Chapter 1: Cash and Cash Equivalents

Expected question(s):
1. What is the amount of cash and cash equivalents to be presented in the financial statements?

Cash and Cash Equivalents

Cash Cash and Cash Equivalents

Cash Cash
Cash
in Fund
on
Bank
Hand

CASH
Cash on Hand:
1. Currencies and coins
2. Postal money order
3. Bank drafts
4. Undeposited Checks (not all checks are included)
a. Cashier’s check Included as CASH
b. Manager’s check Certified checks
c. Traveler’s check

d. Customer’s check
e. Personal check
f. Antedated check

a. Customer’s postdated check

b. Customer’s NSF/DAIF check Excluded from CASH
c. Customer’s stale check (treated as receivable)
Definition of accounts:
 Antedated checks – checks dated on past date that must be encashed before six (6) months
 Postdated checks – checks dated on future date
  Stale checks – checks long outstanding or expired check

Checks must be encashed or deposited in the bank six (6) months following the date of the check.
Checks drawn by the company:
1. Company’s unreleased or undelivered check
2. Company’s postdated check Add back to CASH
3. Company’s stale check
4. Supplier’s postdated check
It is assumed that the journal entry for payment is already made when the check was drawn. But because
check (cash) is still in your control as of reporting date, the entry for payment should be reversed.
Entry made when check was drawn: Entry to reverse since the check is still in your control:
Accounts payable xx Cash xx
Cash xx Accounts payable xx

Cash in Bank:

1. Checking Account or Demand

Deposit Included as CASH

2. Saving’s

Account

Included as
3. Time
CASH

Deposit

Excluded as CASH if the question is

(treated as cash equivalents) How much is cash?

Exclude

How much is Cash and CE?

Include
 Legally restricted – excluded from CASH
(classified as “cash held as compensating balance”, treated as other
current asset if related loan is short term)

(classified as noncurrent investment, treated as other noncurrent

asset if related loan is long term)
4. Compensating

Balance NOT Legally restricted – included from CASH

Silent – included as CASH

 Legally restricted as to foreign exchange (formal) – excluded from
Excluded from CASH CASH (treated as noncurrent asset)
(treated as
other current asset)
NOT Legally restricted as to foreign exchange (informal) – included
5. Deposit in
from CASH
Foreign bank

Silent – Different bank

included as – Excluded from CASH
CASH
(treated as current liability)
Cash in Fund:
6.
7. Deposit
Bank in 
Sub
Closed bank
Overdraft Same bank – included to CASH (offset)

Silent – excluded from CASH (treated as different bank)

divided into two (2) categories: (1) cash fund for operations and (2) cash fund NOT for operations.
1. Cash fund for operation:
a. Petty cash fund
b. Revolving fund
c. Change fund
d. Payroll fund
e. Tax fund Included as CASH
f. Interest fund
g. Dividend fund
h. Travel fund

2. Cash fund NOT for operation:

a. Sinking fund When is the Within 12 months – included as CASH
b. Pension fund disbursement of Beyond 12 months – excluded from CASH
c. Preference share redemption fund related liability?
Silent – excluded from CASH

d. Plant acquisition fund

e. Depreciation fund Always excluded from CASH
f. Contingency fund (treated as noncurrent asset)
g. Insurance fund

Cash Equivalents (CE):

Within 3 months – included as CE

Beyond 3 months – excluded from CE

 1. Time deposit (a.k.a. certificate of deposit)
2. Money market placement (a.k.a. commercial paper)
3. Treasury bills
4. Investment in preference share with redemption date

If not classified as cash equivalents, the proper classification would be:

 If beyond 3 months but within 12 months, classified as short-term investment, reported as (other)
current asset
 If beyond 12 months, classified as long-term investment, reported as (other) noncurrent asset
Three-month rule test:

 The counting of three months is from the date of acquisition of CE to the date of maturity of CE.

