Cash and Cash Equivalents (continuation)

A. LESSON PREVIEW/REVIEW
Write True or False:
TRUE 1. Savings accounts are usually classified as cash on the balance sheet.
FALSE 2. Certificates of deposit are usually classified as cash on the balance sheet.
FALSE 3. Companies include post-dated checks and petty cash funds as cash.
FALSE 4. Cash equivalents are investments with original maturities of six months or less.
FALSE 5. Bank overdrafts are always offset against the cash account in the balance sheet.

Skill-building Activities

Part I. True or False. Write TRUE if the statement is correct; Otherwise, write FALSE.

TRUE 1. Short-term, highly liquid investments may be included with cash on the balance sheet.

TRUE 2. All claims held against customers and others for money, goods, or services are reported as
current assets.

TRUE 3. Checks drawn which are post-dated should be reverted back to cash even if the checks are
already delivered to payees.

FALSE 4. A compensation balance that is legally restricted as to withdrawal can be included as part of
cash and cash equivalents.

FALSE 5. A bank overdraft should always be offset from another bank account with a positive balance.

Part II. Multiple Choice.

1. 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

2. Which of the following is considered cash?

a. Certificates of deposit (CDs)
b. Money market checking accounts
c. Money market savings certificates
d. Post-dated checks

3. Travel advances should be reported as

a. supplies
b. cash because they represent the equivalent of money.
c. investments
d. none of these
4. Which of the following items should not be included in the Cash caption on the balance sheet?
a. Coins and currency in the cash register
b. Checks from other parties presently in the cash register
c. Amounts on deposit in checking account at the bank
d. Postage stamps on hand

5. All of the following may be included under the heading of "cash" except
a. currency
b. money market funds
c. checking account balance
d. savings account balance

6. In which accounts are post-dated checks received classified?

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

7. In which account are postage stamps classified?

a. Cash.
b. Office supplies.
c. Receivables.
d. Inventory.

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

9. Under which section of the balance sheet is "cash restricted for plant expansion" reported?
a. Current assets
b. Non-current assets
c. Current liabilities
d. Stockholders' equity

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

11. Bank overdrafts, if material, 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

12. 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

13. What is the proper accounting treatment for a stale check?

a. Revert back to cash and accounts payable.
b. Revert back to cash and a credit to gain.
c. Ignored
d. Either a or b

14. Which one of the following statements is incorrect?

a. The accounting function should be separated from the custodianship of a company’s assets.
b. Certain clerical personnel in a company should be rotated among various jobs.
c. The responsibility for receiving merchandise and paying for it should usually be given to one
person.
d. A company’s personnel should be given well-defined responsibilities.

15. Karen Company provided the following information on December 31, 2016:
Cash on hand P500,000 -100,000
Petty cash fund 20,000
Security bank current account 3,000,000 -300,000
BDO current account No. 1 400,000
BDO current account No. 2 (50,000)
BSP treasury bill - 60 days 4,000,000
BPI time deposit - 30 days 1,000,000 X
The cash on hand included a customer post-dated check of P100,000 and postal money order of
P40,000. A check for P300,000 was drawn against the Security Bank account, dated January 15,
2017, delivered to the payee and recorded December 31, 2016. The BPI time deposit is set aside
for acquisition of equipment. What total amount of cash and cash equivalents should be reported on
December 31, 2016?
a. P7,470,000
b. P7,770,000
c. P8,070,000
d. P9,070,000

Check for Understanding

MULTIPLE CHOICE
1. 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.

2. 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%.

3. 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.

4. 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.

5. 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
6.Steinert Company has the following items at year-end:
Cash in bank 30,000
Petty cash 500
Short-term paper with maturity of 2 months 8,200
Postdated checks 2,100
Steinert should report cash and cash equivalents of
a. 30,000.
b. 30,500.
c. 38,700.
d. 40,800

7. As of December 31, 20x1, the petty cash fund of TUMULT COMMOTION Co. with a general
ledger balance of P15,000 comprises the following:
Coins and currencies P 2,550
Petty cash vouchers:
Gasoline for delivery equipment P3,000
Medical supplies for employees 2,040 5,040
IOU’s:
Advances to employees 2,220
A sheet of paper with names of several employees
together with contribution to bereaved employee,
attached is a currency of 2,400
Checks:
Check drawn to the order of the petty cash custodian 3,000
Personal check drawn by the petty cash custodian 2,400

The entry to record the replenishment of the petty cash fund includes
a. A debit to cash short/overage account of P2,190 and a credit to cash on hand of P9,450.
b. A credit to cash short/overage account of P810 and a credit to cash of P12,450.
c. A debit to cash short/overage account of P810 and a credit to petty cash fund of
P12,450.
d.A debit to cash short/overage account of P2,190 and a credit to cash in bank of P9,450.

8. On April 1, Jennifer Company established an imprest system petty cash fund for P 10,000
by writing a check drawn against the general checking account. On April 30, the fund contained
the following:

Currency and coins 3,000.00

Receipts for office supplies 4,000.00
Receipts for postage still unused 2,000.00
Receipts for transportation 600.00

On April 30, the entity wrote a check to replenish the fund. What is the amount of replenishment
under the imprest fund system?
a. P 10,000
b. P 6,600
c. P 7,000
d. P 3,000

9. ABC Company provided the following account balances on December 31, 2016:
Cash in bank P2,250,000
Cash on hand 125,000
Cash restricted for addition to plant expected to
be disbursed in 2017 1,600,000
Cash in money market account 750,000
Treasury bill purchased November 1, 2016 maturing
January 31, 2017 3,500,000
Treasury bill purchased December 1, 2016 maturing
March 31, 2017 2,000,000

Cash in bank included P600,000 of compensating balance against short-term borrowing

arrangement. The compensating balance is legally restricted as to withdrawal. What total
amount should be reported as cash and cash equivalents on December 31, 2016?
a. P6,025,000
b. P6,625,000
c. P8,225,000
d. P8,625,000

10. The following information is shown in the accounting records of Manolito Company for the
year 2019:
Balances as of January 1:
Cash P620,000
Accounts receivable 670,000
Merchandise inventory 860,000
Accounts payable 530,000

Balances as of December 31:

Accounts receivable 910,000
Merchandise inventory 780,000
Accounts payable 480,000

Total sales and cost of goods sold for 2019 were P7,980,000 and P5,830,000, respectively. All sales and
all merchandise purchases were made on credit. Various operating expenses of P1,070,000 were paid in
cash. Assume that there were no other pertinent transactions.
The cash balances on December 31, 2019 would be:
a. P1,080,000
b. P1,490,000
c. P2,560,000
d. P3,050,000