Cash and Cash Equivalents

Composition of Cash:
Includes cash on hand as well as current and other accounts maintained with banks such as the following:
a. Undeposited currency and coins
b. Petty Cash – cash items kept on hand to pay minor expenditures
c. Demand deposits – Amounts on deposit in checking and savings account, respectively.
d. Undeposited negotiable checks – are checks payable to the company or bearer but not yet presented to the bank for payment.
e. Foreign currencies – converted to their peso values are also included in the cash.
f. Bank drafts – are commitments by banking institutions to advance funds on demand by the party to whom the draft was directed.
g. Money Orders – are similar to financial instruments to bank drafts but are drawn generally from authorized post offices or other
financial institutions.
h. Other short-term funds for current operations.

Cash Equivalents:
Cash equivalents are short term 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 three
months before maturity can qualify as cash equivalents such as the following:
a. Three-month commercial paper or money market instrument.
b. Three-month time deposit.
c. Three-month treasury bills.

Additional Info:
1. Customers’ post-dated checks, NSF checks (No sufficient fund) and IOUs (“I Owe You”) should be reported as RECEIVABLES
rather than cash.
2. Postage stamps and expenses advances such a as advances for employees travel, are not cash, but are reported as PREPAID
EXPENSES.
3. Bank Overdraft – bank overdraft that cannot be offset against another account is reported as LIABILITY.
Note: A bank overdraft may be offset against a positive balance in another bank account WITH THE SAME BANK if a RIGHT OF
OFFSET EXIST between the bank and the depositor. In such case, the depositor reports the net positive amount of “CASH”
4. Undelivered or Unreleased Checks – are the company’s checks drawn and recorded as disbursed but are not actually issued or
delivered to the payees as of the REPORTING DATE.
5. Company’s post-dated check, which has been recorded as issued and delivered to payee before o at the end of the reporting period
should be reverted the CASH and the corresponding LIABILITY shall continue to be recognized, because there is no actual payment yet
as of that date.
6. Compensating balances – are minimum amounts that a company agrees to maintain in a bank checking account as support or
collateral for a loan by the depositor.
Note:
If compensating balances is not legally restricted as to withdrawal, collateral for short term loan, the amount is reported as CASH.
If compensating balances is legally restricted as to withdrawal, either current asset or non current asset.
7. Cash set aside for long term specific purpose or for acquisition of a non current asset, is reported as NON-CURRET FINANCIAL
ASSET.

Reconciliation of Bank Balances

1. Deposit in transit or undeposited collection – This is a cash receipt that has been added to the company’s cash balance but has not
been added to the balance reported on the bank statement.
2. Outstanding checks – These are checks that were written by the company, issued to the payees, and deducted from the company’s
cash balance but they have not yet been reflected in the bank statement since they have not been presented yet to the bank for payment.
3. Debit Memos – charges to the depositor’s made directly to the bank.
Ex. NSF, DAIF, DAUD, IOUs, Service charges fees.
4. Credit Memos – These are deposits made directly by the bank to the company’s account.
Ex. Notes Collected by bank, Interest earned on company’s checking account.
5. Errors
PROBLEMS:

1. Rod Company reported a cash balance of P1,980,000 on December 31, 2018 which consisted the following:

Petty cash, including IOU from an employee of P1,250 P10,000

Cash on hand, including customer’s check of P17,500,
dated January 5, 2019. 625,000
Cash in bank, General Account, net of P12,500 bank overdraf
in another bank’s account. 525,000
Cash in bank, Payroll Account, net of P10,000 check dated
December 28, 2018 but unreleased as of December 31. 320,000
Savings deposit, restricted for the purchase and intended for
Plant expansion 500,000

What is the correct amount of cash that should be shown in Rod Company’s statement of financial position at December 31, 2018?

2. In preparing its bank reconciliation at December 31, 2018, Silver Company had made available the following information.

Balance per bank statement P 380,750

Deposit in transit 52,000
Outstanding Checks 67,500
Amount erroneously credited by bank to Silver account 4,000
Bank Service charge for December 750
Check drawn, dated and recorded December 31, 2018,
but not mailed until January 10, 2017 (included in the
total outstanding checks above) 9,000
Check of Silver Lining Company charged by bank to the
account of Silver Company 12,000

What is the amount shown as Cash on Silver’s December 31, 2018 statement of financial position?

Multiple Choice Questions

1. Which of the following items shall be presented as part of an entity’s Cash Balance?

I. Foreign Currency Deposit

II. Undeposited customers’ check
III. Bank deposit segregated for acquisition of equipment
IV. Bank deposit segregated for payment of salaries
V. Cash fund for payment of small expenditures
VI. IOUs from employees

a. I, II, IV and V b. II, III, IV and V c. I, II, III, IV and V d. I, II, IV, V and VI

2. Which of the following are considered cash for financial reporting purposes?

I. Petty cash funds and change funds

II. Money orders, travelers’ checks and personal checks
III. Coin, currency, and available funds for current operations
IV. Post-dated checks and IOUs
V. Savings account for employees travel
VI. Savings account for acquisition of equipment
VII. Savings account for acquisition of inventories

a. I, II, III, IV, V, VI and VII b. I, II, III, V, VI and VII c. I, II, III, IV, V and VI d. I, II, III, V and VII
3. The amount reported as “Cash” on a company’s statement of financial position normally exclude:
a. Petty cash fund.
b. Post-dated checks issued by the company.
c. Post-dated checks payable to the company.
d. Undelivered checks to the payee written and signed by the company.

