CASH AND CASH EQUIVALENTS debt instruments with low risk (also low yield) and acquired 3 months

ruments with low risk (also low yield) and acquired 3 months or less
DEFINITIONS: from maturity date shall be considered as cash equivalents.
o Cash - includes money in the form of currency and coins, negotiable
instruments in the form of checks and money orders acceptable by the bank ✓ Examples include Treasury Bills, Bonds and Notes, Time Deposits,
for immediate credit and bank deposits whether in a savings or current Certificate of deposits and Bankers Acceptances and Commercial
account. Papers.
o Cash Equivalents - under PAS 7, cash equivalents are short-term and o Time deposits – Bank savings account that earns interest but not subject to
highly liquid investments that are readily convertible into cash and so near immediate withdrawal or check issuance.
their maturity that they present insignificant risk in changes in value because
of changes in interest rates. ● Time deposits are excluded from cash because of their restriction on
availability as funds and are classified as investments and shall follow these
o Bank Reconciliation - a statement that that settles the difference between specific classifications:
the bank statement balance and the cash balance per book which is the current a. Cash equivalents if the original term is 3 months or less.
balance in the checkbook of the depositor. b. Short term investments if the original term is more than 3 months to 1 year
c. Long-term investments if the original term is more than 1 year.
o Book Reconciling Items - include credit memos, debit memos and errors
that need to be adjusted by the depositor to reconcile with the adjusted Example of Adjusted Balance Reconciliation:
balance.

o Bank Reconciling Items - these include deposits in transit, outstanding

checks and errors.

o Certified Checks - checks that have been accepted by the bank and where
the drawer’s account has been debited but the money has yet to be withdrawn
by the payee. The funds are now held by the bank on behalf of the payee and
the check is no longer outstanding.
o Credit memos include collections by the bank; interest credited by the bank
o Petty Cash Fund - money set aside to pay small and recurring expenses
and matured time deposits transferred to the current account.
where it will be inefficient to settle such payments by issuing checks. Petty
cash fund may be accounted for using either imprest fund system or
o Debit memos include NSF checks, bank service charges and authorized bank
fluctuating fund system.
debits.
o Imprest Control System - a control system where all cash receipts
- - END - -
including checks to be deposited intact and all cash disbursements be made by
the issuance of a check.
CASH AND CASH EQUIVALENTS
Cash includes the following items plus adjustments:
THEORY
✓ Undeposited currency and coins. 1. Cash or Cash on Hand and In Banks on the balance sheet may include the
✓ Checks and money orders held unless the checks are post-dated, following items
defective or stale. Such items shall still be included as receivables. I. Currency or cash items on hand
✓ Unrestricted bank deposits. II. Deposits in foreign countries which are subject to foreign exchange
✓ Funds on hand and deposits that are for current use. restrictions
This includes petty cash fund, payroll fund and funds for taxes and III. Short-term placements of excess cash which can be pre-terminated
dividends as mentioned in PAS 1 but excludes funds appropriated IV. Postdated checks
for non-current assets. V. Cash set aside for the acquisition or construction of noncurrent assets
✓ Foreign currencies converted to their peso values. a. 1, 2 and 3 only
✓ Bank drafts. b. 2, 3 and 5 only
c. 1 and 3 only
d. Not given
Special Items of Cash
o Bank overdraft – A credit or negative balance in the bank account of the
2. Cash equivalents are
depositor resulting from an issuance of a check that exceeds the amount of the
a. Short-term and highly liquid investments that are readily convertible into
deposit.
cash
✓ As a rule, an overdraft shall be classified as a current liability and not offset b. Short-term and highly liquid investments that are readily convertible into
against current accounts with a positive or debit balance. cash with remaining maturity of three months
✓ As an exception, if the overdraft is in a bank where there are other accounts c. Short-term and highly liquid investments that are readily convertible into
that have a positive balance and those accounts are sufficient to cover the cash and acquired three months before maturity
overdraft, the total cash shall be shown net of the overdraft. d. Short-term and highly liquid marketable equity securities

