2_Cash and Cash Equivalents Theory of Accounts

Cash and Cash Equivalents

1. Cash equivalents are

a. Short-term and highly liquid investments that are readily convertible into cash.
b. Short-term and highly liquid investments that are readily convertible into cash with
remaining maturity of three months.
c. Short-term and highly liquid investments that are readily convertible into cash and so near
their maturity represent significant risk of changes in value because of changes in interest
rates.
d. Short-term and highly liquid investments that are readily convertible into cash and
acquired three months before its maturity.

2. Cash on hand and in bank in the statement of financial position excludes

a. Checks drawn before the reporting date but held for later delivery to creditors.
b. US dollar deposited in a foreign currency depository account
c. Cash reserved for the acquisition of fixed assets.
d. Bills and coins

3. The amount reported as “cash” on a company’s statement of financial position normally should
exclude
a. Petty cash fund
b. Postdated check issued by the company
c. Postdated check payable to the company
d. Undelivered check to the payee written and signed by the company

4. Which of the following would not be classified as cash?

a. Stale check issued by a customer c. Cashier’s checks
b. Traveler’s checks d. Personal check

5. As of December 31, 2020, AAA Corporation had various checks and papers in its safe. Which
item should not be included in its cash account on its statement of financial position?
a. US $15,000 cash
b. A past-due promissory note issued in favor of AAA by its president.
c. XYZ Incorporated’s December 5, 2020 P15,000 check payable to AAA.
d. AAA’s December 28, 2020 P50,000 check payable to ABC, an AAA supplier.

6. Deposits held as compensating balances

a. Usually do not earn 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 is reported among current assets.

7. Statement 1: Classification of a restricted cash balance as current or noncurrent should

parallel the classification of the related purpose or obligation for which cash was restricted.
Statement 2: Compensating balance required by a bank should always be excluded from the
“cash” classification on the balance sheet.
a. True; False b. True; True c. False; True d. False; False
2_Cash and Cash Equivalents Theory of Accounts

8. Bank overdraft, if material,

a. Should be reported as a deduction from the current asset section
b. May be offset against a demand deposit account maintained in another bank
c. Should be netted against cash and a net cash amount reported
d. Should be reported as a current liability

9. All of the following are necessary components of internal control over cash, except:
a. Imprest system b. Bank reconciliation c. Petty cash system d.Cash reserve

10. Entries to record the replenishment of petty cash fund result in a debit to various expense
accounts and a credit to cash in bank. This accounting procedure typically exemplifies the
a. Imprest petty cash system c. Petty cash fund system
b. Fluctuating petty cash system d. Internal control

11. In most situations, the petty cash fund is reimbursed just prior to the year-end and an adjusting
entry is made to avoid
a. The overstatement of cash and the understatement of expenses
b. The understatement of cash and the overstatement of expenses
c. The misstatement of revenues
d. The understatement of cash with the appropriate statement of expenses

12. Which is true when a petty cash fund is used?

a. The primary purpose of petty cash fund is to effectively plan cash inflows and outflows.
b. The petty cashier’s summary of petty cash payments serves as a journal entry that is
posted to the appropriate general ledger account.
c. The reimbursement of the petty cash fund should be credited to the cash account.
d. Entries that include a credit to the cash account should be recorded at the time payments
from the petty cash fund are made.

13. An employee asks for an authorized reimbursement of transportation charges out of the
Imprest petty cash fund. To document this transaction, the petty cashier should
a. Debit expense account c. Credit cash account
b. Debit receivable account d. Prepare a petty cash voucher

14. A Cash short and over account

a. Is not generally accepted.
b. Is debited when the petty cash fund proves out over.
c. Is debited when the petty cash fund proves out short.
d. Is a contra account to cash

15. A debit balance in the “Cash short or over” account at the end of the period can be attributed
to the fault of the petty cashier is treated as
a. Receivable from employee c. Other expense
b. Payable to employee d. Reduction to other income

16. Bank reconciliations are normally prepared on a monthly basis to identify adjustments needed
in the depositor’s records and to identify bank error. Adjustments should be recorded for
a. All books and bank reconciling items
b. All items except bank reconciling items
c. Book errors, bank errors, deposit in transit and outstanding checks
2_Cash and Cash Equivalents Theory of Accounts

d. All book reconciling items and bank errors

17. Statement 1: A bank reconciliation should be prepared by the individual responsible for cash
receipts and disbursements.
Statement 2: In a bank reconciliation statement, the amount of NSF check must be added to
the depositor’s cash balance in determining the correct cash balance.
a. True; False b. True; True c. False; True d. False; False

18. In preparing monthly bank reconciliation, which of the following items would be added to the
balance reported on the general ledger to arrive at the correct cash balance?
a. Outstanding checks b. Deposit in transit c. Debit memos d. Credit memos

19. In preparing monthly bank reconciliation, which of the following items would be deducted to
the balance reported on the bank statement to arrive at the correct cash balance?
a. Outstanding checks b. Deposit in transit c. Debit memos d. Credit memos

