ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 2

FINANCIAL ACCOUNTING & REPORTING C. Uberita  G. Macariola  J. Binaluyo

FAR-4203: CASH AND CASH EQUIVALENTS

Cash
a. an item is considered as cash if it is acceptable by bank or other financial institutions for deposit at face
value.
b. it must be immediately available for use in current operations (e.g. for payment of operating expenses, for
payment of current liability or for acquisition of current asset)
c. comprises cash on hand and demand deposits. (IAS 7, Par. 6)
d. is measured at face value and classified as current asset.

Composition of Cash:
Includes cash on hand as well as current and other accounts maintained with banks such as the following:
a. Undeposited currency and coins
b. Petty cash – cash items kept on hand to pay for minor expenditures
c. Demand deposits – amounts on deposit in checking and savings account, respectively
d. Undeposited negotiable checks – are checks payable to the company or bearer but not yet presented to the
bank for payment
e. Foreign currencies – converted to their peso values are also included in the cash
f. Bank drafts – are commitments by banking institutions to advance funds on demand by the party to whom
the draft was directed
g. Money orders – are similar financial instruments to bank drafts but are drawn generally from authorized post
offices or other financial institutions.
h. Other short-term funds for current operations

Cash Equivalents
Cash equivalents are short-term 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 such as the
following:
a. Three-month commercial paper or money market instrument
b. Three-month time deposit
c. Three-month treasury bills

Valuation Of Cash in the Statement of Financial Position:

a. Is generally valued at face amount
b. Cash in foreign currency is valued in Philippine peso using the current exchange rate as of the balance sheet
date
c. Cash in bank or financial institutions having financial difficulty or in bankruptcy should be shown at it
estimated realizable or recoverable value.

Financial Statement Presentation

Shown as the first item among the current assets, as one line item but the detail of which should be disclosed in
the notes to financial statements.

Compensating balance
A set of amount of cash that a firm must keep to its checking account or savings account at all times as part of
a loan agreement. As part of the loan agreement or contract, a financial institution lending money to an
enterprise sometimes requires that a specified amount of cash be maintained in the borrowing entity’s
account(s), and the minimum or average cash to be maintained in the bank during the period of loan is a
compensating balance.

Compensating balance, in effect provides a higher effective interest rate that is higher than the stated interest
rate on a loan agreement because the bank uses the restricted amount that must remain in deposit over the loan
period.

The following generally accepted procedures to disclose compensating balance would be applicable depending
on whether such amount is legally restricted or unrestricted:
1. Legally restricted compensating balance -
a. If held as compensating balance against short-term borrowing arrangements, it should be stated
separately under current assets but under no circumstances should it be included in the caption “Cash
and Cash Equivalents”.
b. If held against long-term borrowings, it should be separately classified as non-current asset either in
the Investments or Other Assets sections of the balance sheet.

2. Unrestricted – should be included as part of the cash items on deposit

In the absence of any information, compensating balance is always considered not available for an unrestricted
use.
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4203
Week 2: CASH AND CASH EQUIVALENTS

Bank Reconciliation Statement

a statement which brings into agreement the cash balance per ledger and cash balance per bank.

Proof of cash
an expanded reconciliation in that it includes proof of receipts and disbursements. This approach may be useful
in discovering possible discrepancies in handling cash particularly when cash receipts have been recorded but
have not been deposited.

Multiple Choices – Theories:

1. Which of the following shall not be considered “cash” for financial reporting purposes?
a. Coin, currency and available funds
b. Postdated checks and IOUs
c. Petty cash funds and change funds
d. Money orders, certified and bank drafts

2. Bank overdraft
a. Is offset against demand deposit account in another bank
b. Is a debit balance in a cash in bank account
c. Which cannot be offset is classified as current liability
d. Which cannot be offset is classified as noncurrent liability

3. Which of the following items must be added to the cash balance per ledger in preparing a bank reconciliation
which ends with adjusted balance?
a. Note receivable collected by the bank in favor of the depositor and credited to the account of the depositor.
b. NSF customer check
c. Service charge
d. Erroneous bank credit

4. Unreleased checks, which are 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

5. Deposits held as compensating balances

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 answer choices are correct.

6. When a petty cash fund is used, which of the following is true?

a. The balance of the petty cash fund should be reporting 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.

