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REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

CASH AND CASH EQUIVALENTS

1. The following data pertain to Angat Corporation on December 31, 2005:

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 20,000
Traveler’s check 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 3/31/06 (purchased 12/31/05) 200,000

Treasury bills, due 1/31/06 (purchased 1/1/05) 300,000

Based on the above information, compute for the cash and cash equivalent that would be reported on
the December 31, 2005 balance sheet.
a. P2,784,000 c. P2,790,000
b. P3,084,000 d. P2,704,000

2. The following data pertain to Balagtas Corporation on December 31, 2005:

Checkbook balance P10,000,000

Bank statement balance 15,000,000
Check drawn on Balagtas’ account, payable to supplier, dated and recorded on
Dec. 31, 2005, but not mailed until Jan. 15, 2006 3,000,000
Cash in sinking fund 4,000,000
Money market, three months due January 31, 2006 5,000,000

On December 31, 2005, how much should be reported as “cash and cash equivalents”?
a. P13,000,000 c. P18,000,000
b. P12,000,000 d. P17,000,000

3. On December 31, 2005, Baliuag Company had the following cash balances:

Cash in bank P15,000,000

Petty cash fund (all funds were reimbursed on December 31, 2005) 50,000
Time deposit 5,000,000
Saving deposit 2,000,000

Cash in bank includes P500,000 of compensating balance against short term borrowing arrangement at
December 31, 2005. The compensating balance is legally restricted as to withdrawal by Baliuag. A
check of P300,000 dated January 15, 2006 in payment of accounts payable was recorded and mailed on
December 31, 2005. In the current assets section of the December 31, 2005 balance sheet, what
amount should be reported as “cash and cash equivalents”?
a. P21,850,000 c. P21,800,000
b. P16,850,000 d. P14,850,000

4. Bocaue Company had the following account balances on December 31, 2005.

Petty cash fund P50,000

Cash in bank – current account 10,000,000
Cash in bank – payroll account 2,000,000
Cash on hand 500,000
Cash in bank – restricted account for plant additions, expected to
be disbursed in 2006 4,000,000
Treasury bills, due February 15, 2006 3,000,000
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The petty cash fund includes unreplenished December 2005 petty cash expense vouchers of P20,000
and employee IOUs of P10,000. The cash on hand includes a P100,000 check payable to Bocaue dated
January 15, 2006. What should be reported as “cash and cash equivalents” on December 31, 2005?
a. P12,420,000 c. P15,420,000
b. P19,420,000 d. P15,450,000

5. Bulacan Corporation's checkbook balance on December 31, 2005, was P800,000. In addition, Bulacan
held the following items in its safe on December 31:

Check payable to Bulacan Corporation, dated January 2, 2006, not included in

December 31 checkbook balance P200,000
Check payable to Bulacan Corporation, deposited December 20, and included in
December 31 checkbook balance, but returned by bank on December 30,
stamped "NSF." The check was redeposited January 2, 2006, and cleared
January 7 40,000
Post-dated checks 15,000
Check drawn on Bulacan Corporation's account, payable to a vendor, dated and
recorded December 31, but not mailed until January 15, 2006 100,000

The proper amount to be shown as cash on Bulacan's balance sheet at December 31, 2005, is
a. P760,000 c. P860,000
b. P800,000 d. P975,000

6. You noted the following composition of Hagonoy Company’s “cash account” as of December 31, 2005:

Demand deposit account P2,000,000

Time deposit – 30 days 1,000,000
NSF check of customer 40,000
Money market placement (due June 30, 2006) 1,500,000
Savings deposit in a closed bank 100,000
IOU from employee 20,000
Pension fund 3,000,000
Petty cash fund 10,000
Customer check dated January 1, 2006 50,000
Customer check outstanding for 18 months 40,000
Total P7,760,000

Additional information follows:

a) Check of P200,000 in payment of accounts payable was recorded on December 31, 2005 but mailed
to suppliers on January 5, 2006.
b) Check of P100,000 dated January 15, 2006 in payment of accounts payable was recorded and
mailed on December 31, 2005.
c) The company uses the calendar year. The cash receipts journal was held open until January 15,
2006, during which time P400,000 was collected and recorded on December 31, 2005.

