HAND-OUT NO.

1: CASH AND CASH EQUIVALENTS

Brian Christian S. Villaluz, CPA
FINANCIAL ACCOUNTING AND REPORTING
HAND-OUT NO. 1: Cash and Cash Equivalents

NATURE OF CASH
 To be reported as “cash”, an item must be unrestricted in use. In other terms, cash must be readily available in
the payment of current obligations and not be subject to any restrictions.

EXAMPLES OF ITEMS INCLUDED IN CASH

1. Coins and currencies
2. Demand deposits and savings accounts
3. Bank drafts
4. Money orders
5. Checks
6. Cash funds set aside for use in current operations such as:
a. Petty cash fund
b. Payroll fund
c. Change fund

EXAMPLES OF ITEMS NOT INCLUDED AS CASH

1. Post-dated checks
2. IOUs or advances to employees
3. Cash funds not available for use in current operations such as:
a. Bond sinking fund
b. Plant expansion fund

ACCOUNTING TREATMENTS FOR CHECKS

Postdated checks received
 Postdated checks received by an entity do not qualify as cash because these checks are not presently available
for immediate use.

Unrealeased checks drawn and Postdated checks drawn

 Unreleased checks drawn and postdated checks drawn are still part of cash.

Stale Checks
 These are checks that are not encashed within a relatively long period of time, normally 6 months.
 Stale checks are reverted back to cash.

CASH EQUIVALENTS
 Short-term and 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.

FINANCIAL STATEMENT PRESENTATION

 Cash and cash equivalents are normally presented as current assets unless they are restricted from being
exchanged or used to settle a liability for at least 12 months after the reporting period.
 Restricted cash is excluded from cash and presented under other line item as either current or non-current asset
depending on the nature of the restriction. For example:
 Restricted cash with restriction of 12 months or less may be presented under “other current assets”
category.
 Restricted cash with restriction of more than 12 months may be presented under “other non-current
assets” category.

MEASUREMENT OF CASH
1. Cash is measured at face value or amount.
2. Cash in foreign currency is measured at the current exchange rate at the reporting date.
3. Cash maintained in a bank undergoing bankruptcy is excluded from cash and presented as receivable
measured at realizable value.

Deposits in foreign banks

 Unrestricted deposits in foreign banks that are available for immediate withdrawal are included as cash at face
amount translated at the current exchange rate as of the reporting date.
 Restricted deposits in foreign banks that are not available for immediate withdrawal are excluded from cash and
presented as receivable. The classification of the restricted deposit as current or noncurrent depends on the
nature of the restriction.

Compensating balance
 A minimum amount that must be maintained in an entity’s bank account as support for funds borrowed from the
bank.
 Compensating balances that are legally restricted as to withdrawal by the borrower are excluded from cash and
shown as part of other current assets or other noncurrent assets depending on the nature of the restriction.

Page 1 of 6
 HAND-OUT NO. 1: CASH AND CASH EQUIVALENTS
Brian Christian S. Villaluz, CPA
 Compensating balances that are not legally restricted as to withdrawal are included in cash.

Problem 1: (Cash and Cash Equivalents: Inclusion and Exclusion)

MT Company had the following balances on December 31, 2018:

Cash in checking account P 350,000

Cash in money market account 750,000
Treasury bill, purchased November 1, 2018
maturing January 31, 2019 3,500,000
Time deposit purchased December 1, 2018
maturing March 31, 2019 4,000,000

1. What amount should be reported as cash and cash equivalents on December 31, 2018?

Problem 2: (Cash and Cash Equivalents: Inclusion and Exclusion)

YD Company had the following balances on December 31, 2018:

Cash in bank – current account P 5,000,000

Cash in bank – payroll account 1,000,000
Cash on hand 500,000
Cash in bank – restricted account for building
construction expected to be disbursed in 2019 3,000,000
Time deposit, purchased December 15, 2018 and
due March 15, 2019 2,000,000

The cash on hand included a P200,000 check payable to YD, dated January 10, 2019.

