Intacc-1A ( Reviewer) - Conceptual Framework and Accounting Standards PDF

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INTERMEDIATE ACCOUNTING – 1A (REVIEWER) CASH AND CASH EQUIVALENTS CASH INCLUDES:      

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Money Any other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit. Checks Bank drafts Money orders Cash on Hand – undeposited cash collections and other cash items awaiting deposit such as: o Customers’ checks o Cashier’s or manager’s checks o Traveler’s checks o Bank drafts o Money orders. (postal money order) Cash in Bank – includes: o Demand deposit o Checking account o Savings deposit o All of the above must be unrestricted as to withdrawal. Cash fund – set aside for current purposes such as: (depende talaga sa purpose pag cash fund) o Petty cash fund o Payroll fund o Dividend fund o Interest fund

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o Travel fund o Tax fund o Bond Sinking Fund – basta one year after the reporting period. Deposits in foreign currency which are not subject for foreign exchange restriction are included in cash. Undelivered or Unreleased Check Postdated Check Delivered Stale Check Given.

NOT INCLUDED IN CASH 

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Postdated checks received. (unacceptable by the bank for deposit and immediate credit or outright encashment.) (“cash in bank includes customer check of 200,000 outstanding for 18 months) Restricted Cash IOU NSF Check – if na redeposit within the year, di na ileless or ignored nalang. Sinking fund Preference share redemption fund Contingent fund Insurance fund Fund for acquisition and construction of PPE Savings Deposit in Closed Bank “the cash receipt journal was held open until Jan 15, 2021 during which time an amount of 450,000 was collected and recorded on Dec 31, 2021. A/R 450,000 Cash 450,000

o BSP treasury bill that was purchased 1 year ago cannot qualify as cash equivalent even if the remaining maturity is three months or less.

UNRESTRICTED CASH  

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There is no specific dealings with “cash”. An entity shall classify an asset as current when the asset as cash or cash equivalents unless it is restricted to settle a liability for more than 12 months after the end of the reporting period. To be reported as “cash”, an item must be unrestricted in use. Cash must be readily available and not subject to any restriction, contractual or otherwise.

INVESTMENT OF EXCESS CASH  

CASH EQUIVALENTS 

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Short-term and highly liquid investments that are readily convertible into cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Only highly liquid investments that are acquired 3 months before maturity can qualify as cash equivalents Examples of Cash Equivalents are: o Three-month BSP Treasury Bill. o Three-year BSP Treasury Bill purchased 3 months before date of maturity. o Three-month time deposit. o Three-month money market instrument or commercial paper. o Preference shares with specified redemption date acquired 3 months before date of maturity. o Time Deposit and Commercial Paper if silent is included. o Certificate of Deposit Not examples of Cash Equivalents: o Equity Securities (do not have maturity date)

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Entity must maintain sufficient cash for use in current operations. Any cash accumulated in excess of that needed for current operations should be invested even temporarily in some type of revenue earning investment. Excess cash may be invested in time deposit, money market instrument and treasury bills for the purpose of earning interest income.

CLASSIFICATIONS OF INVESTMENT OF EXCESS CASH 

Investment in time deposit, money market instruments and treasury bills should be classified as: o If the term is three months or less, such instruments are classified as cash equivalents. o If the term is more than 3 months but within one year, such investments are classified as short-term financial asset or temporary investments and presented as current assets. o If the term is more than 1 year, such investments are classified as non-current or long term investment. o If such investments become due within one year from the end of the reporting period, they are reclassified as current or temporary investments.

MEASUREMENT OF CASH

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Measured at face value Cash in foreign currency is measured at the current exchange rate. If a bank or financial institution holding the funds of an entity is in bankruptcy or financial difficulty, cash should be written down to estimated realizable value if the amount of recoverable is estimated to be lower than the face value.

FOREIGN CURRENCY

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Should be translated to Philippine Pesos using current exchange rate.  Deposits in foreign currency which are not subject for foreign exchange restriction are included in cash.  Deposit in foreign bank subject to foreign restriction should be classified as non-current assets. IF material and restricted – Part of NCA If Immaterial and restricted – part of C&CE Without restriction – part of C&CE If restricted and silent – part of NCA

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BANK OVERDRAFT – mas madami kang inissue na check kesa sa naka deposit 

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CASH FUND FOR CERTAIN PURPOSE 

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Part of cash and cash equivalents. o Petty cash fund, payroll fund, travel fund, interest fund, dividend fund and tax fund. Not part of cash and cash equivalents. o Sinking fund, P/S redemption fund, contingent fund, insurance fund and fund for acquisition and construction of PPE.

