FINANCIAL ACCOUNTING & REPORTING

FAR.0115-Cash and Cash Equivalent MAY 2020 BATCH

LECTURE NOTES

CASH & CASH EQUIVALENT

DEFINITION

Cash
 Includes cash on hand and other negotiable instrument payable in money and
acceptable by the bank for deposit and immediate credit
 Cash include currency and coins, petty cash fund, change fund and negotiable
instruments like checks and bank drafts
 To be reported as cash, items must be readily available and not restricted for use
in the payment of current obligations.

Cash Equivalent
 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
 are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes.
 Those only acquired three months before maturity qualify as cash equivalents

Page 1 of 7 FAR.0115
CPART CPA REVIEW CENTER

Petty Cash
 small amount of currency from which to make small payments (minor office
supplies, taxi, postage, etc.).
 This process is designed to promote control over small cash disbursements which
would be awkward to pay by check.
Bank overdraft
 credit balance in the cash account resulting from the issuance of checks in excess
of the amount on deposit, normally offset with other cash in bank in the same
bank; otherwise present as current liability

Compensating balance
 A minimum or average balance on deposit with a bank in connection with a
borrowing arrangement
 If not legally restricted as to withdrawal, include as part of cash and disclose in
notes
 If legally restricted as to withdrawal, present as other current assets (if
borrowing arrangement is short term; otherwise present as non-current assets

Undelivered or unreleased
 Drawn and recorded but given to payee after the reporting date. Hence no
payment yet

Post-dated checks
 Drawn and recorded given to payee but can be encashed by payee after the
reporting date. Hence liability still exists at reporting date

Stale checks
 Drawn and recorded given to payee but not encashed by payee for a relatively
long period of time. In practice, a check becomes stale if not encashed within 6
months after date. Hence liability still exists.

MEASUREMENT
 Cash is measured at face value. Cash in foreign currency is measured at the
current exchange rate

CLASSIFICATION
 Normally presented as current assets (e.g. cash, demand deposits, petty cash,
etc.)
 If cash is legally restricted as to withdrawal and not intended for current use,
classify as non-current assets (e.g., cash in foreign currency restricted as to
withdrawal, cash set aside for acquisition of PPE, etc.)

PRESENTATION
 shown as a first line item among the current assets, with details/breakdown
shown in the Notes

CASH FRAUD

Window Dressing
 Books are left open after the end of reporting period

Page 2 of 7 FAR.0115
CPART CPA REVIEW CENTER

Lapping
 Concealing cash shortage through postponement of entries and applying
subsequent collection to receivables
Kitting
 Drawing of check from one account to depositing to another account to cover
shortage at the latter bank
Theft of cash
 Unauthorized removal of cash, malversation or misappropriation and etc.

Control of Cash
 Imprest system
 All cash receipts are deposited intact and all disbursements made by check.
 Utilization of Petty Cash Fund
 Segregation of duties
 Bank reconciliation

- done –

REVIEW QUESTIONS

MULTIPLE CHOICE PROBLEMS

1. The following data pertain to Lincoln Corporation on December 31, 2016:

Current account at Metrobank P1,800,000

Current account at Allied Bank (100,000)
Payroll account 500,000
Foreign bank account (in equivalent pesos) 800,000
Savings deposit in a closed bank 150,000
Postage stamps 1,000
Employee’s post dated check 4,000
IOU from employees 10,000
Credit memo from a vendor for a purchase return 20,000

Page 3 of 7 FAR.0115
CPART CPA REVIEW CENTER

Traveler’s check 50,000

Money order 30,000
Petty cash fund (P4,000 in currency and expense receipts for
P6,000) 10,000
Pension fund 2,000,000
DAIF check of customer 15,000
Customer’s check dated 1/1/17 80,000
Time deposit – 30 days 200,000
Money market placement (due 6/30/17) 500,000
Treasury bills, due 3/31/17 (purchased 12/31/16) 200,000
Treasury bills, due 1/31/17 (purchased 1/1/16) 300,000

The cash and cash equivalents as of December 31, 2016 is

a. P2,784,000 b. P3,084,000 c. P3,784,000 d. P3,584,000

2. Ralf Corporation had the following account balances at December 31, 2016:

Cash on hand and in bank P2,500,000

Cash restricted for bonds payable due on June 30, 2017 1,000,000
Time deposit 3,000,000
Savings deposit set aside for dividends payable on June 30, 2017 500,000

The total amount to be reported as cash and cash equivalents as of December

31, 2016 is
a. P7,000,000 b. P6,000,000 c. P6,500,000 d. P5,500,000

3. On December 31, 2016, Alfonso Company had the following cash balances:

Cash in bank P15,000,000

Petty cash fund 50,000
Time deposit 5,000,000
Saving deposit 2,000,000

Cash in bank includes P500,000 of compensating balance against short term

borrowing arrangement at December 31, 2016. The compensating balance is
legally restricted as to withdrawal by Alfonso. A check of P300,000 dated
January 15, 2017 in payment of accounts payable was recorded and mailed on
December 31, 2016. In the current assets section of the December 31, 2016
statement of financial position, what amount should be reported as “cash and
cash equivalents”?
a. P21,850,000 b. P16,850,000 c. P21,800,000 d. P14,850,000