The cash and cash equivalents to be shown on the December 31, 2005 balance sheet is
a. P3,310,000 c. P1,910,000
b. P2,910,000 d. P4,410,000

7. The following information pertains to Bustos Company as of December 31, 2005:

Cash balance per general ledger P15,000,000

Cash balance per bank statement 14,550,000
Checks outstanding (including certified check of P100,000) 1,000,000
Bank service charge shown in December bank statement 50,000
Error made by Bustos in recording a check that cleared the bank in
December (check was drawn in December for P500,000
but recorded at P700,000) 200,000
Deposit in transit 1,500,000

At the December 31, 2005 balance sheet cash in bank should be

a. P15,150,000 c. P14,250,000
b. P14,650,000 d. P14,550,000

8. The bookkeeper of Calumpit Company recently prepared the following bank reconciliation on December
31, 2005:
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Balance per bank statement 20,000,000

Add: Deposit in transit 1,500,000
Checkbook and other bank charge 50,000
Error made by Calumpit in recording check No.
1005 (issued in December) 150,000
Customer check marked DAIF 500,000 2,200,000
Total 22,200,000
Deduct: Outstanding checks 1,900,000
Note collected by bank (includes P200,000 interest) 2,300,000 4,200,000
Balance per book 18,000,000

Calumpit has P1,000,000 cash on hand on December 31, 2005. The amount to be reported as cash on
the balance sheet as of December 31, 2005 should be
a. P19,600,000 c. P20,600,000
b. P18,600,000 d. P19,750,000

9. The petty cash fund of Guiguinto Company on December 31, 2005 is composed of the following:

Coins and currencies P14,000

Petty cash vouchers:
Gasoline payments 3,000
Supplies 1,000
Cash advances to employees 2,000
Employee’s check returned by bank marked NSF 5,000
Check drawn by the company payable to the order of Kristine
Anson, petty cash custodian, representing her salary 20,000
A sheet of paper with names of employees together with contribution
for a birthday gift of a co-employee in the amount of 8,000
Total P53,000

The petty cash ledger account has an imprest balance of P50,000. What is the correct amount of petty
cash on December 31, 2005?
a. P34,000 b. P39,000 c. P14,000 d. P42,000

10. The Plaridel Corporation was organized on January 3, 2005 with an authorized capital stock of
P5,000,000. At December 31, 2005 of the same year, the general ledger of said Company showed the
following accounts and balances:

Accounts receivable P 200,000

Merchandise inventory 250,000
Land 1,200,000
Building 1,600,000
Furniture and fixtures 400,000
Accounts payable 420,000
Notes payable – bank 500,000
Common stock 1,500,000
Additional paid capital 100,000
Sales 5,800,000
Expenses paid (excluding purchases) 725,000

Your review of the bank statement for December disclosed the following information:

Bank balance, December 31, 2005 P 524,500

Bank service charge 6,000
Deposits in transit 62,500
Total checks not returned by the bank 128,000

Your review also revealed that the cash received of P62,500 on December 31, 2005 was deposited on
January 2, 2006. The company’s mark up on sales is 40%.

How much is the adjusted cash balance as of December 31, 2005?

a. P459,000 c. P39,000
b. P536,000 d. P1,619,000

11. Reconciliation of Malolos Corporation’s bank account at November 30, 2005 follows:

Balance per bank statement P3,150,000

Deposits in transit 450,000
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Checks outstanding (45,000)

Correct cash balance P3,555,000

Balance per books P3,558,000

Bank service charge (3,000)
Correct cash balance P3,555,000

December data are as follows:

Bank Books
Checks recorded P3,450,000 P3,540,000
Deposits recorded 2,430,000 2,700,000
Collection by bank (P600,000 plus interest) 630,000 -
NSF check returned with December bank statement 15,000 -
Balances 2,745,000 2,715,000

The checks outstanding on December 31, 2005 amount to

a. P45,000 b. P135,000 c. P90,000 d. P0

CASH AND CASH EQUIVALENTS - THEORY

1. The following statements relate to cash. Which statement is true?

a. The term “cash equivalent” refers to demand credit instruments such as money order and bank
drafts.
b. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all normal
operating expenses for a period of time.
c. Classification of a restricted cash balance as current or noncurrent should parallel the classification
of the related obligation for which the cash was restricted.
d. Compensating balances required by a bank should always be excluded from “cash and cash
equivalent”.