1. What total amount should be reported as cash and cash equivalents on December 31, 2018?

Problem 3: (Computation of Cash balance; With Compensation Balance)

UR Company had the following account balances on December 31, 2018:

Cash in bank P 2,250,000

Cash on hand 125,000
Cash restricted for equipment acquisition and
expected to be disbursed in 2019 1,600,000

Cash in bank included P600,000 of compensating balance against short-term borrowing arrangement. The compensating
balance is not legally restricted as to withdrawal.

1. On December 31, 2018, what amount of total cash should be reported under current assets?
2. Assume the same information except that the P600,000 compensating balance is legally restricted as to withdrawal,
what total amount should be reported as cash on December 31, 2018?

Problem 4: (Computation of Cash balance; Various Checks)

RK Company reported the checkbook balance on December 31, 2018 at P5,000,000 and held the following items on same
date:

Check payable to RK, dated January 5, 2019 in payment

of a sale made in December 2018, not included in
December 31 checkbook balance P 2,000,000
Check payable to RK, deposited December 15 and
included in December 31 checkbook balance,
but returned by bank on December 28 stamped “NSF”.
the check was redeposited on January 3, 2019 and
cleared on January 6, 2019. 500,000
Check drawn on RK’s account, payable to a vendor,
dated and recorded in RK’s books on
December 31, 2018 but not mailed until January 5, 2019. 300,000
Time deposit, purchased December 1, 2018 and due on
February 28, 2019 1,000,000

1. What amount should be reported as cash on December 31, 2018?

CLASSIFICATION OF CASH FUND

 The classification of a cash fund as current or non-current should parallel the classification of the related liability.

BANK OVERDRAFT
 It is a negative or credit balance in the cash in bank account resulting from overpayment of checks in excess of
the amount of deposit.

Page 2 of 6
 HAND-OUT NO. 1: CASH AND CASH EQUIVALENTS
Brian Christian S. Villaluz, CPA
 Presented as current liability and should not be offset against other bank accounts with debit balances.
 When an entity maintains two or more accounts in one bank and one account results in an overdraft, such
overdraft can be offset against the other bank account with a debit balance.
 Generally not permitted in the Philippines.

Problem 5: (Computation of Cash Balance; Bank Overdrafts)

The cash balance of Fallout Company comprises the following:

Cash on hand P100,000

Cash in bank – savings – BPI 200,000
Cash in bank – current – BPI (80,000)
Cash in bank – current – Metrobank (20,000)
Cash in bank – current – BDO (30,000)
Total 170,000

1. How much is the correct amount to be reported as cash in the year-end financial statements?
2. How much is to be reported as bank overdraft under current liabilities?

PETTY CASH FUND

 The imprest system requires all cash receipts to be deposited intact and all cash disbursements to be made
through checks. However, requiring cash disbursements for relatively small amounts to be made through checks
is impractical. Thus, it becomes necessary for an entity to establish a petty cash fund.
 It is money set aside to defray relatively small amounts of cash disbursements. What constitutes a “small” amount
is a matter of company policy.

Problem 6: (Petty Cash Fund; Journal Entries)

On September 1, 2018, the board of directors of Tiger Corp. passed a resolution for the establishment of a P10,000 petty
cash fund. Single disbursements amounting to less than P4,000 will be made through this fund. Those amounting to P4,000
or more will made through checks. The following disbursements were made during the period:

Groceries for consumption of employees in the pantry P1,400

Transportation of Mr. Monte Carlo, the messenger boy 500
Snacks during meetings and conferences 1,000
Gasoline for company vehicles 3,000
Pedicure of Ms. Carla (Secretary) – authorized 3,000
Total 8,900

At year-end, total coins and currencies in the petty cash drawer is P500.

1. How much is the shortage or overage at year-end, if any?

2. Provide the journal entries assuming the petty cash fund is replenished at year-end.
3. Provide the journal entries assuming the petty cash fund is not replenished at year-end.

Problem 7: (Petty Cash Fund)

As of December 31, 2018, the petty cash fund of XYZ Co. with a general ledger balance of P5,000 comprises the following:

Coins and currencies P900

Petty cash vouchers:
Gasoline for delivery equipment 1,000
Medical supplies for employees 680 1,680
Advances to employees 740
A sheet of paper with names of several
employees together with contribution to
bereaved employee, attached is a
currency of 800
An envelope with a stated note “birthday
contributions for an employee, P50”. The
envelope was left opened with no
currencies inside 50

Checks drawn to the order of the petty

cash custodian 1,000

1. How much petty cash fund will be included as part of cash in the December 31, 2018 statement of financial position?
2. How much is cash shortage or overage?

