CHAPTER 14 CASH AND CASH EQUIVALENTS QUESTION 141 What ia cash? ANSWER 141 From th pointof view ofa layman, “ensh" imply means money. ‘Money is the standard medium of exchange in business transactions. Ie refers to tho earreney and coins which are in SSrealation and Tegal tender Hotes lhe esos pets Ui PE Bette i soon nae man eo, Aventunlse in scxoueg ca inchnde “noey anda Aeon ee isa nyu ony on aa El Lait bt Sonal unt areas rdingy, eth include cess, bank draft and mony peer me a thee ae tmoptale bythe bank or depos See eae QUESTION 142 What isthe moaning of "unrestricted cash"? ANSWER 142 “There i no specific standard dealing with “as ‘The only guidance is found in PAS 1, paragraph 0, whic ree at an ety cl asaya eoot ae eureon ROVE cath onus nies i rented fom bo ‘Schangedo sed osetia ity tor at eat twelve moots Sor th end of reporting pore.” ‘is Acsondinaly, tobe reported ae “each ae a ewront acest, an itom imuat be unresied in use "This means that the each muse be ondily avsilable in the payment of current dbligations snd not be subjoet ta any Festrtions,eantravtial oF oshervse "Thus, unrestricted cath jneludes cash on hana cash in bank anil eash fund set aside for current purposes QUESTION 145, ‘Whatis the meaning ofeash oquivalonts ANSWER 143 PAS, parapsph 0. efioe cach oquleces a sorter and highly Tguid tvestinents that axe readily converse nto ena anids0 near thelr matuety that they present insignificant risk Glehanges in value because Of ehanges ia inene ates PAS 7 further statos that “only hihly liquid invostmente that ‘are acquired three months hefore maturity can qualify nth equivalent Beampl of cosh equivalents ar: ‘a. Three-month BSP woasuny bill B. ‘Three-year BSP treasury fl purchased three manshebetore ‘Tite month tine depos: 4. ‘Three-month money market instrument Equity seeurites cannot, qualify as cash equivalents because shares do not have a maturity dala However, preference shares with specie redemption date and ured thevo months bolore redemption da ean Qualify a2 cic equivalent QUESTION 14-4 Explain the valuation of cash in the statement of financial ANSWER 144 (Ca is valued at face uals. Ca athe current exchange rate in foreign curreney i valued enIfa bank or financial institution olding tho funds ofthe entity ip in bankraptey or financial difculty, cash shouldbe writen down to eutimated realizable yalve if the amount recoverable fs cotimated to be lower than the face value. QUESTION 14-5 “Explain the financial statement presentation and classification ‘of eash and cash equivalents, ANSWER 145 ‘The caption “cash and cach equivalents’ should be shown as the fis item among the current ascate, ‘This caption ineudes all cash items, auch as cash on hand, cash in bark, petty cash fund and cash equivalents which are Aunroiricd in use for current operations However, the details comprising the “eash and eash equivalent Should bo diselosed in the notes to financial statements. QUESTION 14-6 Explain the classification of iavestments in time deposit, ones ‘market instrument, and treasury bil ANSWER 14-6, Investments in time deposit, money market instruments and ‘treasury billa should be classified as fellows fa Ifthe term is three months or lass, such instruments a ‘Gassiied .cosh equiaalents and therefore included in the ‘ception “eash and cash equivalents” b, Ifthe term io more than the month but within one eth uch invoetmente are classified as sbort term or tempera? Fnvootments and presented separately as curcent asst Ifthe term is mare than one year, such investments 8” lssiied a long-term incesten ory Hlowovor, such investments become d the end of the reporting period, they are re temporary investments QUESTION 14-7 Explain the teatment of foreign currency ANSWER 147 (Cash in foreign eurreney shall bo translated to Philippine pes ‘using the current exchange rate ‘Deposits in origa counties which are dot subject to any foreign celiange restriction are included in “cae ‘Deposits in foreign bank which ore subject to foreign exchange restriction, if material, shall be classified separately. among, oneurrent sadets and the rastaction clearly indicated. QUESTION 118 “Explain the classification of cash fund set aside fora certain purpose. ANSWER 148 Ifthe cash fund is sot aside for ute ix current operations, ibis a ‘curment asset. Iisineluded aa part of eash and eash equivalents. Examples of such fond are petty cash fund, payrol fund, travel fund, iterest fund, dividend fund and tax fund. (On the ther land, if the ensh fund is act ns for noncurrent ‘urposes, itis shawn as long-term investment. Examplos of much fand are sinking fund, preferred redemption fund, contingent fund, insurance fund and fund for acquisition br ecnetruction of property, plant end equipment. | Chussifieaton of cash fund af cursent or noncurrent shoul poral the classification ofthe related lability. 