4. On January 1, 2016, Tinoc Company borrows P2,000,000 from National Bank at

12% annual interest. In addition, Tinoc is required to keep a compensatory
balance of P200,000 on deposit at National Bank which will earn interest at 4%.
The effective interest that Tinoc pays on its P2,000,000 loan is
a. 10.0% b. 11.6% c. 12.0% d. 12.8%

5. Cash in bank balance of William Co. on January 1, 2016 was P70,000

representing 35% paid-up Capital of its authorized share capital of P200,000.
During the year you ascertained the following postings to some accounts, as
follows:

Page 4 of 7 FAR.0115
CPART CPA REVIEW CENTER

Debit Credit
Petty cash fund P 2,000
Accounts receivable trade 450,000 P290,000
Subscription receivable 60,000 50,000
Delivery equipment 50,000
Accounts payable trade 280,000 430,000
Bank loan 35,000 80,000
Accrued expenses 1,500
Subscribed share capital 60,000
Unissued share capital 130,000
Authorized share capital 200,000
Sales 450,000
Purchases 430,000
Expenses (including depreciation of P5,000 and 90,000
accrued expenses of P1,500)

Cash in bank balance at December 31, 2016 was

a. P41,500 b. P33,000 c. P34,500 d. P39,500

6. An office supplies enterprise, operating on a calendar-year basis, has the

following data in its accounting records:
01/01 12/31
Cash P47,000
Inventory 101,000 P93,000
Accounts receivable 82,000 116,000
Accounts payable 68,000 63,000
Sales 1,150,000
Cost of goods sold 900,000
Operating expenses 200,000

What is the expected cash balance for December 31?

a. P50,000 b. P66,000 c. P76,000 d. P134,000

7. The petty cash fund of Guiguinto Company on December 31, 2016 is composed
of the following:

Coins and currencies P14,000

Petty cash vouchers:
Gasoline payments 3,000
Supplies 1,000
Cash advances to employees 2,000
Employee’s check returned by bank marked NSF 5,000
Check drawn by the company payable to the order of the petty cash
custodian, representing her salary 20,000
A sheet of paper with names of employees together with
contribution for a birthday gift of a co-employee in the amount of 8,000
P53,000

The petty cash ledger account has an imprest balance of P50,000. What is the
correct amount of petty cash on December 31, 2016?
a. P34,000 b. P14,000 c. P39,000 b. P42,000

Page 5 of 7 FAR.0115
CPART CPA REVIEW CENTER

REVIEW QUESTIONS

MULTIPLE CHOICE THEORY

1. As defined in PAS 7, cash comprises
a. Cash on hand c. Cash equivalents
b. Demand deposits d. Both a and b

2. Cash equivalents are

a. Short term highly liquid investments
b. Readily convertible to known amounts of cash
c. Subject to an insignificant risk of changes in value
d. All of the above

3. Which statement is true?

a. Certificates of deposit are usually classified as cash on the statement of
financial position.
b. Companies include postdated checks and petty cash funds as cash.
c. Cash equivalents are investments with original maturities of six months or
less.
d. Savings accounts are usually classified as cash on the statement of financial
position.

4. The following statements relate to cash. Which statement is incorrect?

a. The purpose of establishing a petty cash fund is to pay small expenses which
cannot be paid conveniently by means of check.
b. Classification of a restricted cash balance as current or noncurrent should
parallel the classification of the related obligation for which the cash was
restricted.
c. Compensating balances required by a bank may be included in “cash and cash
equivalent”.
d. The term “cash equivalent” refers to demand credit instruments such as
money order and bank drafts.

5. 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

6. Which of the following is considered cash?

a. Certificates of deposit (CDs) c. Postdated checks
b. Money market savings certificates d. Money orders

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

a. Receivables c. Cash
b. Prepaid expenses d. Payables

8. What is a compensating balance?

a. Savings account balances.
b. Margin accounts held with brokers.
c. Temporary investments serving as collateral for outstanding loans.

Page 6 of 7 FAR.0115
CPART CPA REVIEW CENTER

d. Minimum deposits required to be maintained in connection with a borrowing

arrangement.

9. Under which section of the statement of financial position is "cash restricted for
plant expansion" reported?
a. Current assets c. Current liabilities
b. Non-current assets d. Equity

10. Bank overdrafts generally should be

a. Reported as a deduction from the current asset section.
b. Reported as a deduction from cash.
c. Netted against cash and a net cash amount reported.
d. Reported as a current liability.

11. Which of the following is true regarding the imprest petty cash system?
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.
c. The Petty Cash account is debited when the fund is replenished.
d. All of these are not true.

12. 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

13. The payments of accounts payable made subsequent to the close of the
accounting period are recorded as if they were made at the end of the current
period.
a. Window dressing c. Kiting
b. Lapping d. Imprest system

14. It consists of misappropriating a collection from one customer and concealing

this defalcation by applying a subsequent collection made from another
customer.
a. Window dressing c. Kiting
b. Lapping d. Imprest system

15. The cash receipts function should be separated from the related record
keeping in an organization to
a. Physically safeguard the cash receipts.
b. Establish accountability when the cash is first received.
c. Prevent paying cash disbursements from cash receipts.
d. Minimize undetected misappropriations of cash receipts.

 - end - 

Page 7 of 7 FAR.0115