CAPITAL AND INVENTORY MANAGEMENT

CASH COLLECTION, DISBURSEMENT AND FLOAT

The Components of Working Capital:
Companies keep their money in the bank. Whenever they need to pay something, they issue a
check. Of course, there are expenses that are too small to pay using a check. These are paid from the
petty cash fund that companies maintain. There may also be transactions that require payment in cash.
But these are more the exception than the rule.
In the Philippines, companies usually assign a collection day-usually a Friday afternoon-when all
suppliers may collect their check. So what happens is, the collectors get the check, issue an Official
Receipt for the check, then go back to the office to turn over the check to his companys cashier,
accountant, treasurer, (or whoever responsible for it). Then on Monday (or later depending on the
company procedure), the person who received the check will then deposit it to their companys bank
account. Their bank will inform the companys bank that a check has been issued. The companys bank
will clear the check (if there are sufficient funds in the companys account) or turn it down (if there are
no sufficient funds to cover the check). In the latter case, the check is said to have bounced. A
bouncing check is actually a criminal offense. The issuing party may be sued for estafa.
As far as the accounting books are concerned, the moment the check is issued by the issuing company,
the amount in the Cash-in-Bank account in the Ledger is credited or deducted by the amount of the
check. However, as far as the books of the bank are concerned, the companys account will not still
show any reduction. The reduction will only be reflected once he check has been deposited and cleared.
The period between the issuance of the check and the clearing of the bank may be as short as two days
to several days (depending on how fast the supplier deposits the check). These period is known as the
FLOAT. There are several kinds of float. These are:
PAYMENT FLOAT checks written by the company but have not yet cleared. These are checks
that the company pays to its suppliers.
AVAILABILITY FLOAT checks that have been deposited but not yet cleared. These are check
paid to the company by customer.
NET FLOAT difference between payment and availability float
Valuing Float:
A float results from the delay between your writing the check and the time the check is cleared
by the bank. As the financial manager, your main concern is to know your available balance in the bank
not the companys. If you know beforehand, when the checks will be presented for payment you can
minimize the amount of money in the checking account. The less the money in the checking or current
account, the more money you have available for investment in interest bearing accounts (checking
accounts either have low or no interest at all). This is called playing the float.
You can increase your available cash balance by increasing your net float. These means that you
would want to ensure that checks paid to you by your customers are cleared faster than those you pay
for the suppliers. In a small company it may amount to a little thing and may not be worth doing but
imagine a big corporation like San Miguel or PLDT. For instance, a company with a P1 billion is sales. If
collection is speeded up by just one day, the additional interest alone is P164,383 a day! (Assuming an
interest rate of 6% per annum). As financial manager, it is your duty to study if there are ways wherein
you can earn extra money by managing your floats.
Managing Float:
Reasons for the delays to create a float:
The time that it takes to mail a check (if checks are mailed however this seldom happens today).
The time it takes the company to process the check after it has been received (a payment has to
be recorded or posted, deposit slips made etc.). Bigger companies will tend to take longer as
they normally have more procedures but this also seldom happens today due to the used of
computers.
The time it takes the bank to clear the check and adjust the firms account.
Today, because of the use of computers, much of the delay within the company and within the banking
system has been eliminated. But out of town checks especially foreign checks, take longer to clear.
SPEEDING UP COLLECTIONS
In order to minimize float, many department stores and supermarkets now have an EPS
