Receivables - Receivables usually consist of:

- Business’ monitor customer accounts by 1. Open accounts with customers for

anticipating the probability of the uncollected sales or revenues
collection 2. Advances to officers, employees,
- Revenue Realization / Accrual affiliates (subsidiary companies,
Assumption parent companies)
- Recognize revenue when goods are 3. Claims against suppliers and
sold/services rendered, not insurance companies
necessarily when cash is received 4. Other receivables from non
- Financial assets that represent a recurring transactions (accrual of
contractual right to receive cash or income at the end of the accounting
another financial asset from another entity period)
- Claims against customers and others for Note:
money, goods, or services: For banks and other financial institutions
1. Accounts receivable 1. Receivables result primarily from loans to
- Oral promises of the purchaser to customers
pay for goods and services sold 2. Loans are made to heterogeneous
2. Notes receivable customers
- Written promises to pay a sum of 3. Repayment period are frequently longer
money on a specified future date or over several year
- Promise to pay with interest,
maturity date on the face of the note Classification
- Receivables from other sources (other 1. Trade or non-trade
than sales of goods or rendering - Trade: customer related receivable, other
services) than that it is a non-trade receivable
- Claims receivable - Non-trade Receivables
- Amount expected to receive - Advances to officers and employees
from an insurance company (Current)
for any claims in one’s - Advances to subsidiaries > anak ng
insurance policy parent company (Non-current)
- Interest receivable - Desposites to cover potential
- Amount of interest already damages or losses
earned but not yet received - Deposits as a guarantee of
as of the end of the year performance or payment (supplier of
- Interest accrued as of year goods or vendors)
end - Dividends and interest receivable (to
- Advances to affiliates accrue income)
- represent amounts given in 2. Current or non-current
advance to such parties Current (Trade and other receivables)
(employees and suppliers), - Trade receivables: reasonably expected to
which are expected to be be collected within one year or during the
received in the near future normal operating cycle being used
- Represent amount collectible from whichever is longer (when it is on an on
customers and other arising from: account transaction)
1. Sale of merchandise - In the absence of the information,
2. Claims for money lent; or the “normal operating cycle” is
3. Performance of services assumed one accounting period or
one year
 - Non-trade receivables: reasonably
expected to be collected within one year
Non-current (Accounts / Notes receivable)
- Trade receivables:
- reasonably expected to be collected
beyond one year or the normal
operating cycle
- Non-trade receivables:
- reasonably expected to be collected
beyond one year
ACCOUNTS RECEIVABLE (AR) - Not recognized in the accounting records
- Short-term receivables that arise from the - Customers are billed net of discounts
ordinary course of business operations - Not included in invoice receipt
- An open account that does not receive Cash Discount
interest - Inducements for prompt payment
- AR - when merchandiser sells goods on - Gross Method vs Net Method
credit - POV of Seller: Sales discount
- No formal written promises to pay - POV of Buyer: Purchase discount
(promissory note) Nonrecognition of Interest Element
- Agreement: Customer - debtor - A company should measure receivables in
- Current assets on the SFP or Sales on the terms of their present value
profit or loss statement - In practice, companies ignore interest
[1. Initial Recognition] revenue related to accounts receivable
- Receivables are recognized at fair value because the amount of the discount is not
plus transaction costs directly usually material (immaterial)
attributable to the acquisition Valuation of Accounts Receivable
- Fair value (FV) = Receivables recorded at Reporting Receivable
cost; the supplier records the invoice price - Classification
as the amount receivable on initial - Valuation (net realizable value - (AR-ADA
recognition > possible loss of not being collected, wala
- Expected to be collected within a year; pang loss, there is an anticipation, it won’t
initially recorded at Face Value be sudden)
[2. Subsequent Recognition] - Uncollectible Accounts Receivable
- End of the accounting period, AR is - Sales on account raise the
reported at its net realizable value (NRV), possibility of accounts not being
amount expected to be collected through collected
an adjustment recognizing probable loss
- Customers might not be able to pay Methods of Accounting for Uncollectible
due to business downturn or Accounts (Estimating Loss on Accounts
bankruptcy Receivable)
- Prudence - process of anticipating probable A. Direct Write-Off
loss on receivables Theoretically undesirable: no matching of cost
- Net realizable value (NRV) against the revenue because they are recorded at
- Estimates amount to be eventually different accounting periods, receivable not stated
collected from its customers’ at net realizable value
accounts Ex.
