BALIUAG UNIVERSITY

Integrated Accounting Course II

Summer 2017

MODULE 16: Cash and Cash Equivalents LVC

 RELATED STANDARD: IAS 1 – Presentation of Financial Statements, IAS 7 – Statement of Cash Flows

 Definition of Terms
Cash – It comprises cash on hand and demand deposits.
Cash equivalents – These are short-term, highly liquid investments that are readily convertible to known amounts of cash
and which are subject to an insignificant risk of changes in value.

I. Cash and Cash Equivalents

 Classification of cash and cash equivalents

 Current assets include cash or a cash equivalent unless the same is restricted from being exchanged or used to settle
a liability for at least twelve months after the reporting period.
 For an item of cash and cash equivalent to be classified as current assets, it should be unrestricted in use. Otherwise,
it is classified as noncurrent asset.

 Cash items
a. Cash on hand – Undeposited collections of currency and checks such as bills and coins, customer’s checks, manager’s
checks, traveler’s checks, bank drafts and money order.
b. Cash in bank – Demand deposits such as savings account and checking account.
c. Cash fund – Fund set aside for current operation such as petty cash fund, payroll fund, dividend fund, interest fund,
tax fund, revolving fund and change fund.

 Cash equivalents
 An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less
from the date of acquisition.
 Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents, for example
in the case of preferred shares acquired within a short period of their maturity and with a specified redemption date.
 Examples of cash equivalents:
a. Treasury bill
b. Short-term time deposit
c. Money market
d. Commercial paper
Note: On acquisition date, maturity of the preceding instruments must be 3 months or less.

 Various considerations for cash and cash equivalents

1. Foreign currency
- Cash in foreign currency should be translated to Philippine pesos using the current exchange rate.
- In the statement of financial position, foreign currencies should be translated based on the exchange rates on
the reporting period.
2. Cash in bank experiencing financial difficulty or bankruptcy
- Cash in bank should be written down to estimated realizable value.
3. Cash fund for noncurrent purpose
- The cash fund is presented as noncurrent asset and classified as long-term investment.
- Examples are sinking fund, preference share redemption fund, contingent fund, insurance fund, fund for
acquisition of PPE.
- Cash fund set aside for payment of obligation should be presented in the statement of financial position parallel
to the related liability. If the sinking fund is for a 5-year bond, then the fund is classified as noncurrent asset.
Conversely, if the bond will mature in 12 months or less, then the fund is classified as current asset.
4. Bank overdraft
- A cash in bank with credit balance should not be offset against other bank account in another bank. Thus it is
classified as current liability.
- Offsetting may be done if the entity has more than one bank accounts in the same bank or when the amount is
deemed immaterial.
5. Compensating balance
- Minimum bank account balance may be legally restricted (formal compensating balance) or otherwise (informal
compensating balance).
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- Formal compensating balance is not part of cash and cash equivalents. It is classified as current asset if the related
loan is short-term. Conversely, as noncurrent asset if the related loan is long-term.
- In most cases, compensating balance agreements are not legally binding.
6. Undelivered checks
- Theoretically, checks not yet released to payee should still form part of the cash and cash equivalents balance. It
will require an adjusting entry to restore the cash in bank balance.
- In practice, checks drawn for payee are recorded and therefore deducted from the cash in bank balance. Usually,
no entry to restore the said balance is made. This is because the balance is normally not very substantial and that
there is no evidence of actual cancellation of check.
7. Postdated checks
- Checks delivered to payee but are dated after the reporting period should still form part of the cash in bank
balance. Reversal of the previously recorded payment should be made.
- Moreover, checks received from the drawer but are dated after the reporting period should not form part of the
cash in bank balance. Reversal of the previously recorded collection should be made.
8. Stale checks
- Checks issued but not encashed within six months from the time of issuance become stale. Accordingly, the
drawer may issue a stop payment order to the bank.
- If the amount is immaterial, stale check is recorded by the drawer as miscellaneous income. If the amount is
material and that liability is expected to continue, cash is restored and liability is set up.
9. Cash short or over
- Cash shortage that is traceable to a cashier or custodian is accounted as a receivable from the employee held
liable for the shortage.
- If the shortage cannot be traced, then the amount is debited to loss account or miscellaneous expense.
- Cash overage that is traced to be the money of the cashier or custodian, the amount is accounted as payable to
the employee claiming the overage.
- If the overage cannot be traced, then the amount is credited to miscellaneous income.