20. Bank statements provide information about all of the following except
a. Checks cleared during the period c. NSF checks
b. Errors made by the company d. Bank charges for the period

Practice questions:
1. On an enterprise’s October 31, 2019 balance sheet which of the following items should be
included in the amount reported as cash?
I. A check payable to the enterprise, dated January 2, 2020, in payment of a sale made in
December 2019.
II. A check drawn on the enterprise’s account, payable to a vendor, dated and recorded in
the company’s books on December 31, 2019 but not mailed until January 10, 2020.
A. I only B. II only C. Both I and II D. Neither I nor II

2. Statement 1: A cash item, though restricted, may still be reported as part of “cash and cash
equivalents”.
Statement 2: “Cash and cash equivalents” may be presented as the last item in the asset
section of the statement of financial position.
A. True; False B. True; True C. False; True D. False; False

3. HAM, Inc. placed P1,500,000 in the money market for 60 days subject to pretermination. It is
the company’s policy to treat as cash equivalents all highly liquid instruments with maturity of
three months or less from the date of acquisition. The P1,500,000 should be
A. Included as part of cash and cash equivalents and the appropriate disclosure in the notes
to the financial statements should state the company’s criteria for classifying financial
instruments as cash equivalents.
B. Recorded as part of its trading securities without need of any disclosure.
C. Treated as short-term receivable with the appropriate disclosure in the notes to financial
statements.
D. Considered as part of its trading securities with the appropriate disclosure in the notes to
financial statements.
2_Cash and Cash Equivalents Theory of Accounts

4. On December 31, 2019, JAPHETH Corporation had cash accounts at three different banks.
One account balance is segregated solely for a January 15, 2020 payment into a bond sinking
fund. A second account, used for branch operations, is overdrawn. The third account, used
for regular corporate operations, has a positive balance. How should these accounts be
reported in JAPHETH’s December 31, 2019 classified statement of financial position?
A. The segregated account should be reported as a noncurrent asset, the regular account
should be reported as a current asset, and the overdraft should be reported as a current
liability.
B. The segregated and regular accounts should be reported as current assets, and the
overdraft should be reported as a current liability.
C. The segregated account should be reported as a noncurrent asset, and the regular
account should be reported as a current asset net of the overdraft.
D. The segregated and regular accounts should be reported as current assets net of the
overdraft.

5. AAA received cash to be held in trust for Ambit under an escrow agreement. The effects of
such transaction should be presented in AAA’s financial statements as
A. Part of cash C. An asset and a liability
B. A liability D. An off-balance sheet item but disclosed in
the notes

6. The effect of compensating balance is to

A. Provide greater security for the borrower
B. Always part of the cash balance
C. Part of the cash balance when legally restricted as to withdrawal
D. None of the above.

7. Compensating balance agreements that do not legally restrict the amount of funds shown on
the balance sheet should:
A. Be reported in the current asset section C. Be reported in the long-term investment
section
B. Be reported in the other asset section D. Be reported in the notes to
financial statements

8. Bank overdraft
A. Is a debit balance in the cash in bank account.
B. Is offset against demand deposit account in another bank.
C. Which cannot be offset is classified as current liability.
D. Which cannot be offset is classified as non-current liability.

9. Cash in foreign currency is valued at

A. Face value
B. Current exchange rate
C. Estimated realizable value
D. Current exchange rate reduced by allowance for expected decline in peso

10. If material, deposit in foreign countries which are subject to long-term foreign exchange
restriction should be shown separately as
A. Current asset with disclosure of the restriction.
B. Current asset with no disclosure of the restriction.
C. Non-current asset with disclosure of the restriction.
2_Cash and Cash Equivalents Theory of Accounts

D. Non-current asset with no disclosure of the restriction.

11. Who is responsible, at all times, for the amount of the petty cash fund?
A. President C. General office manager
a. Petty cash custodian D. General cashier

12. A petty cash system is designed to

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

13. Under the imprest fund system, which of the following is not true?
a. The imprest petty cash system in effect adheres to the rule of disbursement by check.
b. Entries are made to the Petty cash account only to increase or decrease the size of the
fund or to adjust the balance if not replenished at year-end.
c. The Petty cash account is debited when the fund is replenished.
d. The account “Cash short/over” if debit balance, is presented as part of operating
expenses.

14. In most situations, the petty cash fund is reimbursed just prior to the year end and an adjusting
entry is made to avoid the
A. misstatement of revenues.
B. understatement of cash and the overstatement of expenses.
C. overstatement of cash and the understatement of expenses.
D. understatement of cash with the appropriate statement of expenses.

15. In replenishing a petty cash fund, which one of the following entries is required?
A. Debit Petty Cash, credit Payable
B. Debit individual expense accounts, credit Cash in bank
C. Debit Petty Cash, credit individual expense accounts
D. Debit Cash in bank, credit Petty Cash

Answers: BDABB DACBC ADDCB