entity as a result of past events.

Economic resource – is a right that has the potential to produce economic benefits embodied in any of
the following ways: (a) used singly or with other assets in the production of revenues; (b) used to
acquire other assets, or settle a liability, or distribute to the enterprise owners.

Financial Instrument – any contract that gives rise to a financial asset of one entity and financial liability
or equity instrument of another entity.

POV of the holder – the instrument is a Financial Asset

POV of the issuer – the same instrument is a financial liability or a component of shareholder’s
equity.

Financial Asset includes:

 Cash and cash equivalents

 Equity instrument of another entity (investments in equity shares of other entities)
 Contractual right to receive from another entity cash or another financial asset (trade
receivables, loans and other receivables)
 Investments in debt instruments of another entity classified by the latter entity as financial
liabilities (investments in bonds and commercial papers)
 Derivatives

Derivatives – a financial instrument that meets all of the following characteristics:

(a) Its value changes in response to change in specified interest rate, commodity price, financial
instrument price, foreign exchange rate, price index, credit rating or credit index, or other
variables;
(b) It requires no initial net investment, or initial net investment smaller than that required in
similar contracts;
(c) It is settled at a future date.

Examples:

 Options and warrants that enable holders to acquire equity shares of other entities.

AN ENTITY SHALL RECOGNIZE A FINANCIAL ASSET IN ITS STATEMENT OF FINANCIAL POSITION WHEN
AND ONLY WHEN THE ENTITY BECOMES A PARTY TO THE CONTRACTUAL PROVISIONS OF THE
INSTRUMENT.

- It means that the entity recognizing the financial asset has the enforceable right to the inflow of
economic benefits from the instrument.

Cash: (a) limited viewpoint – it refers to the currency and coins that are in circulation; (b) accounting
purposes – an item is considered as cash if it is acceptable by bank or other financial institution for
deposit at face value. It includes:

 Bills and coins on hand

  Demand credit instruments (checks, bank drafts, postal money orders and currency demand
deposits with banks).
 Customers’ checks, traveler’s checks, manager’s checks, cashier’s checks.

Cash Funds that are intended for current operations qualify to be reported as Cash in the current assets
section of the statement of financial position. Examples:

 Payroll fund
 Working fund
 Change fund
 Petty cash fund
 Interest fund
 Dividend fund
 Tax fund

Cash Funds that are intended for settlement of long-term obligation in the future or for acquisition of
non-current assets DO NOT qualify to be reported as part of current assets section of the statement of
financial position. Examples:

 Sinking fund cash

 Plant expansion fund

Cash Equivalents – highly liquid financial instruments that are so near their maturity and that there is
insignificant risk of change in value due to fluctuation of interest rates.

- A financial instrument qualifies as cash equivalent if it matures within a short period of time,
normally three months or less, from the date of acquisition

The determination of the maturity date starts from the date of the acquisition of the instrument and not
from the date indicated on the face of the instrument.

Temporary investments in equity shares are generally, NOT INCLUDED as part pf cash equivalents
because these equity securities do not have maturity dates.

CLASSIFICATION:

 Cash in foreign currency and deposits in foreign banks which are subject to immediate and
unrestricted withdrawal, should be translated to Philippine currency using the exchange rate at
the end of the reporting period.
o Cash in foreign banks that are restricted as to use or withdrawal should be reported
separately, as non-current assets.
 Cash in closed banks or in banks having financial difficulty or in bankruptcy – receivable, should
be written down to its recoverable amount.
 Customers’ post-dated checks, NSF checks (no sufficient fund checks – are those that cannot be
covered by funds in the debtor’s bank account; also called DAIF checks & DAUD checks (drawn
against insufficient funds & drawn against unclear deposits)), and IOUs – receivable.
 Postage stamps and expense advances (such as advances for employee’s travel) – not cash but
are reported as prepaid expenses.
 Bank overdraft – occurs when a depositor has written checks for a sum greater than the amount
in the depositor’s bank account, resulting in a credit balance in that cash account.
o A bank overdraft that cannot be offset against another account is reported as a liability.
o A bank overdraft that can be offset against a positive balance in another bank account
with the same bank if a right of offset exist between the bank and the depositor is
reported as Cash (if positive amount); Liability (if negative amount).
 Undelivered or unreleased checks – company’s checks drawn and recorded as disbursed but not
actually issued or delivered to the payees as of the reporting date. These checks should be
reverted to the cash balance.
 Company’s postdated checks – which has been recorded as issued and delivered to payee
before or at the end of the reporting period should be reverted to cash and the corresponding
liability shall continue to be recognized, because there is no actual payment yet, as of that date.
 Compensating balances – are minimum amounts that a company agrees to maintain in a bank
checking account as support or collateral for a loan by the depositor.
o Not legally restricted – cash
o Legally restricted – either current or non-current asset
 Cash set aside for long-term specific purpose or for acquisition of a non-current asset, such as
bond sinking fund and plant expansion fund – non-current financial asset.
CHAPTER 2 – RECEIVABLES

