MODULE 2

CASH AND CASH EQUIVALENTS

 Cash

What is Cash?
Simply means MONEY
Money – Is the standard medium of exchange in business
transactions. It refers to the currency and coins which
are in circulation and legal tender.

In Accounting:
Cash includes “money and any other negotiable instrument
that is payable in money and acceptable by the bank for
deposit and immediate credit”.
 Items included in “cash”

To be reported as cash, an item must be unrestricted in

use.
A. CASH ON HAND

Includes undeposited cash collections and other cash

items awaiting deposit

B. CASH IN BANK
 Includes demand deposit or checking account and
saving deposit which are unrestricted as to withdrawal

C. CASH FUND
 Fund set aside for current purposes such as petty cash
fund, payroll fund and dividend fund.
 Classification of Some Cash Items
a. Cash In Foreign Currency
 If not subject to any foreign exchange restrictions, include in
“cash”
 If subject to restrictions, separate classification as noncurrent
assets
b. Cash Fund for a certain purpose
 If set aside for use in current operations or for payment of
current obligation, it is included as part of cash and cash
equivalents
 If set aside for noncurrent purpose or payment of noncurrent
obligations, it is shown as long-term investment
c. Bank Overdraft
 Generally, classified as a liability
 If with other account in the same bank, can be offsett
 Classification of Some Cash Items
d. Compensating Balance
 If not legally restricted as to withdrawal, this is part of cash
 If legally restricted, this will be classified separately as “cash
held for compensating balance” (under current asset if loan is
short-term and noncurrent investment if loan is long-term)
e. Undelivered or unreleased check
 Reversing entry to bring back the cash balance
f. Post dated check delivered
 Reversing entry to bring back the cash balance

g. Stale check or check long outstanding

 Cash is restored and liability is again set up (if immaterial, may
be credited to miscellaneous income)
 Exercise #1

Affable Company provided the following information at year-end comprising the cash
account:

Cash in bank - demand deposit account 5,000,000

Cash on hand 400,000
Postage stamps unused 5,000
Certificate of time deposit with maturity of 3 months 1,500,000
Money order 50,000
Manager check 100,000
Traveler check 1,000,000
Postdated customer check 500,000
What amount should be reported as “cash” at year-end:
a. 5,550,000 b. 7,050,000
c. 6,550,000 d. 6,450,000
 Exercise #2

On December 31, 2020, Rabid Company reported a cash balance of P5,250,000 which
included the following:

Petty Cash fund 50,000

Undeposited receipts, including a postdated customer
check of P200,000 1,300,000
Cash in Bank 2,500,000
Cash in Sinking fund 1,000,000
Vouchers paid out of collections, not yet recorded 250,000
IOUs signed by employees 150,000
Total 5,250,000

What total amount should be reported as “cash” in the December 31, 2020 statement of
financial position:
a. 3,650,000 b. 3,850,000
c. 4,650,000 d. 4,050,000
 Cash Equivalents
PAS 7, paragraph 6
Cash Equivalents
“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”.
 Only highly liquid investments that are acquired three months
before maturity can qualify as cash equivalents
Examples:
a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before date of
maturity
c. Three-month time deposit
d. Three-month money market instrument or commercial paper
 Measurement of Cash

Cash is measured at face value. Cash in foreign currency is

measured at the current exchange rate.

If a bank or financial institution holding the funds of an entity is

in bankruptcy or financial difficulty, cash should be written
down to estimated realizable value if the amount recoverable
is estimated to be lower than the face value.
 Financial Statement Presentation

The caption “Cash and Cash Equivalents” should be

shown as the first item among the current assets.