40QUESTION 149 ‘Bgplain the teatmont of a bank overdea axswer 149 nen nc bane oman harley tn aio Dace rai bancetn te cash intake om the Pins tts nan of he Smeste knees chased a everett and shoul ‘Abwek Tt agin bank wsunta wth doit blaes woven when hon manne oo ac zonnts t sever sulon surtrnteinanorea sch errr sree cnt the ober ba scout with ae ce Moreover, an overdraft may also be offyt against the other Dank nowunt ifthe amount isnot water QUESTION 14.10 What isa componsating balanes? Explain the elassfieatin in the statement of nancial postion ANSWER 14210 coal ‘compensating balance i he mit ehecing 0 nn blanc tht nt baited eaten Ree rong arsangement 9h bank For example, an entiy borsows P2,000.000 from. a bank nd sages to maintains 1% compensating balance or P200,000 in feurront or checking account. In olfeet, this arrangement ‘hmount borrowed: beeaute the compensating fr eounce of funda to the bank as partial compensation Toa extended results in the reduction of the balance provides QUESTION 14.11 Explain fol the treatment of compensating balance ANSWER 14-11 Tf the deposit i not Leglly restricted as to withdrawal by the borrower because ofan informal compessnting balance agreement, te compensating balance is part of cash. IF the deposit x legally reriricted eno ofa formal ‘ompontaing balance sgzeemen te compensating balance is ligated separtely as cash hild ae composting balan Sander eurent nests if ho relat loa sehr ter If the related loan is lone-term, the compensate balance is laaaed aa noneurrent tovestients In many instances and in accordance with normal banking practices, deposits are not lal restricted boeause mos oon fompensating balance cyroomente are informal and thereon not legally binding. ‘Tho amount and nature of such ngrecmenta whether legally ot sot gully restescted shall be fully eislosed sm the notes to financial statements QUESTION 14:12 ‘What is tho mooning of undelivered or unreleased check? Postlated check? Stale check? ANSWER 1412 i ‘sn undelivered or unreleased check sono that i moray dessa an ord but move Un pae ee the nd of reportng Ee ‘Ths uproonsel chock chal not bo tated ao outstanding chock, Aconeinls the original entry foe th payment shal be reversd ost restore the cash balanue an tb vlad lability account A postdated chest deliver is 9 chock drawn, resonded and ivady given to the payee but it boara a date subsequent Uo the iL of reporting pediod. ‘he original entry recording delivered postdated chock shall ak be roversed and thot nstored tothe cash bodanee, aaQUESTION 14-14 Explain the imprest system, ‘A fate check isn check not encashod by the payee within @ elatively long peiod of tine es stale if not encashed Im banking practice, a check becomes stal Bit aie mond from the time ofisuance. ANSWER 1414 The imprest aytem ean internal eontsol deve for enh whieh requires thot al cash receipts should be deposited intacs and all bash payments should be made by means of check. Small disbursements are paid out ofthe petty cash fund. a coun n marr of ny poy. Thum on tou ne Oy a a etanpent oe SR mona Oaneiinn oe so ce QUESTION 14.15 Whatare the woeptoms of hain pty a nd? Ein oe ANSWER 14:15 ‘The etalo check proviouely issued by an entity shall also be restove to tho cash balance QUESTION 1413, Fisplain window dressing, apping and kiting 1. Imprest fund system ~ Pretty cash expensce are recorded upon replenishment, The amount of the replenishment ‘sormaly equal to the petty cash cisbursements. ae Pome cernameaneaeteer, ue Set ys te showing a better fi al. posit immediately recorded. The amount of replenishment may. QUESTION 14.16, ‘What ie a bank reconciliation? Window dressing is usually perpetrated as flows recording on ofthe Inst day of the acamunting period 9 Be seca ide muon 1 Un veo he pete recorting at of he nt ayo the anu pera By recat ts mad aoengunt wt cleo Sead ANSWER 14.16 ‘A bank rcovilation in a statement which brings into agreement