In broadest sense, represent any legitimate claim from others for money, goods, or services. In
the narrowest sense and as contemplated in accounting, it represents claims that are expected to be
settled by receipt of cash. It includes the following:

 Amounts collectible from customers and others, most frequently arising from sales of
merchandise, claims for money lent, or the performance of services. They may be on open
accounts or evidenced by time drafts or promissory notes.
 Accrued revenues, such as accrued interest, commissions, rental, and others.
 Other items such as loans and advances to officers, employees, affiliated companies, customers
or other outside parties; legitimate claim against suppliers and insurance companies; and other
claims arising from nonrecurring transactions such as calls for subscriptions’ receivables and
disposal of property.

Trade Receivables – receivables arising from sale of goods or services in the normal course of business.
These receivables should only include charges for actual sales completed (when there has already been
actual or constructive delivery of goods or performance of services) on or before the end of the
reporting period. – Current Assets

Non-trade receivables – receivables that arise from the sources other than from the sale of goods and
services in the normal course of business. Examples:

 Loans to officers and employees

 Advances to affiliates
 Accrued interest and dividends
 Deposits to guarantee performance or payment or to cover possible damages or losses
 Subscriptions for the entity’s equity securities
 Deposit with creditors
 Claims for losses and damages
 Claims for tax refunds or rebates
 Claims against common carriers for damaged or lost goods

Normal operating cycle – is the period required for cash to be converted into inventories through
purchase and production, inventories into receivables through sale, and receivables back into cash or
cash equivalents through collections.

Trade Receivables are initially recognized at the transaction price. Transaction price is the amount to
which an entity expects to be entitled in exchange for the transfer of goods and services.

Accounts Receivable – open accounts and are not evidenced by promissory notes or time drafts. These
are evidenced by sales invoices, delivery receipts and other similar documents.

Trade discounts – also known as volume or quantity discounts, are means of converting a catalog list
price to the prices actually charged to the buyer.

- Also used to avoid frequent changes in catalogs and to hide the true invoice price from
competitors.
- Not recognized for financial accounting purposes and are deducted from the list price.
 MANAGERIAL ACCOUNTING
Financial accounting - focuses on providing historical financial information to external users.

External users are those outside the company, including owners (e.g., shareholders) and creditors (e.g.,
banks or bondholders).

Financial accountants reporting to external users are required to follow U.S. Generally Accepted
Accounting Principles (U.S. GAAP) - a set of accounting rules that requires consistency in recording and
reporting financial information.

This information typically summarizes overall company results and does not provide detailed
information.

Managerial accounting focuses on internal users—executives, product managers, sales managers, and
any other personnel within the organization who use accounting information to make important
decisions.

Managerial accounting information need not conform with U.S. GAAP. In fact, conformance with
U.S. GAAP may be a deterrent to getting useful information for internal decision-making purposes. For
example, when establishing an inventory cost for one or more units of product (each jersey or hat
produced at Sportswear Company), U.S. GAAP requires that production overhead costs, such as factory
rent and factory utility costs, be included. However, for internal decision-making purposes, it might
make more sense to include nonproduction costs that are directly linked to the product, such as sales
commissions or administrative costs.

Managerial accounting often focuses on making future projections for segments of a company.

Another characteristic of managerial accounting data is its high level of detail. As noted in the
opening dialogue between the president and accountant at Sportswear Company, the financial
information in the annual report provides a general overview of the company’s financial results but does
not provide any detailed information about each product. Information, such as product profitability,
would come from the managerial accounting function.

Managerial accounting information often takes the form of nonfinancial measures. For example,
Sportswear Company might measure the percentage of defective products produced or the percentage
of on-time deliveries to customers. This kind of nonfinancial information comes from the managerial
accounting function.