7. If the cash balance shown on entity’s 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 bank but not yet recorded by entity
b. Deposits in transit
c. Outstanding checks
d. Bank charges not yet recorded by entity

8. If the cash balance shown on entity’s 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 bank but not yet recorded by entity
b. Deposits in transit
c. Outstanding checks
d. Bank charges not yet recorded by entity

9. Which of the following statements is not true?

a. Adjustment of the petty cash is made at the end of the period is to avoid understatement of expenses
and overstatement of cash.
b. Entries are made to the petty cash account to increase or decrease the size of the fund or to adjust the
balance if not replenished at the year-end.
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4203
Week 2: CASH AND CASH EQUIVALENTS

c. The imprest petty cash system in effect adheres to the rule of disbursements by the checks.
d. The petty cash account is debited when the fund is replenished.

10. For purposes of bank reconciliation, debit memos are

a. added to the bank balance.
b. deducted from the bank balance.
c. added to the book balance.
d. deducted from the book balance.

11. A cash equivalent is a short-term, highly liquid investment that is convertible into known amount of cash:
a. is acceptable as a means to pay current liabilities.
b. has a current market value that is greater than original cost
c. is so near maturity that it presents insignificant risk of change in interest rate.
d. bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation.

12. Which of the following is not true?

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. All of these answer choices are not true.

13. Petty cash fund:

a. is reported as part of cash balance at established amount.
b. should be replenished at the end of the accounting period.
c. will increase but never decrease.
d. always assumed unrestricted and use in operation.

14. In preparing the proof of cash, a bank made an error for a deposit made during the period, the amount of
deposit is P200,000 but it was credited by bank at P220,000. The error was detected and corrected by the
bank in the same period. How would this affect the proof of cash?
a. Add to both receipts and disbursements of P20,000.
b. Add to receipts of P20,000 and add to ending balance of P20,000.
c. Deduct to both receipts and disbursements of P20,000.
d. Deduct to receipts of P20,000 and deduct to ending balance of P20,000.

15. A collection from a customer during the current month for P2,000,000 was debited in the book at P200,000.
This error was discovered and correct in the same month. How would this affect the proof of cash in the book?
a. P1,8000,000 deducted in disbursements, P1,800,0000 deducted in ending balance.
b. P1,8000,000 deducted in disbursements, P1,800,0000 deducted in receipts.
c. P1,8000,000 added in disbursements, P1,800,0000 added in ending balance.
d. No effect

16. After preparing the proof of cash, the adjusted balances of previous and current months cash balances are
not equal. How would this be interpreted when cash balance per book is higher by P5,000 than cash balance
per bank.
a. Bank balance is correct, no adjustments shall be made.
b. Bank balance is correct, cash shortage is adjusted in book.
c. Book balance is correct, cash overage is adjusted in bank.
d. Book balance is correct, cash overage is adjusted in book.
e. Bank balance is correct, cash overage is adjusted in book.

17. How would the cash collections during the current month used in payment of cash expense on the same day
will be treated in proof of cash?
a. added in bank receipts and bank ending balance.
b. deducted in book receipts and added in book ending balance.
c. added in bank receipts and added in bank disbursements.
d. deducted in book receipts and deducted in book ending balance.

18. An NSF check in current period was returned by bank, it was redeposited in the same period. The book
recorded the return of check as a reduction in cash receipts while the redeposit is recorded as cash receipts.
How would this be treated in proof of cash.
a. no adjustment.
b. deducted in receipts and added in disbursement.
c. added in receipts and added in disbursements.
d. deducted in disbursement and deducted in receipts.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4203
Week 2: CASH AND CASH EQUIVALENTS

Multiple Choices – Problems

The petty cash fund of Noodle’s Auto Repair Service, a sole proprietorship, contains the following:
1. Coins and currency P152.00
2. An I.O.U. from Blossom, an employee, for cash advance 400.00
3. Check payable to Noodle’s Auto Repair from Kernel, an
employee, marked NSF 340.00
4. Vouchers for the following:
Postage Stamps P200.00
Two Rose Bowl tickets for Noodle 1,700.00
Printer cartridge 143.50 2,043.50
Total P2,935.50

The general ledger account Petty cash has a balance of P3,000.

