CASH & 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 for 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 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

Valuation of Cash in the Statement of Financial Position

a. Is generally valued at face amount
b. Cash in foreign currency is valued in Philippine peso using the current exchange rate as of the
balance sheet date
c. Cash in bank or financial institutions having financial difficulty or in bankruptcy should be
shown at its estimated realizable or recoverable value.

Financial Statement Presentation

Shown as the first item among the current assets, as one line item but the detail of which should be
disclosed in the notes to financial statements.

Compensating balance
A set of amounts of cash that a firm must keep to its checking account or savings account at all
times as part of a loan agreement. As part of the loan agreement or contract, a financial institution
lending money to an enterprise sometimes requires that a specified amount of cash be maintained in
the borrowing entity’s account(s), and the minimum or average cash to be maintained in the bank
during the period of loan is a compensating balance.
Compensating balance, in effect provides a higher effective interest rate that is higher than the
stated interest rate on a loan agreement because the bank uses the restricted amount that must
remain in deposit over the loan period.
The following generally accepted procedures to disclose compensating balance would be applicable
depending on whether such amount is legally restricted or unrestricted:
1. Legally restricted compensating balance -
a. If held as compensating balance against short-term borrowing arrangements, it should be
stated separately under current assets but under no circumstances should it be included in
the caption “Cash and Cash Equivalents”.
b. If held against long-term borrowings, it should be separately classified as non-current
asset either in the Investments or Other Assets sections of the balance sheet.
2. Unrestricted – should be included as part of the cash items on deposit

In the absence of any information, compensating balance is always considered not available for an
unrestricted use.
Problem 1: On December 31, 2021, the Cash and Cash Equivalents account of Partridge Company
shows the following composition:

Petty Cash Fund 5,000

Traveler’s check 10,000
Savings deposit* ( 50000-40,000)=10,000 50,000
Manager’s check 23,000
Postage stamps ( Office Supplies) 1,000
IOUs from the officers ( Receivable) 3,000
Bank draft in a checking account with Allied Bank 70,000
Postal Money order 20,000
Deposits segregated to pay dividends 100,000

Securities: Date Acquired Maturity Date Amount

BSP T. Bills (1yr.) 1/30/21 01/30/22 40,000
BSP T. Bills (6mos.) 11/01/21 04/01/22 30,000
MM Funds (9mos.) 12/01/21 02/28/22 50,000

*Cash in Savings deposit includes P100,000 of compensating balances. It was noted that
40% of that amount are legally restricted as to withdrawal.

1. How much is the amount of Cash and Cash Equivalents to be presented in the
Statement of Financial Position on December 31, 2021?
a. 218,000 c. 288,000
b. 238,000 d. 328,000

Problem 2: Turtledoves Corporation's checkbook balance on December 31, 2021, was P8,000. In
addition, Turtledoves held the following items in its safe on December 31:

 Check payable to Turtledoves Corporation, dated January 2,

2022, not included in December 31 checkbook balance( 2,000
Properly accounted- ignore)
 Check payable to Turtledoves Corporation, deposited
December 20, and included in December 31 checkbook
balance, but returned by bank on December 30, stamped
"NSF." The check was redeposited on January 2, 2022, and
cleared on January 7, 2022. ( Deduct-NSF check) 500
 Check payable to Turtledoves Corporation, undeposited,
950
dated May 1, 2021, included in December 31 checkbook
balance ( deduct revert back to receivable)
 Check drawn on Turtledoves Corporation's account, payable
to a vendor, dated and recorded on December 31, 2021 but
not mailed until January 15, 2022. ( Addback should not be 1,000
deducted)
 Check drawn on Turtledoves Corporation's account, payable
to a supplier, dated January 3, 2022, was delivered and 850
recorded
 on December 30, 2021. ( Addback should not be deducted)

2. The proper amount to be shown as Cash in the Statement of Financial position on

December 31, 2021 is
a. 6,400 c. 8,400
b. 9,350 d. 7,350

Problem 3: The December 31, 2020 trial balance of Frenchhens Company included the following
accounts:
Cash on hand (1,000,000-200,000)=800,000 P1,000,000
Petty cash fund ( 40,000-10,000)=30,000 40,000
Cash in bank at Metrobank (2.7M+400K)= 3.1M 2,700,000
Cash in bank at Landbank – 60-day time deposit 4,000,000
BSP treasury bills - 30 days 6,000,000
 The Cash on hand included a customer postdated check of P200,000 and a postal money
order of P80,000
 The Petty cash fund included an unreplenished petty cash vouchers for P4,000 and an
employee check for P6,000 dated January 6, 2021.
  A check for P400,000 was drawn against Metro bank account, dated January 31, 2021,
delivered to the payee and recorded December 31, 2020.
 The Landbank time deposit is set aside for the acquisition of Land to be used as a factory
site.