the cash balance per beck and cash balance per boo Tei sally prepared monthly beeause the bank provides the depositor with snisappropriating a eolloetion from one Lapping consists of misappropriating th bank statement at the end of every month, cep ing ral conscaling this dafaleation when collection is fade from another customer. ing iting ina traofor fens rom ons bank anther ak Fee splay atthe end ofthe om. co ee ee mca dpe eee ee ee ‘Aecualy, the bank statement is an exact copy ofthe depositors igor in the records of the bank. 422° 103QUESTION 14.17 ‘What ar eredit- memos and debit memos? ANSWER 1417 ‘Credit memos tefex to item not repreconting deposits ceded by the bank tothe acsourt ofthe dopesitar but not yet renee ty the depositor as eash receipts. They have the effect of sneroating the bank balance, ‘Typical examples of eredit memos are note colected by bank in favor ofthe depositor and proceeds of bank loan credited to the account of the depositor. ‘Debit memos refer to itema Hot roprosenting caecks paid by bani ehich are charge or debited by che bank to the noun ef the depositor but not yet recorded by tho dopositor as cash llisborsements, They Have the effect of decreasing the bank blame ‘Typical examples of debit momos are NSF checks and bank service cargos. QUESTION 1418 yplsin doposits in transit ANSWER 1418 Depooits in transit are collections alveady reeorded by tho depositor as ens reseipts but not yet: reflected on the bank statement Deposite in transit indude ‘a Cellections already forwarded to the bank for deposit but too late to appenr in the bank statement, b, Undeposited ealaetions or those stil in the hands of Hs ‘epotto.Ineffst, these ar eashon hand awaiting dshive? to the bank for depost. QUESTION 14.19 Explain outstanding checks ANSWER 14-19 (Outatonding chacke ave chesks leony reegrded by the depositor a cash disbursements but not yot reflected on the bask Statement, Outstanding checks includ Cheeks drawn and already given to payees but not yet presented for payment. 1b Cortivied checks ~ A cortfod chock is one whore the bonke thas stamped on its fae the word “acspted” or “certfiod” indicating suffciney of fund ‘When the bank corti a check, the acsountof te depositor js immediately debited or chargod to insur the eventual payment of the check, Cortified checks should be deducted from the total outstantling checks Gif included therein) because they are nno longer outstanding for bank reconeliaton purpctas, “QUESTION 14.20 What are the three forms of bank roconeiliation? ANSWER 14.20 1. Adjusted botance method - Under this method, the book balance and the bank bolanca are brought to a correct fash balanee that must appear on the balance shoot. Book to banlk method ~ Under this method, the book Dalanco is sesonetled with the bank balance or Ube book Talanso is adjustod to equal the bank balance. Bonk to book method — Under this method, the benk balance is reconciled with tho hook balanco or the bark Thalanse is adjusted to equal the book balance 25QUESTION 1421 What is "proof of cash? ANSWER 14-21 Jon in that i 1A proof of eash isan expanded recone {adudoe prot of vecelptn and dlsbuasomonts. aati ‘his approach may beef in Sscovering Fee rere a hundlng sath prtolaiy won cash ern beon esr bt bare no en dopo. QUESTION 14-22 Multiple choice (ACP) 1 To ho reporsed aa “cash atl cash equivalene’, the cash and) ‘cash equivalent saust be ‘a, Unrestricted in use for euront operations . Available for the purchace of property, plane and ‘equipment Sot asido for tho liguidation of long-term debt Deposited in bank 2 Cash equivalents are ‘@, Short-term and highly liguid investments that are really eonvertiblo into cash b. Shortsterm and highly liquid investments that are ‘oadily convertible ino eash with remaining macurity of three monthe ©. Shortterm and highly liquid investments that are eadily convertible into eaah and acquired theee months Tefore maturity 4. Short-term and highly liquid! marketable ouity securitios 3. All of the following can be classified as eash and cash equivalents, except? 