- Allowance for doubtful accounts 2021, there is Accounts Receivable of 10k
(ADA); result of deduction of NRV - there is no allowance for doubtful accounts
from outstanding balances of AR - revenue is recorded
[3. Derecognition] (AR removed from books) 2022, writeoff, the accounts receivable is closed
a. Contractual rights to the cash flow expire - Since there is no loss recorded, there is an
- Upon collection of the AR or upon its expense in 2022
write-off - Affects comparability of financial information
b. Entity transfers the receivable and the
transfer qualifies for derecognition B. Allowance Method
- Losses are estimated:
Recognition of Accounts Receivable percentage-of-receivables > based on the
Trade Discount experiences of the company in the previous
- Reductions from the list price years
 - Allowance for possible loss - Analyze in more detail the probability of
- Percentage of Receivables collection or non-collection based on
(Receivables - Allowance for Bad Debt) credit terms
- Statement of Financial approach - Longer past due = higher estimated loss
rate

Aging of Accounts Receivable

a b (a x b)

Allowance for
Days
Amount doubtful
outstanding %Uncollectible
(Balance) accounts
(AGE)
Summary
Percentage of Receivables approach:
- Results in a more accurate valuation of - If it is over 360 days, it is not healthy
receivables on the Statement of Financial anymore. The longer the receivables are
Position past due, there is an increase in risk of not
- Method may also be applied using the aging being collected. If uncollectible is 0 =
schedule writeoff
- Be mindful of the Allowance for Doubtful - Demand letters to collect overdue accounts
Accounts before adjustment receivable
- Added when there is an Doubtful
accounts expense [Other notes]
- Net realizable value = AR - ADA - If AR = deemed worthless = written off or
removed from company’s records
C. Aging of Accounts Receivable - The company has no way of collecting the
- Bad debts completed by creating account – Ex. when customer cannot be
categories or groups that show the no. of contacted or has declared bankruptcy
days the accounts are already past due - It will be removed, as well as its
- Past due if; not fully paid after expiration of corresponding allowance for doubtful
credit period (Credit term example: 2/10, accounts, it does not affect the NRV
n/30 > AR not fully paid after the 30th day is - If it the written off account is recovered, the
considered past due) entity should recognize the cash received
as other income
 - Interest income to be recorded by
NOTES RECEIVABLE the payee
- It is also a trade receivable but a more - Non-interest bearing; nominal rate is equal
formal claim against another party to zero (interest included in face amount)
- Note, a written promise to pay a certain - No interest included in the face
sum of money at a specific future date amount of the promissory note but it
- Notes are supported by a document doesn’t mean there is no interest, it
- Notes can be short term or long term is just hidden
- A negotiable instrument, maker signs in - Present value formulas, and understand
favor of payee the cash flows by the specific conditions
Generally originated from: stated in the note.
- Customers who need to extend the payment - Present Value of a Single Sum:
period of an outstanding receivable - 𝑃𝑉 = 𝐹𝑉 (1 + 𝑖)
−𝑡
- New customers
- PV = Present value
- Loans to employees and subsidiaries
- FV = Future / Face Value
- Sales of property, plant, and equipment
- i = effective interest rate
- Lending transactions (the majority of notes)
- t = term of the note
- Present Value of an Ordinary
Annuity: (Present Value of
Interest)
−𝑡
1 − (1+𝑖)
- 𝑃𝑉𝑂𝐴 = 𝑃[ 𝑖
]
- P (periodic payment) =
(principal of the note )(stated
rate)
Illustration:
a. Note Receivable - recorded at a discount
- Stated Rate < Market Rate
*Nominal/Face Rate/Stated Rate - PV lower than its FV
*Effective/Yield Rate/Market Rate - Look for total present value
1. Initial Recognition - PV of Principal + PV of
- Requirements for a short-term Interest
interest-bearing note receivable same as - Discount on Notes Receivable
those for AR (contra-account of NR)
- Long-term note is initially recognized at = Total present value - FV
present value (PV) 2. Subsequent Recognition
- Find out the effective interest rate - Amortization table
- Recorded at present value (PV) - Initial present value increase based on the
because the nominal amount (face additional amortization
amount) of cash that would be - Carrying amount represents the
received in the future would in fact subsequent recognition of note
have less value or purchasing
a b c d
power than the nominal account of
the same receivable had it been CA
Interest Cash
recognized this period D Received Amort. (first CA is the
Earned total present
- Effective Interest Rate (Yield/Market) A (constant) value)
- Used to determine the present T
value of a not or any other long-term E (CA x i) (FV * SR) Prev.CA
(a - b)
effective rate stated rate +c
negotiable instrument
 ANALYSIS OF ACCOUNTS RECEIVABLE
FINANCIAL RATIOS
3. Derecognition - Used to evaluate an entity’s financial
- If note is held until maturity date, performance and financial position with
the note will simply be collected at regard to its accounts and notes receivable
its face amount a day after it - Takes into account the relationship
matures between elements in the financial
statements and offer users valuable
Illustration: insights
b. Notes receivable - recorded at premium
- same procedure as notes a. Accounts Receivable Turnover
receivable recorded at discount - Used to quantify a company’s
- Effective rate is lower than nominal effectiveness in collecting its receivables
rate (SR > i) - Shows how well an entity uses and
- The present value of the note is manages the credit its extends to its
higher than its amount, giving rise to customers
a Premium on Notes Receivable
account 𝑁𝑒𝑡 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
𝐴𝑅𝑇 =
- Same PV and PVOA formula to get 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
the total present value
- Total Present Value = First Carrying - Average accounts receivable - average of
amount in amortization table beginning and ending balance of
- Premium balance decreases as the consumer’s accounts
amortization of interest increases, - Ex. If Turnover = 12; entity is able to collect
thus a decreasing balance of the the credit extended to customers 12 times
note’s carrying amount during the year.