machine (Express Payment System) in the cashier. Instead of a credit card, you swipe your ATM card
and the amount is automatically deducted from your bank account. This totally eliminates float even if
you did not pay in cash.
Many companies also have PREAUTHORIZED PAYMENTS. For instance, at a predetermined date,
certain bills will be automatically charged to your credit card or your bank account. Again, this speeds
up collection by eliminating or minimizing floats. It even minimizes bad debts.
Another way to speed up collections is through CONCENTRATION BANKING For instance, if a
company has many accounts in one particular area, they will make arrangements with the bank in that
area to have all payments deposited in that bank and that bank will be the one to remit to the
companys bank account. For example, a certain pre-need company has many clients in Coron,Palawan,
which is an island municipality. It has only one bank, the Landbank of the Philippines. Said pre-need
company opened an account with a certain Landbank Branch in Metro Manila. Because of online
banking, all policy holders in the Coron and Busuanga area just deposit their payments in Landbank
Coron.
Unfortunately, concentration banking involves additional costs. These are:
1. Additional administrative costs
2. Bank charges
Hence, the finance manager must evaluate these and determine if the benefits overweigh the costs.
CONTROLLING DISBURSEMENT:
Speeding up collection is only one side of the equation. A company can also increase net float
by slowing down disbursements. However, a company should be careful that it does not damage its
relationship with its suppliers in doing this.
INVENTORIES AND CASH BALANCES
Just like in cash, carrying inventory entails carrying costs-storage, etc. Carrying to much
inventory ties up cash which can otherwise be invested in interest earning securities. However, just like
cash, a company cannot afford not to keep an inventory or raw materials, work-in- process and finished
goods. Doing so might result lost in sales, or shut down in production (which would probably also result
to incurring unnecessary costs). The list below shows the pros and cons about inventory:
Reasons Not To Keep Inventory:
CARRYING COSTS especially storage, including security against pilferage and theft, and
insurance.
RISK OF SPOILAGE in the case of items with a limited shelf life
RISK OF OBSOLESCENCE especially in the case of technology, sensitive items (like computer,
cell phone and cell phone spare parts/accessories
Risk that item in stock may become out of fashion (cloths toys etc.)
Reasons to keep inventory:
The company will not lose a potential sale just because the item is out of stock. This is a very
bad business-to turn out a stock due to lack of inventory.
The production will not shut down due to lack of raw materials. A shut down in production I
very costly in terms of time and money.
Avoid incurring higher or extra costs associated with rush orders and overtime work.
Managing Inventories:
The job of the financial and production manager is to determine the optimum level of
inventory wherein the company will not run out of stock of finished goods and essential
raw materials and at the same time not spend a fortune on storage.
To determine the optimal level of inventory, the following factors should be considered: ( as an
illustration, we will use a fictitious Filipino Restaurant called Dahon ng Saging as an example. Specially,
we will use one of their breakfast dishes as an example, this dish is Lamayo Danggit from Coron
,Palawan served with organic fried egg and fried rice or also known us Filipino as sinangag. (We shall
focus on danggit)
1. The required quantity of the item for a given period. (The restaurant consumes 250 kilos per
year.
2. The carrying cost per item. In the case it should be measured on a per kilo gram basis. (Lets
assume a carrying cost of P1/kilogram)
3. The ordering cost or the administrative costs required to place an order. (Lets assume a P20
administrative cost per order regardless of order size (this includes communication costs,
clerical work in receiving the goods and processing the payment).
Obviously, the restaurant may order 250kgs one time or 25kgs ten times or any combination in
between. This is express in equation below (Q- quantity)