 Petty cash fund

 Petty cash may be accounted as:
a. Imprest system
- Petty cash fund is debited during establishment of fund and whenever the fund balance is increased.
- Petty cash fund is credited at the end of the accounting period to reflect the actual cash in the fund. Likewise,
it is credited whenever the fund balance is decreased.
- Expenses are recorded during replenishment and at the end of the accounting period.
b. Fluctuating system
- Petty cash fund is debited during establishment and replenishment of fund and whenever the fund balance
is increased.
- Petty cash fund is credited whenever the fund balance is decreased.
- Expenses are recorded whenever expenses are paid using the petty cash fund.
- No adjusting entry is necessary at the end of the accounting period.

 Illustration 1: Cash and cash equivalent

Indicate whether the following items is included or excluded from the cash and cash equivalent balance at year end.
o Savings account at ABC bank
o Checking account at XYZ bank
o Another savings account at ABC but with negative balance
o Bank overdraft with LMN Bank, no other account with LMN Bank
o Restricted foreign bank account
o 90-day Treasury bill acquired on Nov 1 of the current year.
o Postal money order
o Postage stamps
o Traveler’s check
o Payroll account in XYZ bank
o Formal compensating balance in ABC bank for a loan agreement
o Commercial paper maturing on January 31 of the succeeding year, acquired on October 1 of the current year
o Postdated checks from customer
o Checks issued but not yet presented for payment for 12 months.
o Change fund for use of cashiers
o Sinking fund for bonds payable due in 4 years
o Petty cash fund
o 180-day Treasury bill dated August 1 of the current year acquired on November 1 of the current year.

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II. Bank Reconciliation

 Bank reconciliation process
 The process of bringing into agreement the cash balance of the entity as recorded in the entity’s books and as
reflected in bank’s record.
 A bank reconciliation statement is periodically prepared, usually at the end of each month.
 Unlike the bank reconciliation which is as of a specific date, a four-column cash reconciliation, also known as a proof
of cash, reconciles bank and book cash balances over a specified time period.

 Reconciling items
 Book reconciling items
- Bank credit memos, bank debit memos, book errors
 Bank reconciling items
- Deposit in transit, outstanding checks and bank errors

 Illustration 2: Reconciling items

Identify the following items as Bank reconciling items (BANK) or Book reconciling items (BOOK). Indicate whether the
reconciling item is an addition (+) or deduction (-)
o Bank service charge
o Proceeds of bank loan automatically credited in the company’s account but not yet recorded
o Checks issued but not yet presented by payee for payment
o Interest on bank account
o NSF checks of customer returned by bank
o Month-end night depository made after the receipt of bank statement.
o Notes collected by bank
o Interest on notes collected by bank
o Checks issued by another company changed to the entity’s account
o Overstatement in recording checks issued
o Customer checks received and deposited intact but recorded twice.
o Undeposited collections to be transferred to bank a day following the receipt of bank statement.
o Erroneous credit on the entity’s bank account representing collections for another company.

 Illustration 3: Bank reconciliation

Prepare a bank reconciliation for the month of January, given the following information
Balance per book, January 31 3,130,000
Balance per bank, January 31 3,500,000
Collections on January 31 but undeposited 550,000
NSF check received from a customer returned by the bank on February 5 with
the January bank statement 50,000
Checks outstanding on January 31 650,000
Bank debit memo for safety deposit box rental not recorded by the depositor 5,000
A creditor check for P30,000 was incorrectly recorded in the depositor’s books as 300,000
A customer’s check for P200,000 was recorded by the depositor as 20,000
The depositor neglected to make an entry in its books for a check drawn in
payment of an account payable 125,000