- On the last year, the note equals its - Higher turnover is more favorable = more
face amount, the amount collected efficient in collecting customer’s accounts.
by the entity
b. Average Collection Period
Derecognition of all Receivables - No. of days an entity is able to collect from
Financial assets are derecognized when: its credit customers
- The contractual rights to the cash
flows from the financial asset 365
𝐴𝐶𝑃 = 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
expires
- When receivable is written
off or collected. If it is
written off, the FV of the - It is more efficient for an entity to have a
account and accompanying shorter collection period compared to its
equal amount of ADA should normal credit terms.
be removed from the entity’s - It would ensure that accounts receivable
records. actually materializes into cash at the
- It transferred the financial asset and earliest time possible
the transfer qualifies for
derecognition
Note: Trade receivables are noninterest-bearing
and are generally with settlement of 30 to 180 days
RECEIVABLE FINANCING - Notification - customers know that
- Used by cash-strapped firms (tight cash their account has been assigned,
position) so they pay directly to the
- Technique undertaken by to expedite creditor-assignee.
(speed up) cash flows from their - Creditor-assignee regularly
accounts receivable renders a report to the
- Involves selling, pledging, assigning, and assignor-debot regards the
factoring of customer accounts status of the assigned
- Cash can also be obtained through accounts and the existing
discounting of notes receivable balance of the debt
1. Pledging - Agreement = terminated;
- Offering AR as collateral against an when loan balance is paid
existing loan in full
- Ownership does not transfer to the creditor 3. Factoring
yet, nor are the collection used to pay off - Entity sells outright its accounts
the debt receivable to a buyer called a factor
- Ownership and control of AR transfers to - Factor - does not normally pay the seller the
creditor if the debtor defaults on his debt entire FV because of risk of non-collection
- Entire amount of receivables - Would only pay the seller a portion
pledged will be used as payment of of the FV of the receivables factored
existing loan
- For financial reporting purposes, AR that Note:
have been pledged will not be removed - In Pledging and assignment, the entity
despite the pledging agreement bears the loss in case of non-collection.
2. Assignment - Factors, bears the loss from non-collection
- Assignor obtains a loan from a creditor of accounts (factored receivables deemed
called assignee worthless)
- Loan repaid by the collection of accounts
receivable that assigned to the creditor Discounting of Notes Receivable
- When AR are assigned, the responsibility - When the entity wants to have its notes
of collecting the accounts may be given turned into cash prior to its maturity
by the firm to the creditor date.