Number of orders per year= sales
Q
= 250
Q
Just before its delivery, the restaurant has effectively no inventory. Just after a delivery it has an
inventory of Q kilos. Therefore, Average inventory is:

Average Inventory= Q kilos
2
If the restaurant increases its regular order quantity by 1 kilo, the average inventory increases by kilo.
The carrying cost is:
Total Carrying Cost = P100x Q
2
The other cost associated with inventory is ordering cost. The table below shows how the cost varies
with different order quantities:
Order size No. of orders per year Total order cost
1kg 250 P5,000.00
2kgs 125 P2,500.00
5kgss 50 P1,000.00
10kgs 25 P500.00
25kgs 10 P200.00
50kgs 5 P100.00
125kgs 2 P40.00
250kgs 1 P20.00

Total order costs = No. of order per year x Cost per order

Sales
-------------- x Cost per order
Q
As mentioned, the optimal order size is that which strikes a balance between Carrying and Ordering
Costs. The optimal ordering size is called the Economic Order Quantity (EOQ). Ideally, this should be the
point where the increase in carrying costs is offset by the decrease in ordering costs.

We have seen that adding 1 kilo increase the average inventory by kilo. Therefore each additional kilo
means an additional carrying cost of P0.50.

Carrying cost/kilo P1.00
Marginal Carrying Cost =__________________ = ------------ = P0.50
2 2
Since the EOQ, is the point where marginal order cost equals marginal carrying cost, the equation is
liked this:

Sales x Cost/Order Carrying Cost per kilo
______________ = __________________
Q2 2

2 x Sales x Cost per order 2 x 250 x P20.00
Q2 = ______________________________ EOQ (Q2) = _____________________= 100kgs
Carrying Cost per kilo P1
This means that the EOQ for this particular case is 100kgs. However, in order to arrive at the EOQ the
following factors must also be considered:
1. The minimum order required by the supplier.
2. The delivery time. From the time the order is placed, how long before the supplier can deliver
since the goods are coming from Coron, Palawan.
3. The minimum safety stock or buffer stock that the company wants or needs to maintain to
ensure that they will never run out.
4. Any discounts that the supplier may give to volume orders and any additional costs due to rush
orders.
THE BAUMOL MODEL
According to William Baumol, cash is just like inventory and the problem of managing cash is
just like the optimum order size problem faced by our fictitious restaurant. However, instead of how
many kilos per order, Q becomes the value of short-term securities sold each time the cash balance is
replenished. The carrying cost of cash is the interest rate. Total cash disbursement takes the place of
number of kilos sold. Hence, the optimum amount of securities to be sold is:


2 x annual cash disbursement x cost per sale of securities
Q* =_____________________________________________________
Interest Rate
Under the model, higher interest rate implies smaller sales of bills. In other words, when
interest rate is high, you should put more of your funds in interest bearing securities (because they will
earn more) and make small sales of these securities when you need the cash. On the other hand if you
use cash at high rate, or if there are high costs incurred when selling securities, you shouls hold on to
large average cash balances.

THE MILLER ORR MODEL
The Baumol model works best as long as the firms cash usage is steady. However, what
normally happens is that in one week, the firm may have a large collection then the next week, a large
expenditure or outlay. The Miller-Orr model was conceptualized under the assumption that it is hard to
predict the day-to-day cash inflows. This was named after M.H Miller and D. Orr.
The model works by determining the upper and lower limit to cash requirements. Follow these
steps:
1. Set the lower limit. This can be zero or a minimum amount required either by the company or
the bank (i.e. maintaining balance).
2. Estimate the variability of cash flows. This can be done through observation or one may employ
more sophisticated methods.
3. Compute the upper limit and the return point.
To illustrate this, use the following case:
1. Minimum cash balance P20,000
2. Variance of the daily cash flows 9,000,000 (3,000/day)
3. Interest rate 0.030% per day
4. Transaction cost for each sale or purchase of securities P100.00
Calculation of Spread between upper and lower cash balance limits:

Transaction cost X Variance
Spread = 3(3/4 X _____________________) 1/3
Interest rate
(Note: exponent of 1/3 means cube root)


P100.00 x 9,000,000
= 3(3/4 x _____________________ )1/3
0.00030
=3(2,250,000,000,000)1/3
=3(13,103.71)
=39,311.13.or P39,300

Upper Limit = Lower Limit + P39,300
= P20,000+P39,300
=P59,300

Return Point = Lower Limit + Spread/3
= P20,000 + (P39,300/3)
= P20,000 + P13,100
= P33,100
Decision Rule: If cash balance rises to P59,300 invest P26,200 in marketable securities. If cash balance
falls to P20,000 sell P33,100 worth of securities and replenish cash.