 Illustration 4: Proof of cash

Prepare proof of cash for the month of February
January February
Cash in bank balance, Jan 31 200,000
Book credits – Feb 720,000
Book debits – Feb 800,000
Bank statement balance, Jan 31 330,000
Bank debits 530,000
Bank credits 700,000
Notes collected by bank 60,000 100,000
Service charge 8,000 2,000
NSF check 20,000 30,000
Deposit in transit 80,000 220,000
Outstanding checks 178,000 372,000

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Illustrative Problems

1. These are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value.
A. Cash and cash equivalents C. Current investment
B. Treasury bills D. Cash equivalents
2. Which of the following is least likely a component of cash and cash equivalents in the statement of financial position?
A. Cash in bank C. Cash fund
B. Cash equivalents D. Cash surrender value
3. Which cash fund is included from the cash and cash equivalent balance?
A. Fund set aside for acquisition of equipment and machinery.
B. Fund set up in a bank exclusively for payment of employees’ compensation.
C. Fund for the redemption of preference shares.
D. Fund established for settlement of long-term obligations.
4. Which of the following would not form part of the cash and cash equivalent balance?
A. Customer’s postdated check C. Drawer Issued stale check
B. Undelivered check D. All of the foregoing
5. Internal control feature that is specific to petty cash is
A. Segregation of duties C. Authorization
B. Independent verification D. Imprest system
6. All of the following can be classified as cash and cash equivalents, except
A. Bank drafts
B. Commercial paper due for repayment in 90 days
C. Investment in equity securities
D. Redeemable preference shares acquired and due in 60 days
7. A cash in bank with credit balance that should not be offset against other bank account in another bank.
A. Bank draft C. Stale check
B. Compensating balance D. Bank overdraft
8. The journal entry to record payment of expenses from the petty cash fund would include a
A. Debit to expense C. Credit to cash on hand
B. Credit to petty cash D. None of the foregoing
9. In reconciling the cash balance with the book balance, which of the following would not cause the bank balance
shown in the bank statement to be lower than the unadjusted book balance?
A. Interest credit to the account of the bank. C. Cash on hand
B. Deposit in transit. D. NSF checks from customer returned by the bank
10. Which of the following is a bank reconciling item?
A. Bank service charge C. NSF check of customer
B. Outstanding checks D. Notes collected by bank
11. It consists of four columns: beginning of the period bank reconciliation, receipts, disbursements, and end-of-the-
period bank reconciliation.
A. Bank reconciliation statement C. Bank statement
B. Proof of cash D. Proof of bank balance
12. The following statements relate to cash. Which statement is true?
A. The term “cash equivalent” refer to demand credit instruments such as money order and bank drafts.
B. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all normal operating
expenses for a period of time.
C. Classification of a restricted cash balance as current or noncurrent should parallel the classification of the related
obligation for which the cash was restricted.
D. Compensating balance required by a bank should always be excluded from “cash and cash equivalent”.
13. Which is not considered as a cash equivalent?
A. A three-year treasury note maturing on May 30 of the current year purchased by the entity on April 15 of the
current year.
B. A three-year treasury note maturing on May 30 of the current year purchased by the entity on January 15 of the
current year.
C. A 90-day T-bill.
D. A 60-day money market placement.
14. As of December 31 of the current year, an entity had various checks and papers in its safe. Which item should not be