4. A petty cash system is designed to:

a. Cash checks for employees.
b. Handle cash sales.
c. Account for all small cash receipts and disbursements.
d. Pay small miscellaneous expenses.

5. In a bank reconciliation that attempts to reconcile the bank balance to the correct cash balance, the following items would affect
reconciliation in what way?
Outstanding Checks Deposits in Transit
a. Added Added
b. Deducted Added
c. Added Deducted
d. Deducted Deducted

6. Deposits held as compensating balances

a. Usually do not earned interest.
b. If legally restricted and held against short term credit may be included as cash.
c. If legally restricted and held against long term credit, may be included among current assets.
d. If legally restricted and held against short term credit should not be included in the cash balance but are reported among
current assets sections.

7. Bataan Company’s checkbook balance at December 31, 2018 was P50,000. In addition, Bataan held the following items in its safe on
that date.

Check payable to Bataan, dated December 31, 2018 in payment of a sale made in
December 2018 not included in December 31 checkbook balance. P 20,000

Check payable to Bataan, deposited December 15 but returned by the bank on

December 30 marked “NSF”. The deposit and the return were both reflected
in the checkbook. 5,000

Check drawn on Bataan Company’s account, payable to a vendor dated December 30,
but not yet mailed to payee as of December 31, 2018. The check is not recorded. 3,000

The amount to be shown as Cash on Bataan’s statement of financial position at December 31, 2018 is
a. P48,000 b. P65,000 c. P68,000 d. P70,000

8. The following pertains to Onyx Trading on April 30, 2018.

Correct cash balance in a general checking account with Equitable- PCIBank P 320,000
Overdraft in a special checking account with Family Bank (Onyx does not
Have another account with family bank) 20,000
Cash accumulated in a special fund in a special fund that will be used for
Plant expansion in five years. 150,000
Cash surrender value of life insurance policy 32,000
Cash travel advances in the hands if sales personnel 12,000
Currency and coins in a petty cash fund (the company has not replenished the fund
Imprest amount of P2,000) 580

How much cash should Onyx report on the April 30, 2018 statement of financial position?
a. P332,580 b. P322,000 c. P320,580 d. P302,000
9. In preparing its August 31, 2018 bank reconciliation, Jade Company has available the following information:

Balance per bank statement, 8/31/18 P 180,000

Deposit in transit, 8/31/18 32,500
Return of customer’s NSF check, 8/31/18 6,000
Outstanding checks, 8/31/18 27,500
Bank service charges for August 1,000

At August 31, 2018, Jade Company correct cash balance is

a. P192,500 b. P185,500 c. P179,500 d. P178,500

10. While checking the cash account of the Turquoise Company on December 31, 2018, you find the following information:

Balance per books P 677,600

Balance per bank statement 653,230
Deposit in bank closed by Bangko Sentral ng
Pilipinas 160,000
Outstanding checks 98,760
Deposit in transit 123,450
Currency and coins counted 95,000
Petty cash fund (of which 4,500 is in the form of
Paid vouchers) 10,000
Bank charges not yet taken up in the books 580
Receivables from employees 7,000
Error in recording a check in the books. The correct
Amount as paid by the bank is P8,900 instead of P9,800
As recorded in the books. 900

The correct cash in bank balance for Turquoise Co. on December 31, 2018 is
a. P554,000 b. P677,920 c. P702,290 d. P837,920

CONCEPTUAL FRAMEWORK

1. Which of the following is NOT included in the scope of the FRSC Conceptual Framework?
a. Supplementary information c. Elements of financial statements
b. Objective of financial reporting d. Qualitative Characteristics

2. The Conceptual Framework

a. is considered a Philippine Financial Reporting Standard (PFRS)
b. shall prevail over the provisions of PFRS in case of rare conflict
c. is used as a guide in developing, applying and interpreting PFRS
d. deals with a comprehensive concepts that underlie the preparation and presentation of financial statements for internal users

3. Which of the following is NOT a basic purpose of the Conceptual Framework for financial reporting?
a. To assist preparers of financial statements in applying PFRS
b. To assist Financial Reporting Standards Council (FRSC) in developing standards
c. To assist auditors in forming an opinion on whether financial statements comply with PFRS
d. To assist Professional Regulatory Board of Accountancy (BoA) in promulgating rules and regulations affecting the practice of
accountancy in the Philippines

4. Under the Conceptual Framework for financial reporting, the objective of general-purpose financial reporting is to provide financial
information about the reporting entity that is useful to
a. Existing and potential investors
b. Existing investors, lenders, and other creditors
c. Potential investors, lenders, and other creditors
d. Existing and potential investor, lenders, and other creditors

5. What are the two (2) fundamental qualitative characteristics of accounting information?
a. Relevance and prudence
b. Reliability and understandability
c. Reliability and substance over form
d. Relevance and faithful representation

6. It is an entity-specific aspect of relevance based on the nature and magnitude of the items to which the information relates in the
context of an entity’s financial report.
a. Materiality c, Feedback value
b. Predictive value d. Confirmatory value

7. What are the three ingredients of faithful representation characteristic of financial information?
a. Completeness, prudence and timeliness
b. Neutrality, verifiability and completeness
c. Prudence, substance over form and neutrality
d. Completeness, neutrality and free from error

8. What are the four (4) enhancing qualitative characteristics of accounting information?
a. Relevance, reliability, comparability and understandability
b. Verifiability, comparability, understandability and timeliness
c. Relevance, faithful representation, prudence and comparability
d. Consistency, going concern, materiality and faithful representation