o Compensating balance 3. All of the following can be classified as cash and cash equivalents, except
● If this amount is legally restricted to withdrawal, it is therefore excluded a. Bank drafts
from cash. However, in cases that it still remains to be unrestricted, the b. Equity investments
compensating balance shall be part of cash. If the c. Loan notes held due for repayment in 90 days
compensating balance is legally restricted the following rules shall be d. Redeemable preference shares acquired and due in 60 days
followed:
✓ The related loan is short-term: The compensating balance shall be part of 4. Which of the following items should not be included in “cash”?
current assets but separately from cash. a. Coins and currency in the cash register
✓ The related loan is long-term: The compensating balance is part of b. Amounts on deposit in checking account at the bank
noncurrent assets as an investment. c. Checks from other parties presently in the cash register
● An informal agreement to maintain a minimum amount of deposit will not d. Money market placement
be legally restricted and therefore included in cash.
5. Which of the following is not considered cash for financial reporting
Cash Equivalents purposes?
o The three important characteristics for cash equivalents as mentioned in PAS a. Bank charges for the period
7 are short-term, highly liquid and near maturity. In other words, short-term b. Errors made by the company
c. Petty cash funds and change funds
d. Postdated checks and IOUs
16. Which is true when a petty cash fund is used?
a. The petty cash fund balance should be reported as investment
b. The reimbursement of the petty cash fund should be debited to expenses
6. What is a compensating balance? and credited to the cash account
a. Savings account balances c. The petty cashier’s summary of petty cash payments serves as a journal
b. Margin account held with brokers entry that is posted to the appropriate general ledger account
c. Temporary investment serving as collateral for outstanding loan d. Entries that include a credit to the cash account should be recorded at the
d. Minimum deposit required to be maintained in connection with a borrowing time payments from the petty cash fund are made
arrangement
17. The following statements relate to the petty cash fund. Which statement is
7. If the deposit is legally restricted as to withdrawal, the compensating true?
balance related to a long-term loan is shown as a. The amount of coins and currency in the petty cash fund is the same before
a. Cash the fund is reimbursed as it is afterwards
b. Other asset b. Entries to record the replenishment of the imprest petty cash fund result in
c. Long-term investment debit to various expense accounts and a credit to the petty cash funds
d. Current liability c. At any time, the sum of the cash in the petty cash fund and the total petty
cash vouchers should equal the amount for which the imprest petty cash fund
8. Bank overdraft, if material, should be was established
a. Reported as a deduction from the current asset section d. Under the imprest petty cash system, it is not necessary to adjust
b. Reported as a deduction from cash unreplenished petty cash expenses at end of the year
c. Netted against cash and a net cash amount reported
d. Reported as a current liability 18. A bank reconciliation is prepared monthly in order for the enterprise to
a. Arrive at the correct cash balance
9. If a financial institution has cash funds in a company, which is in b. Correct bank errors
bankruptcy, and the amount recoverable is estimated to be lower than the face c. Correct book errors
amount, cash should be d. Unearth any undetected cash fraud
a. Eliminated from the balance sheet
b. Written down to its discounted or present value 19. Bank reconciliation
c. Written down to estimated realizable value a. Is the process of transferring money in or out of a bank account
d. Stated at face amount b. Requires that every transaction which will result in a cash payment be
verified, approved and recorded before a bank check is prepared
10. The following statements relate to cash. Which statement is true? c. Is an analysis that reflects the bank transactions made by a depositor
a. The term “cash equivalent” refers to demand credit instruments such as d. Explains the difference between the bank balance and the balance shown in
money order and bank drafts the depositor’s records
b. The purpose of establishing a petty cash fund is to keep enough cash on
hand to cover all normal 20. A bank statement provides information about all of the following, except
operating expenses for a period of time a. Bank charges for the period
c. Classification of a restricted cash balance as current or non-current should b. Check cleared during the period
parallel the classification c. Errors made by the company
of the related obligation for which the cash was restricted d. NSF checks
d. Compensating balances required by a bank should always be excluded from
“cash and cash 21. When preparing a bank reconciliation, bank credits are
equivalent” a. Added to the bank statement balance
b. Deducted from the bank statement balance
11. Which of the following is not a basic characteristic of a system of cash c. Added to the balance per book
control? d. Deducted from the balance per book
a. Use of a voucher system
b. Combined responsibility for handling and recording cash 22. For purposes of bank reconciliation, debit memos are
c. Daily deposit of all cash received a. Added to the bank balance
d. Internal audits at irregular intervals b. Added to the book balance
c. Deducted from the bank balance
12. All cash receipts are deposited intact and all cash disbursements are made d. Deducted from the book balance
by means of check. This internal control is known as
a. Administrative control 23. Which of the following items must be added to the cash balance per ledger
b. Imprest system in preparing a bank reconciliation which ends with adjusted balance?
c. Accounting control a. Note receivable collected by the bank in favor of the depositor and credited
d. Auditing control to the account of the depositor
b. NSF customer check
13. Entries to record the replenishment of petty cash fund result in a debit to c. Service charge
various expense accounts and a credit to cash in bank. This accounting d. Erroneous bank credit
procedure typically exemplifies the
a. Imprest petty cash system 24. In the process of preparing a bank reconciliation
b. Fluctuating petty cash system a. Outstanding checks should be added to the bank balance of cash
c. Internal control b. Outstanding checks should be subtracted from the book balance of cash
d. Administrative control c. All of the reconciling items shown on a bank reconciliation must be entered
in the accounting records after the reconciliation is completed
14. What is the major purpose of an imprest petty cash fund? d. Items that appear on the reconciliation as corrections to the book balance of
a. To effectively plan cash inflows and outflows cash should be entered in the accounting records
b. To ease the payment of cash to vendors
c. To determine the honesty of the employees 25. The reconciling item in bank reconciliation that will result in an adjusting
d. To effectively control cash disbursements entry by the depositor is
a. Outstanding checks
15. A cash over or short account b. Deposit in transit
a. Is not generally accepted c. Bank error
b. Is debited when the petty cash fund proves out over d. Bank service charges
c. Is debited when the petty cash fund proves out short
d. Is a contra account to cash
 2. Juan Company reported the checkbook balance on December 31, 2021 at
P8,000,000. In addition, the entity held the following items in the safe on that
date:
26. What is the adjusting entry for a customer NSF check?
a. Debit cash and credit accounts receivable
b. Debit accounts receivable and credit cash
c. Debit service charge and credit cash
d. No adjustment is necessary