8. Redeemable preference sheres acquited and due in 60 days bb. Commercial papers held and due for zopaymentin 90 days ©. Equity investments a. Atbank overdraft ar4, Which is false conserning monsuremont of cash and cath 8 Unreleased checks (chocks drawn bofore the end of ‘equivalents? ee ae 1 EEE gan tie i ot ISL a leanne aoe anteert cant ena cece Seem 1. Shall be treated as outstanding checks, 1b. Shall be roetored to the carh balance © Shall bo treated as outstanding checks ifthe date is shortly aftor tho end of reporting period Shall be treated as outstanding checks if they are tltimately encashed. Which of the olowing shall not be eonsideved “cash? for finapeial reporting purpoces? Potty cash funds and change funds bh. Money orders, core checks and personal checks & Coin, currency and available fonds ‘@. Poatdated checks and 1OUs taneil deposits in foreign which ao puerto 8 Caneradhange region sal bw aed a Separately as eurrent asset, with appropriate Aiselooure. b, Separately as noncurrent disclosure ‘¢. Bewnition off as an extraordinary loss {LAs part of cash and eash equivalents. sot with appropriate 10, Which of th following is neually considered easla? 2, Cartifcate of deosie & Checking nro & Moray market saving cortiseate 6. Bank overdraft a Postdated check Isa dabit balance ina cash in bank account f [oSsie neuter demand deposit actount sn anotier ANSWER 14-22 bank. c. Which eannot be offuet ia classified as current Le Be liability 2 e ie 44, Which tannot be offset is classified as noncurrent be 8} Lisi Basi sre hear QUESTION 14-28 Multiple choice (AA) jut be included in cash and cash equivalent 1, Petty cash fund is Hee rated and elated ta tne eo ® Ian de claeeified current asset. ce: Which is Ioglly restricted and related bo a shore Tan a classed separately as current asset. 4a, Whe is not legally restricted as to withdrawal Classified separately as current nse, } 4. Separately classified aa current ast 5 Money kept on hand for making minor disbursements af a eny uo han by Weng chek 6 Bet aside fr tne payment 4. Tested ash oe 428 os2 ‘The petty cash fund account under tho imprest fond system ie ebited ‘Only when the fond sn ereated {Wh the fandinersted and avestimeitis replenished 2 When te fund fs eeated and when the ez of the fad Ja meeaood 4. When the fund ip created and when the fund fs decrease. ‘The internal contel fature that is specifi 1 petty each is a, Separation of duties 1 Assignment of responsibility Proper aushorization ‘A Imprest system ‘What isthe major purpose of an improst petty cash fund? ‘a. To effectively plan cash inflows and outiows Bh. ‘Tovease the payment of eash to vendors ©, ‘To datermine the honesty of the petty cashier GL To effectively control cash disbursements What hopzons when a petty eah sin uss? ‘Expenses paid ith potty cash are recondod when the fund is replenished Most smal amounts ee paid from cash rospts before they are deposited. ce, Doty each debited whon the fund is replenished SL Dotty ents ereited when the fund i oplnished {In reimbursing the petty eash fand, which of the following is true! fa, Cash in debited 1, Potty cash is debited Potty ench is credited fi Expense acomuts are debited 1 °. ‘Whon a potty cath fond is uxad, which of the following is 1. Tho balance of the petty cash fund should be reported in the statement of fancial postion as a long-torm investment. b. The petty cashier's summary of petty cash payments sorvee asajournal entry thatispostod tthe appropriate general ledger account, ¢. The reimbursement of the petty cash fund should be exited to the cash account. 4. Entviea that include a crditto the cash account should bb recorded atthe time the payments trom the petty cash fund axe mode A Gash Over and Short acsount a. a not generally sewepiod. bb I dobitad when the petty cash fund proves out over. Ie dobitad when the pety cash fond proves out short {1 Tem conten aoonunt to ah Which of the following statoments in relation to coounting for potty ons fund is False? 4, Boch disbursement from petty eash should he supported ‘bya potty ah voucher. , The eration ofa petty ensh fund requirosajouallentry to reflect the transfer of fund out of the general cash ce. Atay tim, tho sum of the cash inthe patty cash fund fand the total of petty cash vouchers should equal the ‘amount for which the imprest petty cash fund was tablished. 