1. The journal entry to replenish the petty cash fund includes a credit to
a. Petty cash fund, P2,935.50
b. Cash in Bank, P2,783.50
c. Cash in bank, P2,848.00
d. Petty cash fund, P2,783.50

2. The journal entry to replenish the petty cash fund includes a debit to
a. Advances to employees, P340
b. Noodle, Capital P1,700
c. Miscellaneous Expense, P152
d. Cash Over, P64.00

On December 31, 2021, the petty cash fund of Mulan Company has an imprest balance of P30,000 and includes
the following items:
Coins P3,000
Currencies 4,900
Petty cash vouchers:
#5501 Transportation 6,540
#5502 Postage 760
#5503 Miscellaneous 5,500
#5504 Meals 4,320
Check drawn by Mulan Company payable to Cash 2,000
Accommodation Check 2,400

3. How much is the balance of petty cash fund as of December 31, 2021?
a. P12,300
b. P10,300
c. P9,900
d. P7,900

4. How much is the amount of shortage or overage in petty cash fund?

a. P580
b. P2,580
c. P19,700
d. P20,100

The cash equivalent account of Aurora Company is composed of the following items:
Time deposit, 3 months maturity due on January 31, 2022 P200,000
Certificate of shares* 420,000
Money market placement, 2 months 250,000
Customer's check dated December 31, 2021 280,000
Treasury bills dated November 30, 2021, due February 28, 2022 450,000
Treasury bills dated December 31, 2021, due June 30, 2022 490,000
Total 2,090,000
*the share certificate is a redeemable preference share purchased on November 1, 2020 with maturity of
January 31, 2021.

5. How much is the amount of cash equivalent?

a. P900,000
b. P1,180,000
c. P,1320,000
d. P1,670,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4203
Week 2: CASH AND CASH EQUIVALENTS

One Company had the following items in its “Cash” account as of December 31, 2021:
Cash on hand P150,000
Cash in bank – unrestricted 800,000
Cash restricted for additions to plant (to be disbursed in 2024) 600,000
Bank Treasury Bills (acquired 11/1/2021; due in 2/28/2022) 250,000
Cash in bank – to be used for payment of 2022 dividends 300,000
Money Market fund – invested on 12/1/2021 and due on 1/31/2022 150,000

6. How much should be reported as cash and cash equivalents?

a. P1,250,000
b. P1,400,000
c. P1,650,000
d. P2,250,000

Two Corp shows a cash balance of P1,267,200 as of December 31, 2021. During the period, the following
transactions were recorded to arrive at cash balance:
a. The accountant recorded a cash sales transaction of P180,000 dated January 2, 2022 on the books of the
company. Company’s book for year 2021 was left opened until January 4, 2022.
b. A check of P111,600 was drawn and recorded by the cashier payable to Meralco for the utilities consumed for
the month of December, but still not delivered to payee as of December 31, 2021.
c. A check dated January 10, 2022 was held by the cashier amounting to P93,600. Based on the Company’s
experience all postdated checks are realized on the date indicated on the check.
d. A customers check for P18,000 was deposited on December 27 but returned by bank on December 31 as
NSF.
e. The cashier maintained a cash account that is for use in the purchase of company’s equipment which expected
to be delivered in two years’ time, P250,000.

7. How much is the correct cash balance that should be reported in its December 31, 2021 statement of
financial position?
a. P1,060,200
b. P1,420,200
c. P837,000
d. P855,000

The December 31, 2021 trial balance of Northern Company included the following accounts:
Cash on hand P1,000,000
Petty cash fund 40,000
Cash in bank- current account:
At Metro bank 2,000,000
At East-west bank - 001 800,000
At East-west bank - 002 (100,000)
Cash in bank at Land bank 4,000,000
BSP treasury bill - 30 days 6,000,000

Additional information:
• The cash on hand included a customer postdated check of P200,000 and a postal money order of P80,000
• The petty cash fund included an unreplenished petty cash vouchers for P4,000 and an employee check for
P6,000 dated January 6, 2022.
• A check for P400,000 was drawn against Metro bank account, dated January 31, 2022, delivered to the
payee and recorded December 31, 2021.
• The Land bank time deposit is set aside for the acquisition of Land to be used as a factory site.

8. What total amount of cash and cash equivalents should be reported in the statement of financial position on
December 31, 2021?
a. P3,930,000
b. P9,530,000
c. P9,930,000
d. P13,930,000

9. If the month-end bank statement shows a balance of P360,000, outstanding checks are P120,000, a deposit
of P40,000 was in transit at month end, and a check for P5,000 was erroneously charged by the bank
against the account, the correct balance in the bank account at month end is?
a. P275,000.
b. P285,000.
c. P205,000.
d. P435,000.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4203
Week 2: CASH AND CASH EQUIVALENTS

In preparing its bank reconciliation for the month of April 2021, Hero, Inc. has available the following information.
Balance per bank statement, 4/30/21 P39,140
NSF check returned with 4/30/21 bank statement 450
Deposits in transit, 4/30/21 5,000
Outstanding checks, 4/30/21 5,200
Bank service charges for April 20