RAISING CASH BY BORROWING
So far we have assumed that additional cash requirements shall be raised by selling securities.
But what if the company has no securities to sell and would need to borrow in order to meet its cash
requirements?
Borrowing eliminates the costs involves in selling securities. However borrowing also means
paying interest which will most probably be higher than the cost in selling securities.
In order to maximize earnings of your cash, you want to hold on to as little cash as possible so
that you can put more money in interest earning securities. But in case of a sudden need for cash, you
may have to resort o borrowing because it may be difficult or costly to sell securities. As the financial
manager you will be faced with another trade-off.
Lets take for example that you have the opportunity to invest your cash in a security that gives
you 10 %. In such a case, the cost of keeping your cash (and not investing in securities) is the
opportunity lost which is 10%.
Supposing you also have the option to borrow money from the bank at 12%interest, incase of
the sudden need for cash, and selling the securities is not feasible.
In this case, there is a simple rule for maximizing expected return. You should adjust the cash
balances until the probability that you will need to borrow from the bank equals.
Cold of Cash Balances 10
=__________________________ = _________ = 0.83
Cost of borrowing 12

The best cash balance depends on the cost of borrowing and the extent of the uncertainty about future
cash flow. If the cost borrowing is high relative to the interest rate on securities, you should ensure that
the probability that you will need to borrow is low. Otherwise, if you are uncertain about your future
cash flows, you may have to keep large cash balance just to be safe. However if your cash flow is
certain, then you may keep your cash balance to a minimum.
CASH MANAGEMENT IN LARGE CORPORATION
For the large corporations, the transaction cost of buying and selling securities are small
compared to the opportunity cost of holding idle cash. A company with annual sales of P500M will have
an average daily sale of P1.37M. The potential interest that this money can earn will most probably
offset the transaction cost.
Investing Idle Cash: The Money Market
Firms with excess funds may invest their money in the money market. Money market securities
are very liquid therefore easy to convert to cash if needed. Some common money market instruments
are:
TREASURY BILLS issued by the government. Have a maturity of 90 days to 1 year.
COMMERCIAL PAPER short-term unsecured debt of large and well known
corporations. It can last up to 270 days (approx.. 9 months) but it usually issued in two
months. It has low marketability because there is not much trading in commercial
paper.
CERTIFICATES OF DEPOSIT time deposits in banks in large amounts. Unlike demand
deposits, these cannot be withdrawn before maturity. The bank will pay interest only at
maturity. If it is pre- terminated, the depositor will not earn the stipulated interest.
REPURCHASED AGREEMENT a dealer of government bonds sells T-bills to n investor
with an agreement to purchase the same T-bills at a specified date at a higher price. In
effect, this is a collateralized loan with the T-bills as collateral. Since the repurchase
price is higher than the selling price, the difference is like an interest that the investor
earned. If the dealer fails to buy back the T-bills, the investor keeps it as payment.