Problem 8:
SB Company had the following account balances on December 31, 2018:

Page 3 of 6
 HAND-OUT NO. 1: CASH AND CASH EQUIVALENTS
Brian Christian S. Villaluz, CPA
Petty cash fund P 50,000
Cash in bank – current account 4,000,000
Cash in bank – payroll account 1,200,000
Cash in bank – bond sinking fund 2,000,000
Cash on hand 500,000
Cash in bank – restricted account for plant addition and
expected to be disbursed in 2019 1,500,000
Treasury bills 1,000,000

The petty cash fund included unreplenished December 2018 petty cash expense vouchers, P5,000 and employee IOU,
P5,000

The cash on hand included a P100,000 customer check payable to SB dated January 5, 2019.

In accordance with the arrangement with the bank, the company has agreed to maintain a minimum balance of P200,000
in the unrestricted current bank account.

The sinking fund is set aside to settle a bond due that is due on June 30, 2019.

1. What total amount should be reported as cash and cash equivalents on December 31, 2018?

Problem 9:
XB Company provided the following information on December 31, 2018:

Cash on hand P 500,000

Petty cash fund 20,000
Security bank current account 1,000,000
BPI Current account no. 1 400,000
BPI Current account no. 2 (50,000)
BSP treasury bill – 60 days 3,000,000

 The cash on hand included a customer postdated check of P100,000 and postal money order of P40,000.
 A check for P200,000 in payment of an account was drawn against Security Bank account, dated January 5, 2019,
delivered to the payee and recorded December 31, 2018.

1. What total amount should be reported as cash and cash equivalents on December 31, 2018?

Problem 10:
UM Company provided the following information on December 31, 2018:

Cash on hand P 200,000

PNB current account 5,000,000
Chinabank current account 4,000,000
BPI current account (100,000)
Asia bank savings account for equipment acquisition 250,000
Asia bank time deposit, 90 days 2,000,000

Included among the checks drawn by UM against the PNB current account and recorded in December 2018 are:
 Checks written and dated December 26, 2018 and delivered to payee on January 2, 2019, P100,000.
 Checks written on December 24, 2018, dated January 15, 2019 delivered to payee on December 29, 2018,
P150,000.

1. What total amount should be reported as cash and cash equivalents on December 31, 2018?

BANK RECONCILIATION
 A bank reconciliation – a statement which brings into agreement the cash balance per book and cash balance
per bank.
 Usually prepared monthly because the bank provides the depositor with the bank statement at the end of every
month.

RECONCILING ITEMS
1. Book reconciling items
 Credit memos – these are items not representing deposits credited by the bank to the account of the depositor
but not yet recorded by the depositor as cash receipts.
 Debit memos – these are items not representing checks paid by bank which are charged or debited by the
bank to the account of the depositor but not yet recorded by the depositor as cash disbursements.
 Book errors

2. Bank reconciling items

Page 4 of 6
 HAND-OUT NO. 1: CASH AND CASH EQUIVALENTS
Brian Christian S. Villaluz, CPA
 Deposit in transit – these are collections already recorded by the depositor as cash receipts but not yet
reflected on the bank statement.
 Outstanding checks – these are checks already recorded by the depositor as cash disbursements but not yet
reflected on the bank statement.
 Bank errors

Note: A certified check is one where the bank has stamped on its face the word “accepted” or certified” indicating
sufficiency of fund. This should be deducted from the total outstanding checks (if included) because they are no longer
outstanding.