10. What should be the correct balance of cash at April 30, 2021?
a. P39,370
b. P38,940
c. P38,490
d. P38,470

The cash account and bank statement for Pineapple Company for the month of October were as follows:
CASH ACCOUNT *
Bal. Sept. 30 11,000 Checks 26,500
Deposits 30,000

Other data for September:

Sept 30 cash on hand, P500
Sept 30 outstanding checks, P900
Sept 30 Deposit in transit, P1,400
October 31 cash on hand, P500

BANK STATEMENT SUMMARIZED **

Balance, Sept 30 P10,000
Deposits 21,400
Checks (20,900)
Note collected for Pineapple (including 10% interest) 1,100
Customers check - previously deposited and returned by bank as NSF (50)
Bank charges for services (30)
Balance, October 31 P11,520

11. How much is the deposit in transit and undeposited receipts as of October 31, 2021?
a. P10,500
b. P10,000
c. P6,700
d. P,6500

12. How much is the outstanding checks as of October 31, 2021?

a. P6,500
b. P6,000
c. P4,700
d. P4,500

13. What is the correct cash balance as of October 31, 2021?

a. P15,020
b. P15,520
c. P11,020
d. P11,520

The following information pertains to R Company:

Balance per bank P50,000 Balance per books P51,240
Deposit in transit 10,000 Interest earned ?
Checks outstanding 8,600 Service charge 20
NSF check 100
Adjusted balance 51,400 Adjusted balance ?

14. How much interest was earned?

a. P300
b. P340
c. P280
d. P190

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4203
Week 2: CASH AND CASH EQUIVALENTS

Use the following information for numbers 15 – 18:

The following balances reflected the cash balance and reconciling of Malolos Company:
October November
Cash balance per records P230,000 P410,000
Cash balance per bank statement 320,000 375,000
Deposit in transit 55,000 105,000
Outstanding checks 20,000 149,500
Bank service charges 3,000 4,500
NSF checks 12,000 8,000
Book debit error - corrected in the following month 27,000 32,000
Book credit error - corrected in the following month 10,000 5,000
Bank credit error - corrected in the following month 157,000 27,000
Bank debit error - uncorrected - 67,000
Total book debits 560,000
Total bank credits 495,000

15. How much is the adjusted cash balance as of October 31?

a. P232,000
b. b. P212,000
c. c. P208,000
d. d. P198,000

16. How much is the adjusted receipts as of November 30?

a. P508,000
b. b. P518,000
c. c. P528,000
d. d. P538,000

17. How much is the adjusted disbursements as of November 30?

a. P335,500
b. b. P345,500
c. c. P355,500
d. d. P360,500

18. How much is the adjusted cash balance as of November 30?

a. P370,500
b. b. P394,500
c. c. P424,500
d. d. P442,500

Black Swan Company’s cash in bank for the year ended December 31, 2021 had the following information:
Nov. 30 Dec. 31
Cash per books P141,00 P302,000
Cash per bank statements 535,000 735,000
Undeposited collections 41,000 64,000
Outstanding checks 138,000 150,000
Bank service charges 1,000 2,000
Insufficient fund check 32,000 41,000
Company's notes receivable collected by bank 350,000 400,000

The bank statement and the company’s cash records show the following totals:
Checks and debit memos per bank statement P1,100,000
Cash receipts per cash record 1,183,000
Cash disbursements per cash records ?
Deposits and credit memos per bank statement ?

Additional information:
a. A P50,000 bank credit error in November was corrected by the bank in December, while a P10,000 withdrawal
of Black Belt Corp. was erroneously debited by the bank to the company’s account on December 23, this was
corrected on December 30.
b. A P25,000 disbursement check was recorded in November at P15,000. The error was discovered and corrected
in December.
c. A P10,000 customer collection was recorded as disbursement in December at P100,000, the error was
detected and corrected in December.
d. The company accountant recorded a receipt in November for P40,000, the correct amount should be P20,000.
The error was detected and corrected in December.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4203
Week 2: CASH AND CASH EQUIVALENTS

19. What is the adjusted November cash balance?

a. P388,000
b. P408,000
c. P428,000
d. P458,000

20. What is the unadjusted book disbursement in December?

a. P982,000
b. P1,232,000
c. P1,132,000
d. P1,022,000

21. What is the adjusted receipts as of December?

a. P1,385,000
b. P1,292,000
c. P1,323,000
d. P1,312,000

22. What is the adjusted disbursements as of December?

a. P893,000
b. P1,033,000
c. P1,052,000
d. P1,042,000

23. What is the correct cash balance as of December?

a. P659,000
b. P690,000
c. P692,000
d. P704,000

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