CHAPTER 16 CASH AND CASH EQUIVALENTS

QUESTION 16-1 Multiple choice (IAA)

1. Which of the following should not be considered cash?

a. Petty cash fund

b. Money orders

c. Coin and currency

d. IOUs

2. Which of the following is usually considered cash?

a. Certificate of deposit

b. Checking account

c. Money market saving certificate

d. Postdated check

3. A cash equivalent is a short term, highly liquid investment that is readily convertible into known
amount of cash and

a. Is acceptable as a means to pay current liabilities.

b. Has a current market value that is greater than the original cost

c. Bears an interest rate that is at least equal to the prime interest rate at the date of liquidation.

d. Is so near maturity that it presents insignificant risk of change in interest rate.

4. All of the following can be classified as cash and cash equivalents, except

a. Redeemable preference shares acquired and due in 60 days

b. Commercial papers held and due for repayment in 90 days

d. A bank overdraft

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 noncurrent asset with appropriate disclosure.

c. Be written off as loss.

d. As part of cash and cash equivalents.

6. Bank overdraft generally should be

a. Reported as a deduction from current assets.

b. Reported as a deduction from cash.

c. Netted against cash and a net cash amount reported.

d. Reported as a current liability.

7. What is a compensating balance?

a. Saving account balance

b. Demand deposit account balance

c. Temporary investment serving as collateral for outstanding loan

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

8. 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.

Answer 16-1

1. d

2. b

From the point of view of a layman, "cash” simply means money

Money is the standard medium of exchange in business transactions which refers to the currency and
coins which are in circulation and legal tender.

However, in accounting parlance, the term “cash” has a special and broader meaning. Cash connotes
more than money.

Cash includes “money and any other negotiable instrument that is payable in money and acceptable by
the bank for deposit and immediate credit”.

Cash includes petty cash fund, change-fund, coins and currency on hand, demand deposit or checking
account, saving deposit and any fund for the payment of current obligations.

Cash also includes personal checks, manager’s checks, traveler’s checks, bank draft and money orders
because these are acceptable by the bank for immediate deposit or encashment.

3.d

PAS 7, paragraph 6, defines cash equivalents as 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.

PAS 7 further states that “only highly liquid investments that are acquired three months before maturity
can qualify as cash equivalents”. Examples of cash equivalents are:

a. Three-month BSP treasury bill

b. Three-year BSP treasury bill purchased three months before date of maturity

c. Three-month time deposit

e. Preference shares with specified redemption date and acquired three months before redemption
date.

4. c

Equity securities cannot qualify as cash equivalents because shares do not have a maturity date.

5. b

Cash in foreign currency should be translated to Philippine pesos using the current exchange rate.

Deposits in foreign countries which are not subject to any foreign exchange restriction are included in
“cash".

Deposits in foreign bank which are subject to foreign exchange restriction should be classified separately
among noncurrent assets and the restriction clearly indicated

6. d

When the cash in bank account has a credit balance, it is said to be an overdraft.

The credit balance in the cash in bank account results from the issuance of checks in excess of the
deposits.

A bank overdraft is classified as a current liability and should not be offset against other bank accounts
with debit balances.

However, when the entity maintains two or more accounts in one bank and one account results in an
overdraft, such overdraft may be offset against the other bank account with a debit balance

7. d

8. c

A compensating balance is the minimum checking or demand deposit account balance that must be
maintained in connection with a borrowing arrangement with a bank.
If the deposit is not legally restricted as to withdrawal by the borrower because of an informal
compensating balance agreement, the compensating balance is part of cash.

If the deposit is legally restricted because of a formal compensating balance agreement the
compensating balance is classified separately as “cash held as compensating balance” under current
assets if the related loan is short term.

If the related loan is long term, the compensating balance is classified as noncurrent investment.

QUESTION 16-2 Multiple choice (IAA)

1. Which of the following should not be considered “cash”?

a. Change fund

b. Certified check

c. Personal check

d. Postdated check

2. All of the following may be included in “cash”, except

a. Currency

b. Money market instrument

c. Checking account balance

d. Saving account balance

3. Deposits held as compensating balance

a. Usually do not earn interest.

b. If legally restricted and held against short-term credit may be included as cash.

c. If legally restricted and held against long-term credit may be included among current assets.

d. None of these
4. Which of the following is not considered as a cash equivalent?

a. A three-year treasury note maturing on January 31 of the next year purchased by the entity on
December 1 of the current year.

b. A three-year treasury note maturing on January 31 of the next year purchased by the entity on
October 1 of the current year.

c. A 90-day T-bill

d. A 60-day money market placement

5. Which of the following should not be included in “cash” in the current year-end statement of financial
position?

a. US $20,000 cash.

b. Past due promissory note issued in favor of the entity by the 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.