However, the details comprising the “cash and cash

equivalents” should be disclosed in the notes to financial
statements.
Financial Statement Presentation
 Investment of Excess Cash

a. If the term is three months or less

 “cash and cash equivalents”
b. If the term is more than 3 months but within one year
 Short-term financial assets or temporary
investments and presented separately as
current assets.
c. If the term is more than one year
 Investment classified as noncurrent or long-
term investment
 Reclassify as current or temporary investment
if they become due within one year from end of
reporting period.
 Exercise #3

On December 31, 2020, Taboo Company reported cash and cash equivalents of P3,500,000. An
analysis showed the following details:
Undeposited collections 150,000
Cash in Bank-PCIB checking account 500,000
Cash in Bank-PNB (overdraft) ( 50,000)
Undeposited NSF check received from customer, dated Dec. 1, 2020 15,000
Undeposited check from a customer, dated Jan. 15, 2021 25,000
Cash in Bank – PCIB (fund for payroll) 150,000
Cash in Bank – PCIB (saving deposit) 100,000
Cash in Bank – PCIB (money market, 90 days) 2,000,000
Cash in foreign bank restricted due to exchange control 100,000
IOUs from officers 60,000
Sinking fund cash 450,000
Total 3,500,000

Required: Compute the total amount of cash and cash equivalents that should be reported in the
statement of financial position.
 Exercise #4

Abyss Company provided the following information on December 31, 2015:

Cash on hand 200,000

Cash in bank 2,000,000
Petty Cash Fund 10,000
Commercial paper with maturity of 2 months 500,000
Treasury bill with maturity of 6 months 1,000,000
Postdated customer checks 100,000

What amount should be reported as “cash and cash equivalents’?

a. 2,710,000 b. 3,710,000
c. 2,210,000 d. 2,700,000
 Exercise #5
Paula Company provided the following data on December 31, 2015:

Checkbook balance 5,000,000

Bank Statement balance 4,000,000
Check drawn on Paula's account, payable to supplier,
dated and recorded on December 31, 2014 but not
mailed until January 31, 2015 1,000,000
Cash in sinking fund 1,500,000
Treasury bills, purchased Nov. 1, 2014 and maturing
January 31, 2015 2,500,000
Time deposit, purchased October 1, 2014 and
maturing January 31, 2015 2,000,000

What amount should be reported as “cash and cash equivalents” on December 31,
2015?
a. 8,000,000 b. 8,500,000
c. 7,500,000 d. 6,000,000
 Exercise #6

On December 31, 2020, Kibitzer Company had the following balances in the bank
accounts it maintains at First Bank:

Checking account #101 1,750,000

Checking account #201 ( 100,000)
Time deposit account – 30 days 250,000
90-day treasury bill, due February 28, 2021 500,000
180-day treasury bill, due March 15, 2021 800,000

On December 31, 2020, what total amount should be reported as cash and cash
equivalents?
a. 1,900,000 b. 2,900,000
c. 2,400,000 d. 3,200,000
 Exercise #7
Requirement: (1) Prepare adjusting entries on December 31, 2020.
(2) Compute the total amount of cash and cash equivalents that should be
reported on December 31, 2020

On December 31, 2020, Earnest Company provided the following data:

Cash in Bank 1,500,000

Time Deposit – 30 days 500,000
Money market placement due on June 30, 2021 1,000,000
Saving deposit in closed bank 50,000
Sinking fund for bond payable due June 30, 2021 400,000
Petty Cash Fund 10,000

• The cash in bank included customer check of P80,000 outstanding for 18 months.

• Check of P100,000 in payment of accounts payable dated and recorded on December 31,
2020 but mailed to creditors on January 15, 2021
 Exercise #8
Problem 7-5: (1) Prepare adjusting entries on December 31, 2020.
(2) Compute the total amount of cash and cash equivalents that should be
reported on December 31, 2020

On December 31, 2020, Earnest Company provided the following data:

Cash in Bank 1,500,000
Time Deposit – 30 days 500,000
Money market placement due on June 30, 2021 1,000,000
Saving deposit in closed bank 50,000
Sinking fund for bond payable due June 30, 2021 400,000
Petty Cash Fund 10,000

• Check of P50,000 dated January 31, 2021 in payment of accounts payable was recorded
and mailed December 31, 2020

