CASH AND CASH

EQUIVALENTS
Exercise #1
Burr Company had the following account
balances at December 31, 2014:

Cash in banks 2,250,000

Cash on hand 125,000
Cash legally restricted for additions to plant
(expected to be disbursed in 2015)
1,600,000

Compute for total cash.

12:37:55
TIME’S UP!
Answer
● 2,375,000
CASH
● Money and any other negotiable instrument
that is payable in money and acceptable by the
bank for deposit and immediate credit.

● Anentity shall classify an asset as current

when the asset is cash or cash equivalent
unless it is restricted from being exchanged or
used to settle a liability for at least twelve
months after the end of reporting period.
Included in “Cash”
● Cash on hand
● Cash in bank
● Cash fund

Example:
Cash in banks 2,250,000
Cash on hand 125,000
Cash legally restricted for additions to plant
(expected to be disbursed in 2015)
1,600,000
● Cash on hand – includes undeposited
cash collections and other cash items
awaiting deposit like customers’ checks,
cashier’s or manager’s checks, traveler’s
checks, bank drafts and money orders.
● Cash in bank – includes demand deposit
or checking account and saving deposit
which are unrestricted as to withdrawal.
● Cash fund – set aside for current purposes
such as petty cash fund, payroll fund, tax
fund and dividend fund.
Exercise #2
The cash account showed a balance of P48,000.
It includes the following:

● Petty Cash Fund P500

● Checking account balance, per bank statement
(2,500 checks outstanding)
P25,500
● Bond sinking fund P10,000
● Undeposited receipts P12,000

What is the correct cash balance?

TIME’S UP!
Answer
● 35,500
Note!
● The classification of a cash fund as current
or noncurrent should parallel the
classification of the related liability.
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.

● Onlyhighly liquid investments that are

acquired three months before maturity
can qualify as cash equivalents
Examples of cash equivalents:
● Three-month BSP Treasury Bill

● Three-yearBSP treasury bill purchased

three months before date of maturity

● Three-month time deposit

● Three-monthmoney market instrument or

commercial paper
Exercise #3
Given the following:

Cash on hand P50,000

BSP treasury bill (60 days)
P3,000,000
BPI time deposit (30 days)
P2,000,000
BPI money market placement (120 days)

P1,000,000
TIME’S UP!
Answer
● 5,000,000
Foreign Currency
● Ifnot subject to restrictions, part of
“cash”.

● If subject to foreign exchange restrictions,

it will be classified separately among
noncurrent assets.
Bank Overdraft
● Occurs when the cash in bank account has
a credit balance.
● A bank overdraft is classified as a current
liability and should not be offset against
any other bank accounts with debit
balances.
◦ Cash in bank 1st bank (10,000)
◦ Cash in bank 2nd bank 50,000

◦ Total cash 50,000

Exception to the rule:
● When an entity maintains two or more
accounts in one bank and one account
results in an overdraft, it can be offset
against the other bank account with a debit
balance.
◦ Cash in bank 1st bank (10,000)
◦ Cash in bank 1st bank 40,000

◦ Total cash, net of overdraft P30,000

Compensating Balance
● Minimum checking or demand deposit
account balance that must be maintained
in connection with a borrowing
arrangement with a bank.
Exercise #4
Burr Company had the following account balances at
December 31, 2014:

Cash in bank 2,250,000

Cash on hand 125,000
Petty Cash Fund 50,000

The cash in bank includes P600,000 of

compensating balance against a long-term loan. It
is legally restricted as to withdrawal by Burr.

Compute for total cash.

11:22:16
TIME’S UP!
Answer
● 1,825,000
Classification of compensating
balance
● If not legally restricted – part of cash

● Iflegally restricted and the related loan is

short-term – classified separately as cash
held as compensating balance under
current assets.

● Iflegally restricted and the related loan is

long-term – noncurrent investment.
Exercise #5
A check that is merely drawn and recorded
but not given to the payee before the end
of the reporting period.

a. Postdated check
b. Undelivered check
c. Stale check
d. NSF check
Exercise #6
A check drawn, recorded and already given
to the payee but it bears a date subsequent
to the end of the reporting period.

a. Postdated check
b. Undelivered check
c. Stale check
d. NSF check
Exercise #7
A check not encashed by the payee within a
relatively long period of time

a. Postdated check
b. Undelivered check
c. Stale check
d. NSF check
Exercise #8
The 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.
a. Window dressing
b. Kiting
c. Lapping
d. Biking
TIME’S UP!
Undelivered, Postdated, Stale Checks
● Entries to take up:
◦ Accounts Payable xxx
Cash xxx

● Year-end adjusting entry:

◦ Cash xxx
Accounts Payable xxx
Lapping
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. No entry is made for both
the drawing and deposit of the check.
#1
Checking account 1st bank (200,000)
Checking account 2nd bank 2,500,000
Treasury bonds 1,000,000
Payroll account 350,000
Value added tax account 400,000
Foreign bank acct (restricted) 1,000,000
Postage stamps 50,000
IOU from president’s brother 750,000
Traveler’s check 300,000
NSF check 150,000
Petty Cash Fund (20,000 in currency) 50,000
Money order 180,000

Compute for total unrestricted cash.

#2
Cash on hand 500,000
Demand deposit 1,000,000
Petty cash fund 50,000
BDO current account 400,000
BPI time deposit (120 days) 200,000
PNB current account No.1 (50,000)
PNB current account No.2 100,000
Money order 150,000

Checks drawn against the BDO account are checks written and
dated 12/31/14 and delivered to the payee 01/02/15, P50,000

Compute for total amount of cash and cash equivalents.

 #3
At year-end, Lyra company reported cash and
cash equivalents which comprised the following:
Cash on Hand 500,000
Demand Deposit 4,000,000
Certificate of Deposit 2,000,000
Postdated Customer Check 300,000
Petty Cash Fund 50,000
Traveler's Check 200,000
Manager’s Check 100,000
Money Order 150,000

What total amount should be reported as cash at year-end?

#4
A P100 petty cash fund has cash of P16 and
receipts of P86.

Prepare the journal entry to replenish the

fund.
#5
If the petty cash fund is not replenished and
an adjusting entry was not made accordingly,
what is the effect on income, expense, and
the cash accounts?
 17
Therefore, if anyone is in Christ, the
new creation has come: The old has gone,
the new is here!
2 Corinthians 5:17