3. What total amount of Cash and Cash Equivalents should be reported in the Statement of
Financial Position on December 31, 2020?
a. 3,930,000 c. 9,930,000
b. 9,530,000 d. 13,930,000

Problem 4: The Callingbirds Company’s ledger showed a balance of its Cash and Cash Equivalents
account at December 31, 2021 of P363,000 which was determined to consist of the following:

Petty Cash Fund* 3500 5,000

Payroll Account – BPI 60,000
Restricted foreign bank account 25,000
Treasury bill, due 3/30/22 (purchased 12/31/21) 70,000
Treasury bill, due 1/31/22 (purchased 5/1/21) 40,000
Demand deposit – PNB (overdraft) (20,000)
Cash in Bank – BDO** 120,000 90,000
Cash set aside for the acquisition of equipment to
be disbursed 4 months after BS date 30,000
Bond Sinking Fund 45,000
DAUD/DAIF check 10,000
Cash Surrender Value 8,000

* Including expense receipts of 1,000, IOUs of 500 and Employee’s check dated Dec. 30, 2021 of P200.
** Net of undelivered check payable to creditors of P30,000.

4.How much is the amount of Cash and Cash Equivalents on December 31, 2021?
a. 253,300 c. 233,300
b. 253,500 d. 283,500

Problem 5: Goldrings Company established a petty cash fund of P5,000 on July 1, 2020. At the end
of the month, the count of cash on hand indicated that P675.40 remained in the fund. A review of
the petty cash vouchers disclosed the following expenses had been incurred during the month:
Office supplies – P341.61; Postage – P780.00; Representative – P1,000.00; Transportation –
P 1,321.40; and Miscellaneous – P837.60

5. The above information indicates that there is a

a. Cash shortage of 44.00
b. Cash overage of 44.00
c. Cash shortage of 1,394.80
d. Cash overage of 1,394.80

Established 5,000
Cash count 675.40
Total Deductions 4324.6

Petty Cash Voucher 4280.61

Correct= 5000

Cash count = 675.40

Deductions: 4324.6
Total = 5,000

PCF = 5,000
Cash Count : 675.40
Deductions: 4280.61
Total: 4956.01
Shortage: 43.99 or 44 pesos
 Problem 6: If a petty cash fund of Geesealaying Company is established in the amount of P2,500,
and contains P2,000 in cash and P450 in receipts for disbursements when it is replenished,

6. The journal entry to record replenishment should include credit to the following accounts
a. Petty Cash, 450
b. Petty Cash, 500
c. Cash, 450; Cash Over and Short, 50
d. Cash, 500

Established PCF 2500

Cash count = 2,000

Deductions= 450
Total = 2450

Shortage = 50

Various Expenses 450

Cash Shortage/Overage 50
Cash in Bank 500
 Problem 7: The Petty Cash Fund of Swansaswimming Company has an imprest balance of P20,000.
The following items are found in its drawer on December 31, 2021:

Currencies and coins 4,700

Vouchers for expenses during the year:
Office supplies 1,500
Postage stamps 500
Transportation 100 2,100
IOU notes of several employees all dated December 2021 2,500

Unused postage stamps ( Office Supplies) 100

Replenishment check drawn by the Company payable
to the order of petty cash custodian 1,500
Check received from customers representing sales for the month
of December 1,700
Check received from Leni, an officer, dated December 30, 2021 2,000
Envelope containing contributions from employees
for field trip in Star City 5,000

7. What is the correct amount of petty cash fund on December 31, 2021?
a. 4,700 c. 8,200
b. 6,200 d. 20,000

8. What is the amount of shortage/overage?

a. 400 short c. 7,200 short
b. 400 over d. 7,200 over

Established PCF 20,000

Cash Count ( PCF on reporting) 4700 + 1500 = 6,200 + 2000 = 8,200

Deductions 2100+2500 = 4,600 IOU/employee vale + Various Expenses
Total =12,800
Shortage = 7,200

Shortage/Overage
 THEORIES
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 acquired three months before maturity.
d. Short-term and highly liquid marketable equity securities.