27. If the cash balance shown in a company’s accounting records is more than
the correct cash balance and neither the company nor the bank has made any
errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Deposits in transit
c. Outstanding checks What is the correct amount of Cash on December 31, 2021?
d. Bank charges not yet recorded by the company a. P7,500,000 c. P8,300,000
b. P9,300,000 d. P9,000,000
28. In reconciling the bank balance with the book cash balance, which of the
following would not cause the bank balance shown in the bank statement to be 3. On December 31, 2021, the cash account of Christopher Company has a
lower than the unadjusted book balance? debit balance of P3,500,000. An analysis of the cash account shows the
a. Deposits in transit following details:
b. Cash on hand at the company
c. Interest credited to the account by the bank Undeposited collections P 60, 000
d. NSF checks from a customer as reported on the bank statement Cash in bank-PCIB checking account 500, 000
Cash in bank-PNB (overdraft) (50, 000)
29. If the cash balance in a company’s bank statement is less than the correct Undeposited NSF check received from a customer,
cash balance and neither the company nor the bank has made any errors, there dated Dec. 1, 2021 15, 000
must be Undeposited check from a customer,
a. Deposits credited by the bank but not yet recorded by the company dated January 15, 2022 25, 000
b. Outstanding checks Cash in bank-PCIB (fund for payroll) 150, 000
c. Bank charges not yet recorded by the company Cash in bank-PCIB (savings deposit) 100, 000
d. Deposits in transit Cash in bank-PCIB (money market instrument,
90 days) 2, 000,000
30. If the cash balance in a company’s bank statement is more than the correct Cash in foreign bank (restricted) 100, 000
cash balance and neither the company nor the bank has made any errors, there IOUs from officers 30, 000
must be Sinking fund cash 450, 000
a. Deposits credited by the bank but not yet recorded by the company Listed stock held as temporary investment 120, 000
b. Outstanding checks P3,500,000
c. Bank charges not yet recorded by the company Cash and cash equivalents on its December 31, 2021 statement of financial
d. Deposits in transit position should be
a. P2,760,000 c. P2,885,000
31. A proof of cash b. P2,810,000 d. P2,935,000
a. Is a physical count of currencies on hand at the end of reporting period
b. Is a formal statement showing the total cash receipts during the year 4. The current assets of Rhosendy Company on December 31, 2021 include
c. Is a four-column bank reconciliation showing reconciliation of cash the following:
balances per book and per bank at the beginning and end of the current month
and reconciliation of cash receipts and cash disbursement of the bank and the Cash on hand P 50,000
depositor during the current month Petty cash fund 10,000
d. Is a summary of cash receipts and cash payments Cash in bank 200,000
Accounts receivable 400,000
PROBLEMS Inventory 500,000
1. The composition of Addi Company’s “cash account” as of December 31, Marketable equity securities 145,000
2021 is as follows: Deferred charges 20,000
Total P1,325,000
Demand deposit account P2,000,000
Time deposit – 30 days 1,000,000 A. Cash on hand includes:
NSF check of customer 40,000 • Customer’s check of P4,000 returned by bank on December 26, 2021 due to
Money market placement (due June 30, 2022) 1,500,000 insufficient funds but subsequently redeposited and cleared by bank on
Savings deposit in a closed bank 100,000 January 5, 2022.
IOU from employee 20,000 • Customer’s check for P6,000 dated January 15, 2022, received December 22,
Pension fund 3,000,000 2021.
Petty cash fund 10,000 • Postal money orders received from customers, P5,000.
Customer’s check dated January 1, 2022 50,000 • Cash withheld from wages for income tax of employees, P15,000.
Customer’s check outstanding for 18 months 40,000
Total P7,760,000 B. The petty cash fund consists of the following items on December 31, 2021:
• Currency and coins, P2,800.
Additional information follows: • Employees’ vales, P2,000.
• Check of P200,000 in payment of accounts payable was recorded on • Currency in envelope marked “collections for birthday party”, P1,000.
December 31, 2021 but mailed to suppliers on January 5, 2022. • Unreplenished petty cash vouchers, P2,000.
• Check of P100,000 dated January 15, 2022 in payment of accounts payable • Check drawn payable to petty cashier, P2,200.
was recorded and mailed on December 31, 2021.
• The company uses the calendar year. The cash receipts journal was held open C. Included among the checks in payment of accounts payable drawn by the
until January 15, 2022, during which time P400,000 was collected and company against its current
recorded on December 31, 2021. account and recorded in December 2021 are:
The cash and cash equivalents to be shown on the December 31, 2021 balance • Check written and dated December 22, 2021 and delivered to payee on
sheet is: January 5, 2022, P10,000.
a. P3,310,000 c. P2,910,000 • Check written December 26, 2021 and dated January 21, 2022, delivered to
b. P1,910,000 d. P4,410,000 payee on December 26, 2021, P15,000.
Question 1: How much is the adjusted cash on hand on December 31, 2021?
a. P40,000 c. P5,000
b. P1,328,000 d. P225,000