- However, ownership of accounts is retained - Endorses unmatured note to a financial
by the firm institution, usually a bank
- Accounts receivable assigned, new - Proceeds of note will depend on the
account remaining term of the note, its
- Once accounts are assigned to the nominal interest rate, and its face
creditor-assignee value
- Non-notification and notification basis - Discounted with or without recourse
- Non-notification - customers are - With Recourse - bank may go after
not informed that their accounts the entity to collect the maturity
have been assigned, they would value of the note plus protest fee if
continue to pay the entity, who will the maker dishonors it
then forward the collections to the - Without Recourse - bank can no
assignee to be applied to his longer collect from the entity that
existing loan balance discounted the note should the
maker dishonor the note
 Chapter 4: Investments in Equity and Debt Classification of Financial Assets (IFRS 9)
Instruments
Designation of FVPL, FVOCI, and AC depends on
Investments two tests:
- Debt or equity instruments of another entity Contractual cash flow test Business model test
mainly used for passive income (increases
in equity that do not arise from main-income Asks if the entity is holding Asks about the intention
generating operations) the instrument solely for of the entity which may
the collection of interest only be determined by
- Financial Flexibility - taking advantage of
and dividends that may the decision of the
another opportunity to earn from one’s extra be received from mandement personnel
resources = generate more income and investment
establish mutually beneficial business
relationship with other entities
Important features of FVPL, FVOCI, and AC
- Investments are financial assets held by an
entity for the accretion of wealth through Type Asset Measured Form of
Classification at Instrument
distribution such as interest, royalties,
dividends and rentals, for capital FVPL Current FV Equity and
appreciation or for other benefits to the debt
investing entity
- Assets not directly identified with the FVOCI Noncurrent FV * Equity and
operating activities of an entity and occupy debt
only an auxiliary relationship to the central Amortized Noncurrent Amortized Debt only
revenue producing activities of the entity Cost cost
- Secondary source of revenue
* Fair value analyzed side by side with “would be”
Statement Classification carrying amount under effective interest method
to determine unrealized gain or loss
- Current investments - readily realizable
and are intended to be held for not more Investment in Associate
than one year. Ex: trading securities - Investment in Associate and Joint Ventures
- Non-current investments - are intended to
be held more than one year or are not Continuation:
expected to be realized within twelve https://www.notion.so/Chapter-4-Investments-3
months after end of the accounting period a95188848a14ca98bc4bdf4c1dfd842

Financial Instrument
- Any contract that gives rise to a financial
asset of one entity and a financial liability or
equity instrument of another entity
- Investments based on measurement and
designation:
- Measured at FVPL , FVOCI, and
Financial Asset at Amortized Cost
Chapter 5: Inventories ○ To determine possible loss or
shrinkage of inventory during the
Inventories year
- Assets which are held for sale in the
ordinary course of business; in the process b. Periodic Inventory System
of production for sale; in the form of ● Used by businesses with low priced high
materials or supplies to be consumed in the volume nature of merchandise
production process or rendering of services ● Cost of purchase is recorded in a
purchases account, an expense account.
Classification of Inventory ● Accounts used:
For merchandising firms: ○ Freight in - used to record freight
● Merchandise Inventory - goods that a cost paid
company purchases and plans to resell to ○ Purchase Returns and allowances
customers at a higher price for goods returned and allowance
● Supplies Inventory - all items purchased granted
by a merchandising firm for store and ○ Purchase discounts
office use ● Cost of goods sold - goods available for
For manufacturing firms: sale during the period less any unsold
● Raw materials inventory - the cost of goods at the end of the period
materials held for use in the ● Does not maintain a running account of
manufacturing of a product. This is the changes in inventory
cost of all component parts currently in ● Ending inventory determined by a physical
stock that have not yet been used in the count
production of goods
● Work in process inventory - the cost INVENTORY VALUATION
incurred for partially completed items Items to be included in Inventory
including raw materials used, labor, and - economic control rather than physical possession’
overhead usually consistent with possession of legal title
● Finished goods inventory - goods that 1. Goods in Transit (Not yet received)
have been completed by the - Freight/shipping terms are considered in
manufacturing process but which have establishing the ownership of these goods.
