CASH & CASH EQUIVALENTS TEST BANK

A. TRUE or FALSE

__________1. Cash is measured at face value.

__________2. Savings accounts are usually classified as cash on the balance sheet.

__________3. Restricted cash may be available to meet the normal operating needs of a company.

__________4. Certificates of deposit are usually classified as cash on the balance

sheet.

__________5. Companies include postdated checks and petty cash funds as cash.

__________6. Cash equivalents are investments with original maturities of six months or less.

__________7. Bank overdrafts are always offset against the cash account in the balance sheet.

__________8. Postdated checks received cannot be considered as cash yet because these checks are
unacceptable by the bank for deposit and immediate credit or outright encashment.

__________9. Equity securities may qualify as cash equivalents.

__________10. If the deposit is not legally restricted because of an informal compensating balance
agreement, the compensating balance is part of cash if the related loan is short-term.

B. MULTIPLE CHOICE -THEORY

1. As contemplated in accounting, cash includes

a. Money only

b. Money and any negotiable instrument

c. Any negotiable instrument

d. Money and any negotiable instrument that is payable in money and acceptable by the bank for
deposit and immediate credit

2. To be reported as “cash and cash equivalent”, the cash and cash equivalent must be

a. Unrestricted in use for current operations

b. Available for the purchase of property, plant and equipment

c. Set aside for the liquidation of long-term debt

d. Deposited in the bank

3. Cash equivalents are

a. Short-term and highly liquid investments that are readily convertible into cash

b. Short-term and highly liquid investments that are readily convertible into cash with remaining
maturity of three months

c. Short-term and highly liquid investments that are readily convertible into cash and acquired three
months before maturity

d. Short-term and highly liquid marketable equity securities

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

c. Equity investments

d. A bank overdraft

5. Which is false concerning measurement of cash and cash equivalents?

a. Cash is measured at face value

b. Cash in foreign currency is measured at the current exchange rate

c. If a bank or financial institution holding the funds of the company is in bankruptcy or financial
difficulty, cash should be written down to estimated realizable value

d. Cash equivalents should be measured at maturity value, meaning face value plus interest.

6. If material, 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 a non-current asset with appropriate disclosure

c. Be written off as an extraordinary loss

d. As part of cash and cash equivalents

7. Bank overdraft

a. Is a debit balance in a cash in bank account

b. Is offset against demand deposit account in another bank

c. Which cannot be offset is classified as a current liability

d. Which cannot be offset is classified as non-current liability

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 a current asset

c. Which is legally restricted and related to a short-term loan is classified separately as a current asset

d. Which is not legally restricted as to withdrawal is classified separately as current asset

9. Unreleased checks (checks drawn before the end of reporting period but held for later delivery to
creditors)

a. Shall be treated as outstanding checks

b. Shall be restored to the cash balance

c. Shall be treated as outstanding checks if the date is shortly after the end of reporting period.

d. Shall be treated as outstanding checks if they are ultimately encashed.

10. Which of the following shall not be 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 IOUs

11. Which of the following is usually considered cash?

a. Certificates of deposit

b. Checking accounts

c. Money market saving certificate

d. Postdated check
12. Petty cash fund is

a. Separately classified as current asset

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

c. Set aside for the payment of payroll

d. Restricted cash

13. The petty cash account under the imprest fund system is debited

a. Only when the fund is created

b. When the fund is created and every time 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 size of the fund is decreased

14. The internal control feature that is specific to petty cash is

a. Separation of duties

b. Assignment of responsibility

c. Proper authorization

d. Imprest system

15. 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

MULTIPLE CHOICE – COMPUTATIONAL

16. Consider the following: Cash in Bank – checking account of $13,500, Cash on hand of $500, Post-
dated checks received totaling $3,500, and Certificates of deposit totaling $124,000. How much should
be reported as cash in the balance sheet?

a. $ 13,500.

b. $ 14,000.
c. $ 17,500.

d. $131,500

17. On January 1, 2010, Lynn Company borrows $2,000,000 from National Bank at 11% annual interest.
In addition, Lynn is required to keep a compensatory balance of $200,000 on deposit at National Bank
which will earn interest at 5%. The effective interest that Lynn pays on its $2,000,000 loan is

a. 10.0%.

b. 11.0%.

c. 11.5%.

d. 11.6%

18. Kennison Company has cash in bank of $10,000, restricted cash in a separate account of $3,000, and
a bank overdraft in an account at another bank of $1,000. Kennison should report cash of

a. $9,000.

b. $10,000.

c. $12,000.

d. $13,000.