• The reporting period is the calendar year. The cash receipts journal was held open until
January 15, 2021 during which time P230,000 was collected and recorded on December
31, 2020
.
 Misappropriations of Cash
 Window Dressing
 Any deliberate misstatement of the assets, liabilities, equity,
income and expenses.
 A practice of opening the books of accounts beyond the close of
the reporting period for the purpose of showing a better financial
position and performance.
 Lapping
 A practice used for concealing a cash shortage
 Consists of misappropriating a collection from one customer and
concealing this defalcation by applying a subsequent collection
made from another customer.
 Kiting
 Occurs when a check is drawn against a first bank and
depositing the same check in a second bank to cover the
shortage in the latter bank.
 PCF: Imprest Fund System

1. A check is drawn to establish the fund

Petty Cash Fund xx
Cash in bank xx
2. Payment of expenses out of the fund
Memo entry in the petty cash journal
3. Replenishment of petty cash payments
Expenses xx
Cash in bank xx
4. If there are unreplenished expenses at the end of the accounting period
Expenses xx
Petty Cash Fund xx
(reversed at the beginning of the next accounting period)
 PCF: Imprest Fund System

5. The fund is increased

Petty Cash Fund xx
Cash in bank xx
6. The fund is decreased
Cash in Bank xx
Petty Cash Fund xx
 PCF: Fluctuating Fund System

1. A check is drawn to establish the fund

Petty Cash Fund xx
Cash in bank xx
2. Payment of expenses out of the fund
Expenses xx
Petty Cash Fund xx
3. Replenishment / Increase of the fund
Petty Cash Fund xx
Cash in bank xx
4. Decrease of the fund
Cash in Bank xx
Petty Cash Fund xx
 PCF: Imprest & Fluctuating
Imprest Fund System Fluctuating Fund System
1. Check is drawn to establish Petty Cash Fund xxx Petty Cash Fund xxx
the fund Cash in Bank xxx Cash in Bank xxx

2. Payment of expenses out Memo entry in the petty cash journal Expenses xxx
of the fund Petty Cash Fund xxx
3. Replenishment of petty Expenses xxx Petty Cash Fund xxx
cash payments Cash in Bank xxx Cash in Bank xxx
4. Unreplenished expenses at Expenses xxx
end of period Petty Cash Fund xxx NA
(reversed at the beginning of next acctg period)
5. The fund is increased Petty Cash Fund xxx Petty Cash Fund xxx
Cash in Bank xxx Cash in Bank xxx
6. The fund is decrease Cash in Bank xxx Cash in Bank xxx
Petty Cash Fund xxx Petty Cash Fund xxx
 Petty Cash Fund

On April 1, 2020, MGM Company established an imprest petty cash fund for
P10,000 by writing a check drawn against the checking account. On April 30, 2020,
the fund contained the following:
Currency and coins 3,000
Receipts for office supplies 4,000
Receipts for postage still unused 2,000
Receipts for transportation 600

On April 30, 2020, the entity wrote a check to replenish the fund. What is the
amount of replenishment under the imprest fund system?
 Exercise-Petty Cash

Admirable Company had a petty cash fund which included the following details:

Coins and currency 2,000

Paid and vouchers
Transportation 600
Gasoline 400
Office supplies 500
Postage stamps 300
Due from employees 1,200 3,000

Employee's check returned by bank marked "NSF" 1,000

Check drawn by the entity to the order of petty cash
custodian 4,000
What amount of petty cash should be reported?
a. 10,000
b. 7,000
c. 6,000
d. 9,000
 Exercise-Petty Cash

Zealous Company established a petty cash fund.

1. Established a petty cash fund of P10,000 on January 2.

2. Petty cash expenses – January 2-31 are:
Postage 1,500
Supplies 5,500
Transportation 1,200
Miscellaneous expense 800
3. The fund is replenished on February 1 and increased by P5,000

Required: Prepare journal entries to record the transaction under the fluctuating fund
system and imprest fund system.