CLASSIFICATION OF CASH FUND

Should be parallel in the classification of the related liability. o Example, sinking fund that is set aside to pay a bond payable shall be classified as current asset when due within one year after the end of the reporting period, part of cash and cash equivalent o Preference share Redemption fund – depende kung current or not, pag current part of cash. Cash fund set aside for the acquisition of a noncurrent asset, future expansion for PPE. should be classified as noncurrent regardless of the year of disbursement. Cash Fund set aside for current purpose – part of cash

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Credit Balance of CASH IN BANK. o Results from the issuance of checks in excess of the deposits. Classified as current liability NOT TO BE OFFSET against other bank accounts with debit balances from the same bank. EXAMPLE: a. Cash in Bank – First bank, which is overdrawn by 10,000 b. Cash in Bank – Second Bank, with a debit balance of 100,000. o Net Cash Balance is 90,000. It is not necessary to adjust and open a bank overdraft account in the ledger. o In other words, Cash in Bank – First Bank account is maintained in the ledger with a credit balance. Overdrafts are not permitted in the Philippines.

EXCEPTION TO THE RULE ON OVERDRAFT. 

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When an entity maintains two or more accounts in one bank and one account results in an overdraft, such overdraft can be offset against the other bank account with a debit balance in order to show cash, net of bank overdraft or bank overdraft, net of other bank account. An overdraft can also be offset against the other bank account if the amount is not material. Under IFRS, bank overdraft can be offset against other bank account when payable on demand and often fluctuates from positive to negative as an integral part of cash management.

COMPENSATING BALANCE 

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Generally takes the form of minimum checking or demand deposit account balance that must be maintained in connection with a borrowing arrangement with a bank. Example: o Entity borrows P 5,000,000 from a bank and agrees to maintain a 10% or 500,000 minimum compensating balance in a demand deposit account. In effect, this arrangement results in the reduction of the amount borrowed because the compensating balance provides a source of fund to the bank as partial compensation for the loan extended. Naka charge to normally sa cash in bank account. If silent, assume as not legally restricted.

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Pag legally restricted as to withdrawal yung amount ng compensating balance, I miminus siya sa Cash in Bank account. o It will be classified as “cash held as compensating balance” under current assets if the related loan is short term. o If Long term, compensating balance is classified as noncurrent investment. Pag not legally restricted as to withdrawal yung amount ng compensating balance, hindi siya ileless sa cash in bank. (in effect, part siya ng cash)

Possible Questions: 1. What is the correct amount of Cash? a. Cash only, not included si cash equivalents. 2. What is the correct amount of cash in the notes to financial statements? a. Cash only, not included si cash equivalents 3. What is the correct amount of cash in the SFP? a. Cash and Cash Equivalents 4. What is the correct amount of cash and cash equivalents? a. Cash and Cash Equivalents

CLASSIFICATION OF COMPENSATING BALANCE Chapter 2 Bank Reconciliation Bank Deposits

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3 kinds of bank deposit o Demand Deposit o Saving Deposit o Time Deposit

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Demand Deposit 

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Current account or checking account or commercial deposit where deposits are covered by deposit slips and where funds are withdrawable on demand by drawing checks against the bank. Noninterest bearing

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Saving Deposit  

Depositor is given a passbook upon the initial deposit. Passbook is required when making deposits and withdrawals. Interest bearing

RECONCILING ITEMS 

Time Deposit   

Similar to saving deposit in the sense that it is interest bearing. Evidenced by a formal agreement embodied in an instrument called certificate of deposit. May be preterminated or withdrawn on demand or after a certain period of time agreed upon.

BANK RECONCILIATION  

Statement which brings into agreement the cash balance per book and cash balance per bank. Prepared monthly because bank provides the depositor with the bank statement at the end of every month.