4. With the establishment ofan imprest petty cash fund, ‘one person is given the authority and responsibility for Suing cele to caver minor disbursements.40, Which ofthe following statements in relation to the cash short or over account is true? ‘4 Tt would be impossible to have cash shortage or ‘overage if employees were paid in eas rather than by check, >, ‘The entry to account for dally cash sales for which a ‘small amount of eash shortage existed would include fa dobit to cash short or over account, Ifthe cash short or ever aceount has a debit balance fat the end of the period st must be debited to an (xpenae, account 4. Acredit balance ina eash short or over account should be considered a Tiaility because the short-changed castomer will demand return of this amount. ANSWER 1428 Bb 8 a ser arene Gd a Wes Bae est ee oo QUESTION 14.24 Multiple chotce (IAA) 41. Which of the following is not considered as « cash equivalent? a. Athree-year treasury note maturing on May 30 of the furent year purchased by the entity on April 15 of the current yoar bs three-year treasury note maturing on May 80 ofthe ‘current year purchased by the entity on January 16 of tho cusrent year A Do-day Till ‘A 6Dulay money marker placement 2 At the end of the eurrent year, an entity had various checks and papers in ita eafe. Which item should not be included in “cash in the eureent year-ond statoment of financial position? a. US $20,000 eaah, +, Past due promissory note issued in favor ofthe eniey by the President «Another entity's P150,000 check payable to tho entity dated December 19 of tho current year @. "The entity's undelivered check paysblo to a eupplier ddatod Decombor 81 of tho current year 3, Which item should be excluded from cash and cash cequivalentsin the current year-end statement of financial position? 8. The minimum cash balance in the entity's current account which is maintained to avoid service charges. b. Accheck issued by the entity on Deoomber 27 of the tourrent your but dated January 15 of next year. Time deposit which matures in ono year. 44. Acustomer's chee denominated in a foreign curceney 4. Which of the lowing statements is incorrect? 4 Tho accounting function should be soparated from the ceustodianship of assets, 1, Certain clerical personnel should be rotated among various jobs. . The responsibility for roooiving merchendico and paying for it should usually be givon to one person 4. An ontity’s porsonnel should be given well-defined rosponsibilties, 83‘Attho ond of tho current year, an ontity bad cush accounts ‘at three different banks, One acanunt is aeuregaced solely for payment into a bond sinking fund. A second account, used for branch operations, is ovardrawn. ‘Tho thitd account, used for regular corporate operations, has a positive balance. How should these accounts be reported”? a. The segregated account should be reported as a onourvent aacet, the regular account abould be ‘eported as a curront asset, and the overdraft should be reported as a currant liability bb. The segregated andl regular aezounts should be reported ts curront assets, and the overdraft should be reported as a current lability The segregated account should be reported as a roneurront aseot, and the rogular account should be reported a8 a current sot not of the overdraft The scgregatad and regular aesounta should be reported fa current ascts not of the overdraft ANSWER 14-26 QUESTION 14-25 Multiple choice (AA) 1 ‘A bank reeonelliation ie ‘a. A formal financial latement tbat lists all of the bank ‘oapint halanos ofan entity 1b, Amenger oft banks that previously wore eompetitars «A statement sont by the bank to depecitor on a monthly basis A. A schedule chat accounta for the differences between ‘anentitscash balance as shown in th bank statement fand the nah balance shown inthe general lester ro Which of the following items must be added to the cash Tulane per ledge in preparing banle eooneliation whieh ‘nds vith adjusted cash balance? a. Note raseivable collected by bank in lavor of the depositor and eredited to the aeeount of the depositor INSP customer check ‘Sorvien charge Erroneous bank debit, Inpreparinga bank resonellstion, intoroe pid bythe bonke ‘on the acount ie ‘Added to the bank balance Subtraote fom the bank balance ‘Acide tothe book balance Subtrncted fiom tho book balance {In preparing a monthly banle reconciliation, which of the following items would be added tn th alange per Banke statement to arsive at the cornet cash balanee? Outstanding checks Bank service charge Deposits in transit A ccastomers note collected by the hank on behalf the depositar Which of the following must be deducted from the bank statement balanee in preparing a bank reeonilation which ‘ends with adjusted cash