Question 2: How much is the adjusted petty cash fund balance on December
31, 2021?
a. P40,000 c. P5,000
a. P1,328,000 d. P225,000

Question 3: How much is the adjusted cash in bank balance on December 31,
2021? Question 1: The corrected balance per bank on June 30 is:
a. P40,000 c. P5,000 a. P9,085 c. P9,235
b. P1,328,000 d. P225,000 b. P9,160 d. P10,075
Question 4: How much is the correct cash balance on December 31, 2021? Question 2: The corrected June receipts per books is:
a. P270,000 c. P275,000 a. P11,575 c. P13,346
b. P265,000 d. P280,000 b. P13,300 d. P13,375
5. Shown below is the bank reconciliation for Johanna Company for Question 3: The corrected June disbursements per books is:
November 2021: a. P10,830 c. P11,250
b. P11,170 d. P11,300
Balance per bank, Nov. 30, 2021 P150,000
Add: Deposit in transit 24,000
Total P174,000
Less: Outstanding checks P28,000
Bank credit recorded in error 10,000 38,000
Cash balance per books, Nov. 30, 2021 P136,000

The bank statement for December 2021 contains the following data:

Total deposits P110,000

Total charges, including NSF check of P8,000
and a service charge of P400 96,000

All outstanding checks on November 30, 2021, including the bank credit,
were cleared in the bank in December 2021. There were outstanding checks of
P30,000 and deposits in transit of P38,000 on December 31, 2021.

Question 1: How much is the cash balance per bank on December 31, 2021?
a. P154,000 c. P164,000
b. P150,000 d. P172,400

Question 2: How much is the December receipts per book?

a. P124,000 c. P110,000
b. P 96,000 d. P148,000

Question 3: How much is the December disbursements per books?

a. P96,000 c. P89,600
b. P79,600 d. P98,000

Question 4: How much is the cash balance per books on December 31, 2021?
a. P150,000 c. P180,400
b. P170,400 d. P162,000

Question 5: The adjusted cash in bank balance as of December 31, 2021 is:
a. P141,600 c. P180,400
b. P170,400 d. P162,000
Note: Final answer should be P172,000.

6. Charles Company is making a four-column reconciliation on June 30 from

the following data. The amounts per bank statement were: Balance - May 31,
P6,500; June receipts, P13,000; June disbursements, P11,000. The amounts
per books were: Balance – May 31, P7,635; June receipts, P11,548; June
disbursements, P11,235;
Balance – June 30, P7,948.