TRUE OR FALSE:
Write the TRUE if the given statement is correct and FALSE if otherwise.
1. Inventory is the most liquid current assets.
2. The higher is the average collection period, the more efficient is the collection activity.
3. The current ratio is more severe test of short term solvency.
4. The liquidity of the current assets will directly affect the solvency of a business.
5. If the debt ratio is 40%, then the equity ratio is 60%.
6. When goods are sold on credit, the current ratio will increase.
7. To analyze the financial statements is synonymous to interpreting the financial statements.
8. A low inventory turnover may indicate low sales volume.
9. A common size statement shows only the component percentage of each item in the statement.
10. Time-series analysis involves the comparison of the financial ratios of the current period with
the previous period.
11. An audit assurance service is the independent examination that ensures the fairness and
reliability of the reports that management submits to users outside the business entity.
12. Government accounting deals solely with the identification of the sources of resources and the
application of such resources in consistent with existing laws.
13. Conservatism or prudence means that when accountants have genuine doubts concerning
which of two or more reporting alternatives to select, the alternative with the most favorable
impact on owners equity should be chosen.
14. The Accounting Entity Concept/Principle presumes that the business is separate and distinct
from the owners and that its operation continues indefinitely.
15. Information has the quality of reliability when it is free from material error and bias and can be
depended upon by users to represent faithfully that which is either puports to represent or
could reasonably be expected to represent.
16. The actual basis of accounting means that accountants records revenues or income as they are
earned and expenses as they are incurred.
17. Substance over form conveys the true intention of the contract or true meaning of an economic
transaction rather than the customary words embodied in a legal document.
18. One of the qualitative characteristics of financial information relating to representation is
Comparability. To achieve this, users of accounting information must be able to compare
financial statement of an enterprise over time in order to identify trends in its financial position
and performance. The users must also be able to compare financial statements of different
enterprises with in the same industry in order to evaluate their relative financial position and
performance.
19. To achieve the primary qualitative characteristics relating the presentation of financial
information, such information must have the quality of Understandability. Understandability
means that the financial information must be comprehensible and intelligible.
20. One of the primary qualitative characteristics of accounting information is Relevance. To
achieve relevance, such financial information can be used to many predictions or forecasts, or
for instance, future cash flows or income.

IDENTIFICATION
Write the correct accounting terms that is being described in the statements below.
1. A form of business where only a small amount of capital is need, the owner usually acts as the
manager and enjoys all the benefits of the business and assumes all losses.
2. These are amounts received by a business entity for services rendered or for goods sold.
3. These are broad general standards or rules and procedure that serve as guides in the practice of
accounting.
4. The procedural aspect of accounting which involves the regular routine work of measuring,
recording, and classifying business transaction.
5. The underlying principle which requires one to recognize revenues or income when a service
had been rendered or goods are delivered or sold regardless of collection of payments.
6. The underlying principles which requires one to recognize an expense when a service had been
received of goods had been purchased regardless of payments for such.
7. The accounting principle which requires one to separate the business activities from the
personal activities of the owner or manager.
8. This financial statement reflects the business entitys profitability as of given period of time and
is sometimes referred as statement of operation.
9. This financial statement reflects the business entitys resources, obligations and equity as of a
specific date.
10. The financial statement reflects the changes that occurred in the owners equity as of a given
period of time and is sometimes called the statement of capital.