2. A compensating balance
a. Must be included in cash and cash equivalent.
b. Which is legally restricted and related to a long-term loan is classified as current asset.
c. Which is legally restricted and related to a short-term loan is classified
separately as current asset.
d. Which is not legally restricted as to withdrawal is classified separately as current asset.

3. Which of the following is usually considered cash?

a. Certificate of deposit. ( Cash Equivalent)
b. Checking account. ( Cash in Bank)
c. Money market saving certificate. ( Cash Equivalent)
d. Customer’s Postdated check. ( Receivable)

4. Petty cash fund is

a. Separately classified as current asset.
b. Money kept on hand for making minor disbursements of coin and currency rather
than by writing checks.
c. Set aside for the payment of payroll. ( Payroll Fund)
d. Restricted cash. ( Not Cash)

5. The petty cash fund account under the imprest fund system is debited
a. Only when the fund is created.
b. When the fund is created and every time it is replenished.
c. When the fund is created and when the size of the fund is increased.
d. When the fund is created and when the fund is decreased.

PCF
Cash

6. Which of the following statements is not true?

a. Adjustment of the petty cash account is made at the end of the period to
avoid understatement of expenses and overstatement of cash.
b. Entries are made to the petty cash account to increase or decrease the size of the fund or
to adjust the balance if not replenished at year-end.
c. The imprest petty cash system in effect adheres to the rule of disbursements by check.
d. The petty cash account is debited when the fund is replenished.

7. A cash short and over account is

a. A contra account to cash.
b. Debited when the petty cash fund proves out over.
c. Debited when the petty cash fund proves out short.
d. Not generally accepted.

8. What is the major purpose of an imprest petty cash fund?

a. To effectively plan cash inflows and outflows.
b. To ease the payment of cash to vendors.
c. To determine the honesty of the petty cashier.
d. To effectively control cash disbursements.
9. If the cash balance shown in the company’s cash records is less than the correct cash
balance and neither the company nor the bank has made any errors, there must be
a. Outstanding checks.
b. A no-sufficient fund check returned by the bank.
c. Bank charges not yet recorded by the depositor.
d. An interest credited by the bank in the depositor’s account.

10.A bank reconciliation is

a. A formal financial statement that lists all of the bank account balances of an entity.
b. A merger of two banks that previously were competitors.
c. A statement sent by the bank to depositor on a monthly basis.
d. A schedule that accounts for the difference between an entity’s cash
balance as shown in the bank statement and the cash balance shown in the
general ledger.

11. Which of the following items must be added to the cash balance per ledger in
preparing a bank reconciliation which ends with adjusted cash balance?
a. Note receivable collected by bank in favor of the depositor and credited to
the account of the depositor.
b. NSF customer check.
c. Service charge.
d. Erroneous bank debit.

12. Bank reconciliation are normally prepared on a monthly basis to identify

adjustments needed in the depositor’s records and to identify bank errors.
Adjustments on the part of the depositor should be recorded for
a. All items except bank errors, outstanding checks and deposits in transit.
b. Bank errors, outstanding checks and deposits in transit.
c. Book errors, bank errors, deposits in transit and outstanding checks.
d. Outstanding checks and deposits in transit.

13. Following are reconciling items in an enterprise’s bank reconciliation statement.

1. Deposits in transit
II. Company’s check for P32,500 recorded in the books for P23,500
Ill. Note collected by bank in behalf of the company
IV. Deposit of another company erroneously credited by bank to the company’s account
V. No sufficient fund check charged back by bank
VI. Company deposit for P32,500 recorded in the books for P23,500
Which of these adjustments would be shown as addition to the cash balance per books in
order to arrive at the correct cash balance?
a. II, III, and VI
b. II and III
c. II, V and VI
d. III and VI

14. Bank statements provide information about all of the following, except
a. Bank changes for the period.
b. Errors made by the company.
c. Checks cleared during the period.
d. No sufficient fund checks.

15. In preparing a bank reconciliation, interest paid by the bank on the depositor’s
account is
a. Added to the bank balance.
b. Added to the book balance.
c. Subtracted from the bank balance.
d. Subtracted from the book balance.