19. Kaniper Company has the following items at year-end:

Cash in bank:$20,000

Petty cash:300

Short-term paper with maturity of 2 months:5,500

Postdated checks:1,400

Kaniper should report cash and cash equivalents of

a. $20,000.

b. $20,300.
c. $25,800.

d. $27,200.

20. Lawrence Company has cash in bank of $15,000, restricted cash in a separate account of $4,000, and
a bank overdraft in an account at another bank of $2,000. Lawrence should report cash of a. $13,000. b.
$15,000. c. $18,000. d. $19,000.

C. AUDIT of CASH & CASH EQUIVALENTS

PROBLEM NO. 1

In connection with your audit of Caloocan Corporation for the year ended December 31, 2006, you
gathered the following:

Current account at Metrobank

P2,000,000

Current account at BPI

(100,000)

Payroll account

500,000

Foreign bank account – restricted (in equivalent pesos)

1,000,000

Postage stamps
1,000

Employee’s post dated check

4,000

IOU from controller’s sister

10,000

Credit memo from a vendor for a purchase return Traveler’s check

20,000 50,000

Not-sufficient-funds check

15,000

Money order

30,000

Petty cash fund (P4,000 in currency and expense receipts for P6,000)
10,000

Treasury bills, due 3/31/07 (purchased 12/31/06)

200,000

Treasury bills, due 1/31/07 (purchased 1/1/06)

300,000

Question:

Based on the above information and the result of your audit, compute for the cash and cash equivalent
that would be reported on the December 31, 2006 balance sheet.

a. P2,784,000

c. P2,790,000

b. P3,084,000

d. P2,704,000

PROBLEM NO. 2

In the course of your audit of the Las Piñas Corporation, its controller is attempting to determine the
amount of cash to be reported on its December 31, 2006 balance sheet. The following information is
provided:

1. Commercial savings account of P1,200,000 and a commercial checking account balance of P1,800,000
are held at PS Bank.
2. Travel advances of P360,000 for executive travel for the first quarter of the next year (employee to
reimburse through salary deduction).

3. A separate cash fund in the amount of P3,000,000 is restricted for the retirement of a long term debt.

4. Petty cash fund of P10,000.

5. An I.O.U. from a company officer in the amount of P40,000.

6. A bank overdraft of P250,000 has occurred at one of the banks the company uses to deposit its cash
receipts. At the present time, the company has no deposits at this bank.

7. The company has two certificates of deposit, each totaling P1,000,000. These certificates of deposit
have maturity of 120 days.

8. Las Piñas has received a check dated January 2, 2007 in the amount of P150,000.

9. Las Piñas has agreed to maintain a cash balance of P200,000 at all times at PS Bank to ensure future
credit availability.

10. Currency and coin on hand amounted to P15,000.

Question:

Based on the above and the result of your audit, how much will be reported as cash and cash equivalent
at December 31, 2006?

a. P3,025,000

c. P2,575,000

b. P2,825,000

d. P5,025,000

PROBLEM NO. 3

The cash account of the Makati Corporation as of December 31, 2006 consists of the following:

On deposit in current account with Real Bank

P 900,000

Cash collection not yet deposited to the bank

350,000

A customer’s check returned by the bank for insufficient fund A check drawn by the Vice-President of
the Corporation dated January 15, 2007 A check drawn by a supplier dated December 28, 2006 for
goods returned by the Corporation A check dated May 31,2006 drawn by the Corporation against the
Piggy Bank in payment of customs duties.

150,000

70,000 60,000

Since the importation did not materialize, the check was returned by the customs broker. This check was
an outstanding check in the reconciliation of the Piggy Bank account Petty Cash fund of which P5,000 is
in currency; P3,600 in form of employees’ I.O.U. s; and P1,400 is supported by approved petty cash
vouchers for expenses all dated prior to closing of the books on December 31, 2006

410,000

10,000

Total Less: Overdraft with Piggy Bank secured by a Chattel mortgage on the inventories

1,950,000 300,000
Balance per ledger

P1,650,000

Question:

At what amount will the account “Cash” appear on the December 31, 2006 balance sheet?

a. P1,315,000

b. P1,425,000

c. P1,495,000 d. P1,725,000

ANSWERS:

A. TRUE OR FALSE

1. TRUE

6.FALSE

2.TRUE

7.FALSE

3.FALSE
8. TRUE

4.FALSE

9.FALSE

5.FALSE

10. TRUE

B. MULTIPLE CHOICE. THEORIES

1. D

2. A

3. C

4. C

5. D

6. B 7. C

8. C

9. B

10. D

11. B

12. B

13. C

14. D

15. D