A bank statement is a monthly report of the bank to the depositor showing: o Cash balance per bank at the beginning o Deposits made by the depositor acknowledged by the bank o Checks drawn by the depositor and paid by the bank o Daily cash balance per bank during the month When bank statement is received, attached thereto are the depositor’s canceled checks and any debit or credit memo that have affected the depositor’s account. Cancelled Check – checks issued by the depositor and paid by the bank during the month

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Book Reconciling Items o Credit Memo o Debit Memo o Erros Bank Reconciling Items o Deposit in Transit o Outstanding Checks o Errors

CREDIT MEMOS 

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Items that are not deposits credited by the bank to the account of the depositor but not yet recorded by the depositor as cash receipts. Has the effect of increasing the bank balance.

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Typical examples of credit memos are: o Notes Receivables collected by bank in favor of the depositor and credited to the account of the depositor. o Proceeds of bank loan credited to the account of the depositor. o Matured time deposit transferred by the bank to the current account of the depositor.

DEPOSIT IN TRANSIT  

DEBIT MEMOS 

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Items that are not checks paid by bank which are charged or debited by the bank to the account of the depositor but not yet recorded by the depositor as cash disbursement. Have the effect of decreasing the bank balance. Mga auto debits ganon. Typical examples of debit memos are: o NSF or No Sufficient Fund Checks – checks deposited but returned by the bank because of insufficiency of fund. Other name is DAIF or “drawn against insufficient fund” o Technically Defective Checks – checks deposited but returned by the bank because of technical defects such as absence of signature or countersignature, erasures not countersigned, mutilated checks, conflict between amount in words and amount in figures. o Bank Service Charges – bank charges for interest, collection, checkbook and penalty. o Reduction of loan – amount deducted from the current account of the depositor in payment for loan which the depositor owed to the bank and which has already matured.

Collections already recorded by the depositor as cash receipts but not yet reflected on the bank statement. It includes: o Collections already forwarded to the bank for deposit but too late to appear in the bank statement. o Undeposited collections or those still in the hands of the depositor. In effect, these are cash on hand awaiting delivery to bank for deposit.

OUTSTANDING CHECKS  

Checks already recorded by the depositor as cash disbursements but not yet reflected on the bank statement. It includes: o Checks drawn and already given to payees but not yet presented for payment. o Certified Check – one where the bank has stamped on its face word “accepted” or “certified indicating sufficiency of fund”  When the bank certifies a check, the account of the depositor is immediately debited or charged to insure the eventual payment of the check.  SHOULD BE DEDUCTED FROM THE TOTAL OUTSTANDING CHECKS (if included therein) because they are no longer outstanding for Bank Recon.

FORMS OF BANK RECONCILIATION

1. Adjusted Balance Method – the book balance and the bank balance and the bank balance are brought to a correct cash balance that must appear on the balance sheet. 2. Book to Bank Method – the book balance is reconciled with the bank balance or the book balance is adjusted to equal the bank balance. 3. Bank to Book Method – bank balance is reconciled with the book balance or the bank balance is adjusted to equal the book balance.

Errors will have to be analyzed if it is a deduction or addition. 2. BOOK TO BANK METHOD Book Balance xxx Add: Credit Memo Outstanding Checks xxx Total xxx Less: Debit Memo Deposit in Transit (xx) Bank Balance xxx

PROFORMA RECONCILIATION 1. ADJUSTED BALANCE METHOD Book Balance Add: Credit Memo Total Less: Debit Memo Adjusted Book Balance xxx Bank Balance Add: Deposit in Transit Total Less: Outstanding Checks Adjusted Bank Balance xxx

xxx xxx xxx (xx)

xx xx

xx xx

3. BANK TO BOOK METHOD Bank Balance Add: Deposit in Transit Debit Memo Total xxx Less: Outstanding Checks Credit Memo Book Balance xxx

xxx xxx xxx (xx)

Illustration

xxx xx

xx xxx

xx xx

(xx)

The cash records of Company X show the following for the month CASH RECEIPTS Jan 5 60,000 Jan 13

20,000

Jan 25

30,000

Jan 31

40,000 150,000

Jan 11 Jan 12 Jan 14 Jan 17 Jan 26 Jan 26 Jan 30 Jan 30

CASH DISBURSEMENT Jan 6 Check No. 5,000 721 Jan 7 Check No. 10,000 722 Jan 10 Check No. 18,000 723 2,000 Jan 14 Check No. 724 Jan 28 Check No. 37,000 725 Jan 31 Check No. 28,000 726 100,000