Usual distractions (items that are NOT considered as CASH)

1. I Owe You or IOUs (treated as receivables)
2. Postage stamps (treated as supplies)
3. Credit memo from suppliers (treated as contra purchase account)
4. Cash surrender value (treated as investment)
5. Investment in shares or equity securities (treated as investment)
Issues in cash:
1. Window dressing – opening the accounts even after the reporting period
2. Lapping – practice used for concealing cash shortage, where it consists of misappropriating collections in
customers.
3. Kitting – practice used for concealing cash shortage through bank reconciliation.
Accounting principle

PAS 1 (Presentation of Financial Statements) provides that “an entity shall classify an asset as current when
the asset is cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability for
at least twelve months after the end of the reporting period.”

Measurement

Cash is measured at face value.

Cash in foreign currency is measured at current exchange date (balance sheet date)
Cash is measured at estimated realizable value if bank is in financial difficulty or bankruptcy and if
recoverable amount is lower than face value (currently, cash account is insured up to P500,000)

Topic 2: Petty Cash Fund

Expected question(s):
1. What is the correct journal entries affecting the petty cash fund?
2. What is the amount of shortage or overage of petty cash fund?
3. What is the amount of replenishment check?
 4. What is the adjusted balance of petty cash fund at year-end?
5. What are the correct journal entries affecting the cash shortage or overage?

1. What is the correct journal entries affecting the petty cash fund?

Answer:

Transaction Imprest Fund Fluctuating Fund

1. Establishment PCF xx PCF xx

CIB xx CIB xx

2. Disbursement No Entry Expenses xx

PCF xx

3. Replenishment Expenses xx PCF xx

CIB xx CIB xx

4. Not replenished at the end Expenses xx No Entry

of reporting period PCF xx

5. Reversing of year-end PCF xx No Entry

adjustment Expenses xx

6. Increase of balance PCF xx PCF xx

CIB xx CIB xx

7. Decrease of balance CIB xx CIB xx

PCF xx PCF xx

2. What is the amount of shortage or overage of petty cash fund?

Answer: Total accountability of custodian xx

Less: Total accounted by custodian xx
Overage / (Shortage) xx

OR
 PCF balance xx
Less: Coins and currencies xx
Add: Replenishment checks xx (xx)
Overage / (Shortage) xx

Accountability
Imprest balance of petty cash fund xx
Undeposited collection currencies from customer xx
Undeposited collection checks from customer xx
Unclaimed salaries xx
Excess of advance of travel xx
Employee contributions (always) xx
xx

Accountable
Currencies and coins xx
Undeposited collection, check from customers xx
Paid vouchers (regardless of date) xx
Replenishment checks xx
IOUs xx
Accommodation check (all) xx
Employee contribution (only if closed) xx
xx

3. What is the amount of replenishment check?

Answer:
PCF balance xx
Less: Coins and currencies xx
Add: Replenishment checks xx (xx) (squeeze)
Overage / (Shortage) xx

4. What is the adjusted petty cash fund at year-end?

Answer:
Currencies and coins at the date of count XX
Add: Disbursements after December 31 XX
Less: Receipts after December 31 XX
Currencies and coins at December 31 XX
Less: Cash included in currencies but do not belong to PCF:
1. Undeposited currencies collection XX
2. Unclaimed salaries XX
3. Excess of advance travel XX
4. Employee contributions (only if open) XX XX
Currencies and coins belonging to PCF at December 31 XX
 Add: Replenishment checks XX
Accommodation checks (valid checks at December 31 only) XX
Adjusted balance of PCF at December 31 XX

5. What are the correct journal entries affecting cash shortage or overage?

Answer:
Accounting for cash shortage/overage

1. Discovery of shortage: Cash short or over xx

Cash xx

2. Assuming cashier is responsible for shortage: Due from cashier xx

Cash short or over xx

3. Assuming investigation unsuccessful: Loss from cashier xx

Cash short or over xx

Accounting for cash shortage/overage

1. Discovery of overage: Cash xx

Cash short or over xx

2. Assuming the money is from cashier: Cash short or over xx

Payable to cashier xx

3. Assuming no claim of overage: Cash short or over xx

Misc. Income xx