not yet been sold to consumers - Amount excluded from the physical
inventory count at the end of the period
INVENTORY RECORD SYSTEM - Determine whether the GOODS IN
a. Perpetual inventory system TRANSIT are to be included in the inventory
● Used when there are few controllable of the buyer or the seller
items in the inventory; continuous record of - Freight terms are considered in establishing
Inventory and COGS ownership of the goods
● Cost of purchases and sales are recorded - FOB = Free on Board, whether the buyer
directly in the Inventory account, an asset or the seller will pay for SHIPPING
account EXPENSES
● Cost of goods sold/Cost of Sales a. FOB Shipping point [Freight In]
increases and Merchandise Inventory - FOB origin, place of the seller
decreases - the buyer is responsible for paying
● Physical count is needed freight costs incurred in transporting
○ To verify the correctness of the the merchandise from the point of
inventory balance shipment to its destination
- The seller has to get the goods to
the shipping point
 -Ownership transferred from seller to is taken. The Purchase Discount reduces
buyer the cost of inventory purchased
b. FOB Destination [Freight Out] - Net Method - the purchase is recorded at
- The seller is responsible for costs its net price, and the amount of the
incurred in moving the goods to their discount appears only if the discount is not
destination taken. The Purchase Discount Lost
- Sellers pay for the shipping fee, account is presented is other expense in the
FREE SHIPPING for buyers income statement
- Goods in transit - seller
- Distribution expense in the income 2. Product and Period Costs
statement of seller - Product (inventoriable) costs
- Incurred to produce or acquire
units of inventory
2. Consigned Goods - Recorded in the inventory account
- Consignment is trading agreement in - Include freight charges on goods
which a seller sends goods to a reseller purchased, other direct costs of
who pays the seller only as and when the acquisition, and labor and other
goods are sold production costs incurred in
- Goods out on consignment remain the processing the goods up to the time
property of the consignor. The goods are of scale
included in its inventory at cost plus - Period costs
handling and shipping costs incurred in - Charged to expenses as incurred
the delivery to the consignee - Example: selling, general
- Goods held on consignment by the administrative expenses, interest
consignee, acting as agent of the consignor, costs
excludes the goods from its inventory
- Ex. Variable vs Absorption Costing
- Landmark - Consignee of Adidas - Variable (direct) costing - varies directly
- Consignee will not report as with the production volume, charged to
inventory because they are products as manufacturing takes place
held on consignment, - Fixed manufacturing costs are
excluded from the inventory expensed as incurred
account - Absorption (or full) costing - costing
- Pinabebenta lang nila method in which all manufacturing costs,
- Adidas - Consignor variable and fixed, direct and indirect,
incurred in production are included in the
COSTS INCLUDED IN INVENTORY cost of inventory
● Cost of Purchases, net of trade and cash
discounts received Cost Flow Assumption
● Cost of conversion (fixed and variable - Year-end inventory = plays an qin the
manufacturing overheads) determination of COGS and consequently
● Other costs incurred in bringing the net income on the income statement
inventories to their present location and - Must be accurate and compliant with
condition GAAPS
1. Cash Discounts 1. Specific Identification
- Gross Method - the purchase is recorded - Specific costs are attributed to identify
at the gross price and the amount of the items of inventory
discount is recorded only if the discount - Appropriate treatment for items that are
segregated for a specific project,
 regardless of whether they have been - Recording inventory write-down
bought or produced - Direct method - record write-down
- Inappropriate when there are large of inventory cost to net realizable
number of items of inventory that are value directly in its inventory and
ordinarily interchangeable cost of goods sold account
- Used where a small number of costly, - Allowance method - record the
distinctive items are sold. market decline as an increase to a
- ex. Jewelry, automobile, and custom loss account and an allowance
artwork. account which is deducted from
- Offers opportunity to manipulate income inventory on the statement of
- Each unit sold and each unit on hand financial position. The allowance
identified at their actual costs be included in account must be adjusted each
COGS and ending inventory period]
Analysis of Inventories
2. Average Costs - Internal control principles should be
- each item is determined from the average established to ensure that inventory is
of the cost of similar items at the properly safeguarded these may include:
beginning of a period and the cost of similar - Clear lines of responsibility
items purchased or produced during the - Effective record keeping
period - Segregation of duties between
- the moving average method employees
(perpetual system) -requires - Insurance for key assets
computation of a new average cost - Adequate security systems
after each purchase. Issues are a. Inventory turnover ratio
priced at the latest average unit cost - stock turnover ratio
- the weighted average method - measures the number of times on average a
(periodic system) - average cost is company sells inventory during the period.
determined only once at the end of - measures the liquidity of the inventory.
the period - evaluates the efficiency of a company in
handling the goods it manufactures or buys
3. First-In, First-Out (FIFO) to resell
- Assumes that the items of inventory that - high inventory turnover ratio means the
were purchased or produced first are company is more efficient and profitable. It
sold first. indicates that the firm is holding a low level
- Items remaining in inventory at the end of of average inventory in relation to sales
the period are those most recently 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
purchased or produced
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
- Assumes that goods are used in the order - Average inventory = (beginning + ending
purchased inventory) / 2
- Earliest costs = charged to COGS and
ending inventory are stated at recent costs. b. Average days to sell inventory
- Reported at approximate replacement cost - measures the average number of days’
sales for which a company has inventory on
LOWER OF COST AND NET REALIZABLE hand
VALUE (NRV) 𝑁𝑜.𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟 𝑜𝑟 365 𝑑𝑎𝑦𝑠
- Net Realizable Value - estimated selling
𝐴𝑣𝑒. 𝑑𝑎𝑦𝑠 = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜
price in the ordinary course of business less
the estimated costs of completion and the
estimated