Problem 11: (Bank Reconciliation; Bank-to-Book)

In preparing the bank reconciliation for the month of February, VR Company provided the following information:

Balance per bank statement P 3,800,000

Deposit in transit 520,000
Amount erroneously credited by bank to VR’s account 40,000
Bank service charge for February 5,000
No sufficient fund check 50,000
Outstanding check 675,000

1. What is the adjusted cash in bank?

2. What is the unadjusted cash in bank balance per book?

Problem 12: (Bank Reconciliation; Book-to-Bank)

Mac Company provided the following data for the month of January:

Balance per book P 1,000,000

Bank service charges 3,000
Outstanding checks 235,000
Deposit in transit 300,000
Customer note collected by bank 375,000
Interest on customer note 15,000
Customer check returned NSF 62,000
Payment of note payable by depositor charged to account 250,000

1. What is the adjusted cash in bank?

2. What is the unadjusted cash in bank per bank statement?

Problem 13: (Bank Reconciliation; Adjusted balance method)

King Company provided the following information for the purpose of reconciling the cash balance per book with the balance
per bank statement on July 31, 2018:

Balance per book P 1,700,000

Balance per bank statement 4,000,000
Deposit in transit 400,000
Outstanding checks, including a certified check of P200,000 1,000,000
July NSF checks, of which P30,000 had been redeposited and cleared on July 30, 2018 230,000
Erroneous credit to King’s account, representing proceeds of loan granted to Ping Company 600,000
Proceeds of note collected by bank for King, net of service charge of P50,000 1,500,000

1. What amount should be reported as cash in bank as of July 31, 2018?

Problem 14: (Comprehensive Bank Reconciliation; Adjusted balance method)

Tikka Company provided the following data pertaining to the cash transactions and bank account for the month of
September:

Cash balance per accounting record P 1,719,000

Cash balance per bank statement 3,195,000
Bank service charge 10,000
Debit memo for the cost of printed checks delivered by the bank; the charge has not
been entered in the accounting record 12,000
Deposit of September 31 not recorded by bank until October 2 500,000
Outstanding checks 685,000
Proceeds of a bank loan on September 31, not recorded in the accounting record, net
of interest of P30,000 570,000
Proceeds from a customer promissory note, principle amount, P800,000 collected by
the bank not taken up in the accounting records 810,000
Check no. 988 issued to a supplier entered in the accounting record as P210,000 but
deducted in the bank statement at an erroneous amount of 120,000
Stolen check lacking an authorized signature deducted from Tikka’s account by the
bank in error 80,000
Page 5 of 6
 HAND-OUT NO. 1: CASH AND CASH EQUIVALENTS
Brian Christian S. Villaluz, CPA
Customer check returned by the bank marked NSF, indicating that the customer bank
account balance was not adequate to cover the check; no entry has been made in the
accounting records to record the said check 77,000

1. What is the adjusted cash in bank?

FINANCIAL ACCOUNTING THEORIES

1. Which of the following is not considered cash for financial reporting purposes?
A. Petty cash funds and change funds
B. Money orders, certified checks, and personal checks
C. Coin, currency, and available funds
D. Postdated checks and I.O.U.'s

2. In which account are post-dated checks received classified?

A. Receivables.
B. Prepaid expenses.
C. Cash.
D. Payables.

3. Under which section of the balance sheet is "cash restricted for plant expansion" reported?
A. Current assets.
B. Non-current assets.
C. Current liabilities.
D. Stockholders' equity.

4. 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.

5. Deposits in foreign bank which are subject to foreign exchange restriction should be classified
A. Separately as current asset, with appropriate disclosure.
B. Separately as non-current asset with appropriate disclosure.
C. Be written off as loss.
D. As part of cash and cash equivalents.

6. Bank overdrafts should be

A. Reported as current liabilities.
B. Offset from the balance of cash.
C. Reported as current liabilities unless offsetting is permitted.
D. Disclosed only.

7. Highly liquid investments that are readily convertible into cash can be shown as cash equivalents if the investments
have a maturity of 90 days or less from
A. the date the investments are acquired.
B. the end of reporting period.
C. the date of issue of financial statements.
D. the date the investments are acquired or from the end of the reporting period.

8. Bank reconciliations 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 shall be recorded for
A. Bank errors, outstanding checks and deposits in transit.
B. All items except 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.

9. Which of the following is an appropriate reconciling item to the balance per bank in a
bank reconciliation?
A. Bank service charge.
B. Deposit in transit.
C. Bank interest.
D. Chargeback for NSF check.

10. Which of the following is true about erroneous bank credit?

A. Receipts per bank is overstated.
B. Cash balance per book is overstate.
C. It should be recorded as a credit to cash in bank account.
D. It should be added to balance per bank in preparing bank reconciliation.

END OF HANDOUT
Page 6 of 6