MULTIPLE CHOISES
Write only the letter of the correct answer.
1. Generally accepted accounting principles.
a. Are fundamental truths or actions that can be derived from the law of nature.
b. Derived their authority from legal court proceedings.
c. Derived their credibility and authority from general recognition and acceptance by the
accounting profession
d. Have been specified in detail by the Board of Accountancy.
2. A form of statement of financial position that mists the assets on the left and the liabilities and
owners equity on the right is called.
a. Report form c. a natural form
b. Accounting form d. a functional form
3. A complete set of financial statements includes the following components, except:
a. Statement of financial position, statement of income and statement of cash flows.
b. A statement of changes in owners equity.
c. Notes, comprising a summary of significant accounting policies and other explanatory notes.
d. Reports and statements such as environment reports and value added statements.
4. Current assets include all of the following except.
a. Cash and cash equivalents
b. Assets held for trading purposes which are expected to be realized within one year from
balance sheet.
c. Inventories and trade receivables that are sold consumed or realized as part of the normal
operating cycles even when they are not expected to be realized within twelve months of
the balance sheet date.
d. Available for sale securities that are expected to be realized within twelve months of the
balance sheet date.
5. The normal balance of an account is on the
a. Debt side of the account
b. Credit side of the account
c. Side is represented by increase in the account balance
d. Side represented by decrease in the account balance
6. A ledger is defined as a collection of
a. Transactions
b. All statements of financial position accounts
c. All income statements accounts
d. Account titles with their corresponding account number
7. Which of the following statements regarding a trial balance is incorrect?
a. A trial balance should always balance
b. A trial balance is a test of the equality of the debits and credits in the ledger
c. A trial balance that is in balance proves that no error of any kind has been made in the
accounts during the accounting period
d. A trial balance is useful in the preparation of the statement of income and the statement of
financial position
8. The accrual basis of accounting recognizes:
a. Revenues when products are produced or services have been rendered as part of operating
activities.
b. Expenses when resources are consumed as part of operating activities
c. Revenues when cash is received
d. Expenses when cash is paid
9. A step in accounting cycle to bring the books and accounts up to date is known as:
a. Current entries c. Adjusting entries
b. Correcting entries d. Reclassifying entries
10. Which of the following is the purpose of adjusting entries?
I. To apportion the proper amounts of revenue and expenses to the current
accounting period.
II. To establish proper amounts of assets and liabilities in the balance sheet.
III. To accomplishes the objective of offsetting the revenue of the period with all the
expenses incurred in generating the revenue.
IV. To prepare the revenue and expense accounts for recording transactions of the
following period.
a. I and II only c. I,II and III only
b. II and III only d. All of these
11. The accrued balance in a revenue account represents an amount which is
Earned Collected
a. Yes Yes
b. Yes No
c. No Yes
d. No No
12. All adjusting entries should have:
a. Bothe statement of income accounts
b. Bothe statement of financial position accounts
c. A statement of income account and a statement of financial position account
d. An asset account and a liability account
13. The major cost/expense of a merchandising business is:
a. Cost of goods sold
b. Depreciation Expense
c. Interest expense
d. All of the above are major cost/expense
14. The correct equation which applies to the determination of cost of goods sold is:
a. Beginning inventory Purchases + Ending inventory
b. Beginning inventory + Purchases + Ending inventory
c. Beginning inventory + Purchases Ending inventory
d. Beginning inventory + Purchases Sales Ending inventory
15. This method of accounting for inventories records the cost of goods sold each time a sale is
made:
a. Physical inventory system
b. Perpetual inventory system
c. Periodic inventory system
d. First in-First out system
16. The inventory costing method presumes that the first items into the stockroom are the first out,
which means that goods sold are assigned the cost of the oldest inventory available and the
ending inventory is to be valued at its most recent cost.
a. FIFO
b. Specific identification
c. Weighted average cost
d. None of the above
17. Which of the following involves an accrued expense?
a. Interest collectible at maturity on a note receivable
b. Interest payable at maturity on a note payable
c. Interest received in advance on a note receivable
d. Interest paid in advance on a note payable.
18. Which of the following accounts is not closed at the end of the period?
a. Salaries expense c. Commission income
b. Accrued Income d. Merchandise Inventory, Beginning
19. Which of the following accounts is not a real account?
a. Building c. Accrued taxes
b. Depreciation on the building d. Advances to employee
20. Which of the following is mixed account before the books are adjusted?
a. Salaries payable c. Prepaid insurance
b. Accrued income d. Accrued Expenses
21. In a manufacturing operations. Prime cost means?
a. Raw materials used plus Direct labor cost
b. Raw materials used plus Factory overhead
c. Direct labor cost plus factory overhead
d. Raw materials used plus factory overhead
22. In a manufacturing operations. Conversion means:
a. Raw materials used plus Direct labor cost
b. Raw materials used plus factory overhead
c. Direct labor cost plus factory overhead
d. Raw materials used plus factory overhead
23. In a manufacturing operations, total manufacturing costs plus work in process at the beginning
of the period, less work in process at the end of the period is called.
a. Total Cost of Goods Places in Process
b. Total Cost of Goods Available for Sale
c. Total Cost of Goods Manufactured
d. Total Cost of Goods Sold
24. In accounting for the Value Added Tax (VAT), VAT on sales of goods or services of a VAT
registered entity is properly termed as:
a. Input Tax c. Output Tax
b. VAT Payable d. Creditable Tax
25. In accounting for Value Added Tax (VAT), VAT on purchases of goods or services of a VAT
registered entity is properly termed as:
a. VAT Payable c. Creditable Tax
b. Output Tax d. Input Tax