balance? Deposit in transit Outstanding check Reduction oflone charged tothe aczount ofthe depositor Cevtified eheele peep1f eke balance shown on an entis’s bank statement is less thin the eorsect cash balance and neither the entity aoe the bank hs made abs errors, there must be ‘4. Deposits erdited by tho bank but not yet resonded by the entity 'b, Outstanding checks Deposits in transit & Bank charges not yo recorded hy the entity Ife cash balance shown on entity’ accounting records is bo than the correct eash balance and neither the entity nor the bank has made any error, there must be ‘a, Deposits erodited by the bunk but not yet recorded by the entity 1, Deposits in transit fe Outetanding checks 44. Bank charges not yet recoded by the entity Which of the following will not roquire an adjusting entiy tm the depositor’ books? ‘a. NSF check from customer i. Check in payment of sotount payable as recorded by tho depositor sn overstated © Deposit of another entity is eeited by the bank to the secount of the depositor 4. Bank wervice charge Bask reconilations are normally proparod on x monthly basis to Mentify adjustments needed in the depositors curds nnd to ientify bankeerrors Adjustmentson che patt tf the dapositar should be recorded for Bank errors outstanding cheeks and deposits in transit All iiems except bank errors, oustanding caceke and epost in transit «¢, Boole errors, bank errors, deposits in transit and ‘ostatanding checks. 4. Ovistanding checks and deposits in transit. ep 6 10. Bank statements provide information about all of the flowing, except Checks cleared dating the period NSF checks i Bank charges forthe period Trtors made hy the depositor ANSWER 1425 6. r 8 9, 10. QUESTION 14-26 Multiple choice (IAA) 1 ‘Which ofthe following seatements is false? a enrie chck in iy af he bunk certifi it Boece ener cany pease ‘ould not othe aceop a rsonl check Rewried chad in one deren ty a bank upon tale A certified check thosld not bo inclated in the Osta check A proof of cash 4. Te. pial count of eres on nda the end of 1, net pob aa formal statement showing the total cash reel during the year. . . Te a fourveslumn bank reconciliation showing ‘eeonellatonafesth balan po bok and per bank 3 the betianing and end of the current month and ‘eooneaton of eash receipe and cash dsbureemonts the bank and the deposit daring Ue cirront month Isa summary of ash roots and cash payments.3. Aproof of eaah would be usofel for 1 Discovering cash recnpts that have not beon recorded inthe oa making & Discovering time Jag in making depots Dissovring cash receipss that have been recorded but Ihave not pen deposited Discovering an inadoquats separation of incompatible dutios of employees: ‘Which of the following is not a basic characteristic of a system of cash contel? Uso ofa voucher system Combined responsibility for handling and recording exch Daly deport of all cash rensived Tnfornal audits at irtogular intervals. pose ‘This is defined as the plan of organization and all the rmothods and measures adopted within an entity to Sikeguand assets, check the accuracy of accounting data, promote operational effiiency, ané encourage adherence to managerial policies ‘Accounting control ‘Administrative control ‘Managerial contol Internal control ANSWER 1426 CHAPTER 15 ACCOUNTS RECEIVABLE QUESTION 15-1 Define recsivables and enumorate the classes of receivables ANSWER 16-1 [Revolvablea are financial assets because they reprocent a contends right a neceive cash or another financiel aot fiom ‘nother one For ‘etalore or manunoturers, ocsivables are classified into ‘ade receivables ant nontrade receivables. Trade receivables rofer to elnims arising from sale of merchandise or services in the ordinary cowese of business ‘operations. The usual typos aro aceoune uccuable and notes revit, Accounts receivable re open sesounte or thowe not supported ty premisagry notes. Otlier names of accounts receivable are Sisloners" accounts, ide debtors, ad ade occls oiesrcivabe are thee support by formal peonses top in the fore of notes, ae a Nourade receivables represont claims assing from sources ‘thar than the sale of merchandise or serves inthe oensry Sure of business. or banks and other financial iustitulions, receivables resul Brimary fam foans 1 customers be loans are made to heterogencous customers and eho opment periods ar frequently longer or owse several yours 0