6. At the end of the current year, an entity had cash accounts at three different banks. One account 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 these accounts be reported?

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

Answer 16-2

1. d 4. b
2. b 5. b

3. d 6. A

QUESTION 16-3 Multiple choice (IAA)

1. Petty cash fund is

a. Separately classified as current asset

b. Money kept on hand for making minor disbursement of coin and currency rather than by writing
checks

c. Set aside for the payment of payroll

d. Restricted cash

2. The internal control feature specific to petty cash is

a. Separation of duties

b. Assignment of responsibility

c. Proper authorization

d. Imprest system

3. 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

4.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 everytime 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.

5. A Cash Over and Short account

a. Is not generally accepted.

b. Is debited when the petty cash fund proves out over.

c. Is debited when the petty cash fund proves out short.

d. Is a contra account to cash.

6. Which of the following statements in relation to an imprest petty cash is incorrect?

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 or to
adjust the balance if not replenished at year-end.

c. The petty cash account is debited when the fund is replenished.

d. The petty cash fund is reported as part of current assets.

7. When an imprest petty cash fund is used, which of the following statements is true?

a. The balance of the petty cash fund should be reported in the statement of financial position as a long-
term investment.

b. The petty cashier’s summary of petty cash payments serves as a journal entry that is posted to the
appropriate general ledger account.

c. The reimbursement of the petty cash fund should be credited to the cash account.

d. Entries that include a credit to the cash account should be recorded at the time the payments from
the petty cash fund are made.
8. Which of the following statements in relation to petty cash fund is false?

a. Each disbursement from petty cash should be supported by a petty cash voucher.

b. The creation of a petty cash fund requires a journal entry to reflect the transfer of fund out of the
general cash account.

c. At any time, the sum of the cash in the petty cash fund and the total of petty cash vouchers should
equal the amount for which the imprest petty cash fund was established.

d. With the establishment of an imprest petty cash fund, one person is given the authority and
responsibility for issuing checks to cover minor disbursements.

ANSWER 16-3

1. b 5. c

2. d 6. c

3. d 7. c

4. c 8. d

QUESTION 16-4 Multiple choice (IAA)

1. 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

2. In preparing a bank reconciliation, interest paid by the bank on the combined current and saving
account is

a. Added to the bank balance

c. Added to the book balance

d. Subtracted from the book balance

3. In preparing a monthly bank reconciliation, which of the following would be added to the balance per
bank statement to arrive at the correct cash balance?

a. Outstanding check

b. Bank service charge

c. Deposit in transit

d. A customer’s note collected by the bank on behalf of the depositor

4. Which of the following must be deducted from the bank statement balance in preparing a bank
reconciliation which ends with adjusted cash balance?

a. Deposit in transit

b. Outstanding check

c. Reduction of loan charged to the account of the depositor

d. Certified check

5. If the balance shown in the bank statement is less than the correct cash balance and neither the
entity nor the bank has made any errors, there must be

a. Deposits credited by the bank but not yet recorded by the entity

b. Outstanding checks

c. Deposits in transit

d. Bank charges not yet recorded by the entity

6. If the cash balance shown in the accounting records is less than the correct cash balance and neither
the entity nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the entity

b. Deposits in transit

c. Outstanding checks

d. Bank charges not yet recorded by the entity

7. 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 should 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.

8. Bank statements provide information about all of the following, except

a. Checks cleared during the period

b. NSF checks

c. Bank charges for the period

d. Errors made by the depositor

ANSWER 16-4

1. a

2. c

The book reconciling items are credit memos and debit memos.

Credit memos are added to the balance per book and debit memos are deducted from the balance per
book.
Typical examples of credit memos are note collected by bank in favor of the depositor and proceeds of
bank loan credited to the account of the depositor.

Typical examples of debit memos are NSF checks and bank service charges.

3. c

4. b

5. c

6. a

The bank reconciling items include deposits in transit and outstanding checks.

Deposits in transit are added to the balance per bank and outstanding checks are deducted from the
balance per bank.

7.b

Only book reconciling items require adjusting entry on the books of depositor.

8. d

A bank statement is a monthly report of the bank to the depositor showing the cash balance per bank at
the beginning, the deposits acknowledged, the checks paid, other charges and credits and the daily cash
balance per bank during the month.

Actually, the bank statement is an exact copy of the depositor's ledger in the records of the bank.