MULTIPLE CHOICE- PROBLEM

1. On June 1, 2012, UNO Company sold merchandise with a list price of P1,000,000 to Dos
Company. UNO allowed trade discounts of 20% and 10%. Credit terms were 5/10, n/30 and the
sale was made FOB Shipping Point. UNO prepaid P50,000 of delivery cost for Dos as an
accommodation for the customer. On June 11, 2012, Uno received from Dos full remittance of?
a. P684,000 c. P720,000
b. P734,000 d. P770,000
2. Bestlink Hardware has P225,000 in accounts receivable as of Dec. 31, the fiscal year. Based on
its experience the company estimates that around 5% of its accounts may prove uncollectable.
It has an existing allowance for bad debts of P12,500 (credit balance). At what amount should
the allowance for bad debts be shown in the balance sheet as of December 31?
a. P11,250 c. P1,250
b. P23,750 d. P0
3. On December 31,2012, San Juan Services sold one of its services vehicle for P150,000. It was
acquired in January 1, 2009 for P1,000,000 and its depreciated using the straight line method
and has an estimated useful life of 5 years with a P10,000 scrap value. How much is the gain or
loss realized from the disposal of the service vehicle?
a. P50,000 Loss c. P58,000 Loss
b. P58,000 Gain d. P150,000 Gain
4. The following information for the year ended December 31,2012 were available
Total current assets P1,250,000
Total current liabilities 725,000
Total non current assets 1, 825,000
Jose Capital- December 31, 2012 2,350,000
Net Sales-2012 5,025,000
Total Selling Expenses 850,000
Total Administrative Expenses 225,000
Jose, Drawings-2012 375,000
Cost of sales is 70% of net sales
No additional investment were made during 2012
How much is Jose, Capital at the beginning of the period (January 1, 2012)
a. P2,292,500 c. P2,407,500
b. P2,350,000 d. P1, 917,500
5. The following data were available from the records of Nueve Trading on December 31, 2012
Finished goods inventory, January1 P 1,000,000
Finished goods inventory, Dec31 1,200,000
Cost of goods Manufactured 5,000,000
Loss on sale of machinery 100,000
The cost of goods sold for the year was?
a. P4,800,000 c. P4,900,000
b. P5,200,000 d. P5,300,000

ADJUSTING ENTRIES
The Steady Company presented the following information pertaining to accounts that will need
adjustments for its December 31,2012 year-end statements.
1. Assume that December 31,2012 is a Friday and the steady Company pays its employees a total
of P87,500 the following Mondays representing salaries for the last two weeks.
2. Steady Company acquired Office Equipment costing P353,800 on July 31, 2012. The equipment
is expected to last for 5 years after which will be worthless.
3. Steady Company with its owner Mr. Jhon Camuna credited the Unearned Services Revenue
account for P22,800 receipt of cash on November 30,2012 from a customer for service to be
rendered during the month of December 2012, January, February and March 2013.
4. The balance in the ledger account Office Supplies amounted to P32,000. An inventory count of
the office supplies at the end of the period totaled P12, 800.
5. On December 30, 2012, Steady Company debited Prepaid Insurance account for P10,800 for
6months insurance premiums payment,
Required:
Prepare the necessary adjusting entries as of December 31,2012. Omit brief explanations for its
adjusting journal entries.

PROBLEM SOLVING
The cost department of CSI Company provided the following information:
Net purchases of materials P320,000
Factory overhead is 25% of Direct Labor Cost
Materials used 300,000
Increase in Finished Goods Inventory 48,500
Conversion cost 500,000
Decrease in Work in Process Inventory 28,500
Required: Show your solutions in good form:
1. Cost of goods sold
2. Factory overhead
3. Prime cost
4. Conversion cost