The general ledger shows the cash in bank account with a debit balance of 150,000 and credit balance of 100,000. So the balance of the cash in bank in depositor’s account is 50,000 Usually pag Jan 1 yung tas “balance” yung description, di siya kasama kase beginning balance yon ng cash account

722 723

10,000 18,000

724

2,000

20,000 30,000 15,000 CM 5,000 RT 1,000 SC

The following data are gathered in connection with the CM and DM appearing on the bank statement: a. The CM of 15,000 on Jan 26 represents proceeds of note collected by bank in favor of company. b. The RT of 5,000 represents check of customer deposited previously but returned by the bank because of NSF. c. The last amount on the balance of the bank statement is the unadjusted balance per bank amount.

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Deposit in Transit Outstanding Checks Check No. 725 Check No. 726

40,000 37,000 28,000 6,000 15,000

Debit memo Credit memo

BANK STATEMENT Date Jan 6 Jan 8

Check No. 721

Withdrawals

5,000

Deposits

Balance

60,000

60,000 55,000

45,000 27,000 47,000 45,000 75,000 90,000 85,000 84,000

Adjusted Balance Method: Balance per book Add: Credit Memo

50,000 15,000

Total Less: Debit Memo Adjusted Balance per book

65,000 (6,000) 59,000

Balance per Bank Add: Deposit in Transit Total Less: Outstanding Check Adjusted Balance per Bank

84,000 40,000 124,000 65,000 59,000

Bank to Book Method Balance per Bank Add: Deposit in Transit Debit Memo Total Less: Outstanding Check Credit Memo (80,000) Balance per Book

84,000 40,000 6,000 46,000 130,000 65,000 15,000

Chapter 3 Proof of Cash TWO-DATE BANK RECONCILIATION  

Literally involves 2 dates Same procedure as to 1 date bank recon.

Formula of Book Balance

Book to Bank Method Balance per Book Add: CreditMemo Outstanding Check 80,000 Total Less: Debit Memo Deposit in Transit (46,000) Balance per Bank

Balance per book – beginning of the month xxx Add: Book Debits during the month xxx Total Less: Book Credits during the month (xx) Balance per book – end of the month xxx

50,000 15,000 65,000 130,000 6,000

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40,000 84,000

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xxx

Book Debits – refer to cash receipts or all items debited to the cash in bank account. Book Credits – cash disbursement or all items credited to the cash account.

Formula of Bank Balance Balance per bank – beginning of the month Add: Bank Credits during the month Total Less: Bank Debits during the month (xx) Balance per bank – end of the month xxx 

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xxx xxx xxx Formula of Outstanding Checks

Bank Credits – all items credited to the account of the depositor which includes deposits acknowledged by bank and credit memos. o In the absence of any statement to the contrary or if the problem is silent, bank credits are assumed to be deposits acknowledged by bank. Bank Debits – all items debited to the account of the depositor which include checks paid by bank and debit memos. o In the absence of any statement to contrary or if the problem is silent, bank debits are assumed to be checks paid by bank.

Formula of Deposit in Transit Deposit in Transit – beginning of the month Add: Cash Receipts deposited during the month xxx Total deposits to be acknowledged by bank Less: Deposits acknowledged by bank during the month (xx) Deposit in Transit – end of the month xxx

xxx

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Outstanding Checks – beginning of the month Add: Checks drawn by depositor during the month Total checks to be paid by the bank Less: checks paid by the bank during the month (xx) Outstanding Checks – end of the month xxx

xxx xxx xxx

Illustration Cash in bank per ledger Balance, January 31 50,000 Book debits for February including January CM for note collected of P15,000 200,000 Book Credits for February, including NSF check of 5,000 and service charge of 1,000 for January 180,000 Bank statement for Feburary Balance, January 31 84,000 Bank Credits for February, including CM for note collected of 20,000 and January

deposit in transit of 40,000 170,000 Bank Debits for February, including NSF check of 10,000 and January outstanding check of 65,000 130,000

Bank Recon for the month of January Balance per book – January 31 50,000 Not...