included in its cash account in the year-ended balance sheet?
A. US $20,000 cash.
B. Past due promissory note issued in favor of the entity by its President.
C. Another entity’s P150,000 check payable to the entity dated December 15 of the current year.
D. The entity’s undelivered check payable to a supplier dated December 31 of the current year.
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15. Which item should be excluded from cash and cash equivalent on the current year-end balance sheet of an entity?
A. The minimum cash balance in the entity’s current account which is maintained to avoid service charges.
B. A check issued by the entity on December 27 of the current year but dated January 15 next year.
C. Time deposit which matures in one year.
D. A customer’s check denominated in a foreign currency.
16. At December 31 of the current year, an entity had cash accounts at three different banks. One account balance is
segregated solely for 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 three accounts be
reported in the December 31 classified balance sheet?
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.
17. In order to be classified as cash equivalents, an investment must have a maturity period of
A. Less than 6 months C. 6 to 12 months
B. 3 to 6 months D. 3 months or less
18. Burr Company had the following account balances at December 31, year 2: Cash in banks P2,250,000 Cash on hand
P125,000 Cash legally restricted for additions to plant (expected to be disbursed in year 3) P1,600,000 Cash in banks
includes P600,000 of compensating balances against short-term borrowing arrangements. The compensating
balances are not legally restricted as to withdrawal by Burr. In the current assets section of Burr’s December 31, year
2 balance sheet, total cash should be reported at
A. 1,775,000 C. 2,375,000
B. 2,250,000 D. 3,975,000
19. Trans Co. had the following balances at December 31, year 2:
 Cash in checking account P35,000
 Cash in money market account P75,000
 Treasury bill, purchased 11/1/Year 2, maturing 1/31/Year 3, P350,000
 Treasury bill, purchased 12/1/Year 2, maturing 3/31/Year 3, P400,000
Trans’s policy is to treat as cash equivalents all highly liquid investments with a maturity of three months or less
when purchased. What amount should Trans report as cash and cash equivalents in its December 31, Year 2
balance sheet?
A. 110,000 C. 460,000
B. 385,000 D. 860,000
20. Perth COMPANY reported the checkbook balance on December 31, Year 1 at P8,000,000. In addition, the entity
held the following items in the safe on that date:
 Check payable to Perth COMPANY, dated January 2, Year 2 in payment of a sale, not included in December 31
checkbook balance, P1,000,000
 Check payable to Perth COMPANY, deposited December 15 and included in December 31 checkbook balance,
but returned by bank on December 30 stamped NSF. The check was redeposited on January 2, Year 2 and
cleared on January 5, Year 2, P3,000,000
 Check drawn on Perth COMPANY account, dated and recorded on December 31, Year 1 but not mailed until
January 15, Year 2, P2,500,000
 Coins and currencies on hand P800,000
 Three-month money market instruments P1,500,000
What is the correct amount of cash on December 31, Year 1?
A. 7,500,000 C. 9,800,000
B. 9,300,000 D. 8,300,000
21. Queen COMPANY had the following account balances on December 31, Year 1:
Petty cash fund 50,000
Cash on hand 500,000
Cash in bank – current account 4,000,000
Cash in bank – payroll account 1,000,000
Time deposit 2,000,000
Cash in bank – restricted account for plant addition, expected to be disbursed
in Year 2 500,000
Cash in sinking fund set aside for bond payable due June 30, Year 2 1,500,000
The petty cash fund included unreplenished December 31, Year 1 petty cash expense vouchers of P5,000 and
employee IOU of P5,000. The cash on hand included a P100,000 check payable to the entity dated January 31, Year

