Cash, receivables, and inventories

Current assets are where a lot of easy FAR points live, and where careless candidates give them away. Cash, receivables, and inventories show up in almost every set, and the traps are always the same: a check that is not really cash, an allowance computed off the wrong base, an inventory formula the standard does not allow. Lock these rules down and you bank the points every time.

Cash and cash equivalents

Cash is money available for immediate use: currency and coins on hand, demand and checking deposits, undeposited customer checks already dated on or before the reporting date, money orders, and the petty cash fund. Watch the classic exclusions. A postdated check received from a customer is a receivable until its date arrives. An employee IOU is a receivable. Postage stamps are prepaid expense. A bond sinking fund for a debt due in three years is a noncurrent investment, not cash.

Cash equivalents are short-term, highly liquid investments readily convertible to a known amount of cash and subject to an insignificant risk of change in value. The maturity test is three months or less measured from the date of acquisition, never from the reporting date, so a one-year treasury bill bought two months before year-end never qualifies even though little time remains.

Bank reconciliation

The goal is a single adjusted balance that both the bank side and the book side agree on. Bank-side reconciling items (deposits in transit, outstanding checks, bank errors) never need a book entry. Book-side items (unrecorded service charges, NSF checks, bank-collected notes, book errors) do require an adjusting entry.

Worked example. Pateros Trading shows a bank statement balance of P312,000 and an unadjusted book balance of P305,000. Deposits in transit are P28,500, outstanding checks are P41,200, an unrecorded bank service charge is P1,700, and a customer's NSF check is P4,000.

Bank side: 312,000 + 28,500 deposit in transit · 41,200 outstanding checks = P299,300

Book side: 305,000 · 1,700 service charge · 4,000 NSF check = P299,300

Both sides meet at P299,300, which is the cash reported in the statement of financial position.

Petty cash and compensating balances

An imprest petty cash fund is fixed in amount. At replenishment, receipts plus cash on hand should equal the fund. Any gap is cash short or over: if receipts of P5,200 plus P2,750 cash on hand only account for P7,950 of an P8,000 fund, the fund is P50 short. Only actual currency and coins in the box count as cash on hand; vouchers and IOUs do not.

A compensating balance is cash a bank requires you to keep on deposit to support a loan. If it is legally restricted for a period beyond the current period, it is disclosed and excluded from cash, and shown as a noncurrent asset when the related loan is noncurrent.

Receivables

Trade receivables arise from selling goods or services in the ordinary course of business. Non-trade receivables are everything else: advances to officers and employees, subscriptions receivable, claims for tax refunds, and dividends receivable. Trade receivables are current if collectible within the normal operating cycle even when that exceeds twelve months; non-trade items follow the plain twelve-month test.

Initial and subsequent measurement. A trade receivable without a significant financing component is initially measured at its PFRS 15 transaction price, then carried at amortized cost using the effective interest method, net of any loss allowance. A long-dated or non-interest-bearing note is initially measured at the present value of its future cash flows discounted at the market rate; the gap between face value and present value is unearned interest income amortized over the term.

Expected credit losses. Under PFRS 9, trade receivables use the simplified approach, which measures the loss allowance at lifetime expected credit losses from the start, usually through a provision matrix or an aging schedule. The doubtful accounts expense for the year is the amount needed to bring the allowance to its required ending balance: if the required allowance is P120,000 and the allowance already carries a P25,000 credit, the expense is P95,000.

Discounting, factoring, pledging, assignment. These are ways to turn receivables into cash early. Pledging uses receivables in general as collateral. Assignment pledges specific identified receivables. Factoring is an outright transfer to a factor; whether it is a true sale or a secured borrowing turns on whether the entity has transferred substantially all the risks and rewards. Discounting a note hands a note to a bank before maturity for cash. In a factoring, the factor's commission and any holdback reduce the cash you receive: factor P1,200,000 of receivables with a 4 percent commission (P48,000) and an 8 percent holdback (P96,000), and you collect 1,200,000 · 48,000 · 96,000 = P1,056,000.

Inventories (PAS 2)

Cost formulas. Items not ordinarily interchangeable use specific identification. Interchangeable items use FIFO or weighted average, applied consistently. LIFO is not permitted under PFRS. In periods of rising prices, FIFO leaves the newest, higher-cost units in ending inventory, so it reports a higher ending inventory and a lower cost of sales than weighted average.

Lower of cost and net realizable value. PAS 2 carries inventory at the lower of cost and NRV, where NRV is the estimated selling price in the ordinary course of business less the estimated costs to complete and to sell. The comparison is made item by item; a write-down on one item is never netted against an unrealized gain on another.

Worked example. Ternate Traders holds three items:

Item	Cost	NRV	Lower of cost and NRV
Item 1	P150,000	P140,000	P140,000
Item 2	P200,000	P220,000	P200,000
Item 3	P120,000	P110,000	P110,000

Total cost is P470,000 and total NRV is also P470,000, so an aggregate comparison would show no write-down. Applied item by item, inventory is reported at 140,000 + 200,000 + 110,000 = P450,000, capturing the P20,000 write-down that the aggregate view hides.

Estimation methods. When a physical count is impossible (say, a fire), the gross profit method estimates ending inventory: goods available for sale minus estimated cost of sales, where cost of sales is net sales times (1 minus the gross profit rate). With beginning inventory P350,000, net purchases P1,450,000, net sales P2,000,000, and a 25 percent gross profit rate, goods available are P1,800,000, estimated cost of sales is 2,000,000 x 75 percent = P1,500,000, and estimated ending inventory is P300,000. The retail method instead applies a cost-to-retail ratio to ending inventory measured at retail.

Common traps

• Counting a postdated check, an IOU, or a bond sinking fund as cash.
• Measuring the cash equivalent maturity from the reporting date instead of the date of acquisition.
• Forgetting the existing allowance balance when computing doubtful accounts expense.
• Netting an inventory write-down on one item against a gain on another.
• Treating LIFO as an option; it is prohibited under PFRS.
• Adding the factor's holdback back to the cash received when it is withheld, not paid.

Recap

Cash is only what is available for immediate use, and cash equivalents are judged from the acquisition date. Receivables are carried at amortized cost with a lifetime-ECL allowance for trade accounts, and long or non-interest-bearing notes at present value. Inventory is the lower of cost and NRV, compared item by item, with FIFO or weighted average for interchangeable goods and the gross profit or retail method when you must estimate.