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2. In exchange for a guaranteed line of credit, the entity has agreed to maintain a minimum balance of P200,000 in
the unrestricted current bank account.
What amount should be reported as cash and cash equivalents on December 31, Year 1?
A. 6,940,000 C. 7,940,000
B. 8,940,000 D. 7,440,000
22. Royal COMPANY reported the following information in relation to imprest petty cash fund at year-end:
Coins and currency 22,000
Petty cash vouchers:
Gasoline 3,000
Medical supplies 1,000
Repairs 1,500
IOU from an employee 3,500
Check drawn payable to the order of Rose Anne, petty cash custodian, representing
her salary. 15,000
Check of an employee returned by bank marked “NSF” 3,000
A sheet of paper with names of several employees together with contribution for a
birthday party and attached to the sheet of paper is a currency of 5,000
The petty cash ledger account had a balance of P50,000. What amount of petty cash fund should be reported at
year-end?
A. 42,000 C. 37,000
B. 27,000 D. 22,000
23. Sun COMPANY provided following information on December 31, Year 1:
Cash in bank per book 7,400,000
Cash in bank per bank statement 8,180,000
Deposit in transit 1,200,000
Outstanding checks, including certified check of P200,000 1,500,000
Note collected by bank for the entity, including interest of P100,000 1,100,000
Service charge for December 20,000
DAIF checks of customers returned by bank 500,000
Error in recording a check in the book. The correct amount as paid by the bank is
P100,000 instead of P200,000 as recorded in the book. 100,000
Deposit in other bank closed by BSP 1,500,000
Currency and coins on hand 600,000
Petty cash fund 50,000
What is the total cash to be reported as current asset on December 31, Year 1?
A. 8,730,000 C. 8,180,000
B. 8,080,000 D. 8,530,000
24. U COMPANY provided the following information on December 31, Year 1:
Cash on hand 200,000
Petty cash fund 20,000
Philippine Bank current account 5,000,000
Manila Bank current account 4,000,000
City Bank current account (bank overdraft) ( 100,000 )
Asia Bank savings account for equipment acquisition 250,000
Asia Bank time deposit, 90 days 2,000,000
 Cash on hand included the following items: customer’s check for P35,000 returned by the bank December 26,
Year 1 due to insufficient fund but subsequently redeposited and cleared by the bank on January 10, Year 2;
and customer’s check for P15,000 dated January 10, Year 2, received December 23, Year 1.
 The petty cash fund compromised the following items on December 31, Year 1:
Currency and coins 5,000
IOU from an officer 2,000
Unreplenished petty cash vouchers 12,000
 Included among the checks drawn by U COMPANY against the Philippine Bank current account and recorded in
December Year 1 are: check written and dated December 31, Year 1 and delivered to payee on January 3, Year
2, P25,000; and check written December 26, Year 1, dated January 30, Year 2 delivered to the payee on
December 28, Year 1, P45,000
What total amount should be reported as cash and cash equivalents on December 31, Year 1?
A. 11,125,000 C. 11,155,000
B. 11,225,000 D. 11,205,000
25. True COMPANY had the following bank reconciliation on June 30, Year 1:
Balance per bank statement, June 30 3,000,000
Deposit in transit 400,000
Total 3,400,000
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Outstanding checks ( 900,000 )
Balance per book, June 30 2,500,000
The bank statement for the month of July showed the following:
Deposits (including P200,000 note collected) 9,000,000
Disbursements (including P140,000 NSF check and P10,000 service charge) 7,000,000
All reconciling items on June 30, Year 1 cleared through the bank in July. The deposit in transit amounted to
P1,000,000 and the outstanding checks totaled P600,000 on July 31.
What is the cash in bank balance per ledger on July 31, Year 1?
A. 5,400,000 A. 5,550,000
B. 5,350,000 D. 4,500,000
26. In preparing its August 31, year 2 bank reconciliation, Apex Corp. has available the following information:
Balance per bank statement, 8/31/Y2 P18,050
Deposit in transit, 8/31/Y2 P3,250
Return of customer’s check for insufficient funds, 8/31/Y2 P600
Outstanding checks, 8/31/Y2 P2,750
Bank service charges for August P100
At August 31, year 2, Apex’s correct cash balance is
A. 18,550 C. 17,850
B. 17,950 D. 17,550
27. Reconciliation of Joy Company’s bank account at May 31 of the current year is
Balance per bank statement, 2,600,000
Deposit in transit 300,000
Total 2,900,000
Outstanding checks ( 100,000)
Adjusted bank balance 2,800,000

Balance per book 2,810,000

Bank service charge ( 10,000)
Adjusted book balance 2,800,000

June data are as follows:

Bank Book
Checks recorded 2,200,000 2,500,000
Deposit recorded 1,600,000 1,800,000
Service charges recorded 50,000 10,000
Notes collected plus interest 550,000
NSF checks 100,000
Balances 2,400,000 2,100,000
The deposit in transit on June 30
A. 100,000 C. 400,000
B. 300,000 D. 500,000
28. The outstanding checks on June 30
A. 700,000 C. 500,000
B. 100,000 D. 400,000
29. The adjusted cash in bank balance on June 30
A. 2,500,000 C. 2,100,000
B. 2,400,000 D. 2,800,000
30. The adjusted cash receipts for the month of June
A. 2,150,000 C. 1,600,000
B. 2,350,000 D. 1,800,000
31. The adjusted cash disbursement for the month of June
A. 2,200,000 C. 2,650,000
B. 2,350,000 D. 2,510,000

- End of discussion

“Education's purpose is to replace an empty mind with an open one.” Malcolm Forbes

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