2. 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 so near their
maturity that they represent insignificant risk of changes in value because of changes in interest
rates.
d. Short term and highly liquid marketable equity securities.

3. Which of the following statements is false?

a. Not all items included in cash constitute legal tender.
b. Cash may be offset against a liability if the deposit of funds in restricted account clearly constitutes
the legal discharge of the liability.
c. Legally restricted bank deposit held as compensating balances should be segregated from the cash
account and reported under a separate caption.
d. One-year BSP treasury bills with remaining maturity of three months on balance sheet date may be
shown as part of “cash and cash equivalents” provided this is disclosed.

4. All cash receipts are deposited intact and all cash disbursements are made by means of check. This
internal control is known as
a. Administrative control c. Accounting control
b. Imprest system d. Auditing control

5. Entries to record the replenishment of petty cash fund result in a debit to various expense accounts and
a credit to cash in bank. This accounting procedure typically exemplifies the
a. Imprest petty cash system c. Internal control
b. Fluctuating petty cash system d. Administrative control

6. 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 employees
d. To effectively control cash disbursements

7. A cash over or short account

a. Is not generally accepted
b. Is debited when the petty cash fund proves out over
c. Is debited when the petty cash fund proves out short
d. Is a contra account to cash
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8. The payments of accounts payable made subsequent to the close of the accounting period are recorded
as if they were made at the end of the current period.
a. Window dressing b. Kiting c. Lapping d. Imprest system

9. Bank reconciliation
a. Is the process of transferring money in or out of a bank account.
b. Requires that every transaction which will result in a cash payment be verified, approved and
recorded before a bank check is prepared.
c. Is an analysis that reflects the bank transactions made by a depositor.
d. Explains the difference between the bank balance and the balance shown in the depositor’s records.

10. If the cash balance shown in a company’s accounting records is less than the correct cash balance and
neither the company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Deposits in transit
c. Outstanding checks
d. Bank charges not yet recorded by the company

11. If the cash balance in a company’s bank statement is less than the correct cash balance and neither the
company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
c. Bank charges not yet recorded by the company
d. Deposits in transit

12. The journal entries for a bank reconciliation

a. Are taken from the balance per bank only
b. May include a debit to office expense for bank service charges
c. May include a credit to accounts receivable for an NSF check
d. May include a debit to accounts payable for an NSF check

13. When preparing a bank reconciliation, bank credits are

a. Added to the bank statement balance
b. Deducted from the bank statement balance
c. Added to the balance per book
d. Deducted from the balance per book

14. Bank overdrafts, if material, should

a. Be reported as a deduction from the current asset section.
b. Be reported as a deduction from cash.
c. Be netted against cash and a net cash amount reported.
d. Be reported as a current liability.

15. Which of the following is not a basic characteristic of a system of cash control?
a. Use of a voucher system
b. Combined responsibility for handling and recording cash
c. Daily deposit of all cash received
d. Internal audits at irregular intervals

16. Bank statements provide information about all of the following except
a. Checks cleared during the period.
b. NSF checks.
c. Bank charges for the period.
d. Errors made by the company.

REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

INVENTORIES

1. Cagayan Company included the following items under inventories:

Materials P 1,400,000
Advance for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventories 60,000
Advertising catalogs and shipping boxes 150,000
Finished goods in factory 2,000,000
Finished goods in company-owned retails store, including 50% profit on cost
750,000
Finished goods in hands on consignees including 40% profit on sales 400,000
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Finished goods in transit to customers, shipped FOB destination, at cost

250,000
Finished goods out on approval, at cost 100,000
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit shipped FOB shipping point, excluding freight of P30,000
330,000
Goods held on consignment, at sales price, cost P150,000 200,000

How much is the correct amount of inventories?

a. P5,610,000 c. P5,375,000
b. P5,500,000 d. P5,450,000

2. The Abulug Manufacturing Company reviewed its year-end inventory and found the following items:
(a) A packing case containing a product costing P100,000 was standing in the shipping room when
the physical inventory was taken. It was not included in the inventory because it was marked “Hold
for shipping instructions.” The customer’s order was dated December 18, but the case was
shipped and the costumer billed on January 10, 2006.
(b) Merchandise costing P600,000 was received on December 28, 2005, and the invoice was
recorded. The invoice was in the hands of the purchasing agent; it was marked “On consignment”.
(c) Merchandise received on January 6, 2006, costing P700,000 was entered in purchase register on
January 7. The invoice showed shipment was made FOB shipping point on December 31, 2005.
Because it was not on hand during the inventory count, it was not included.
(d) A special machine costing P200,000, fabricated to order for a particular customer, was finished in
the shipping room on December 30. The customer was billed for P300,000 on that date and the
machine was excluded from inventory although it was shipped January 4, 2006.
(e) Merchandise costing P200,000 was received on January 6, 2006, and the related purchase invoice
was recorded January 5. The invoice showed the shipment was made on December 29,2005,
FOB destination.
(f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer
took possession of the goods on that date. The merchandise was included in inventory because
Abulug still holds legal title. Historical experience suggests that full payment on installment sale is
received approximately 99% of the time.
(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in
the inventory because the sale was accompanied by a purchase agreement requiring Abulug to
buy back the inventory in February 2006.

How much of these items should be included in the inventory balance at December 31, 2005?
a. P1,300,000 c. P1,650,000
b. P 800,000 d. P1,050,000

3. The Alcala Company counted its ending inventory on December 31. None of the following items were
included when the total amount of the company’s ending inventory was computed:

 P150,000 in goods located in Alcala’s warehouse that are on consignment from another company.
 P200,000 in goods that were sold by Alcala and shipped on December 30 and were in transit on
December 31; the goods were received by the customer on January 2. Terms were FOB
Destination.
 P300,000 in goods were purchased by Alcala and shipped on December 30 and were in transit on
December 31; the goods were received by Alcala on January 2. Terms were FOB shipping point.
 P400,000 in goods were sold by Alcala and shipped on December 30 and were in transit on
December 31; the goods were received by the customer on January 2. Terms were FOB shipping
point.

The company’s reported inventory (before any corrections) was P2,000,000. What is the correct amount
of the company’s inventory on December 31?
a. P2,550,000 c. P2,500,000
b. P1,950,000 d. P2,700,000

4. Aparri Company included the following items in its inventory on December 31, 2005:

Merchandise out on consignment, at sales price,

including 25% markup on cost P4,000,000
Goods purchased in transit, FOB destination 2,000,000
Goods held on consignment by Aparri Company 1,000,000

By what amount should the inventory at December 31, 2005 be reduced?

a. P3,800,000 c. P1,800,000
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b. P2,000,000 d. P1,000,000

5. Allapacan Company had the following consignment transactions during 2005:

Inventory shipped on consignment to Benguet Company, consignee P600,000

Freight paid by Allapacan 50,000
Inventory received on consignment from Ifugao, consignor 800,000
Freight paid by Ifugao 50,000

No sales of consigned goods were made through December 31, 2005. In its December 31, 2005
balance sheet, Allapacan should include consigned inventory of
a. P600,000 c. P 650,000
b. P700,000 d. P1,500,000

6. On June 1, 2005 Amulung Company sold merchandise with a list price of P5,000,000 to ABC. Amulung
allowed trade discounts of 20% and 10%. Credit terms were 5/10, n/30 and the sale was made FOB
shipping point. Amulung prepaid P200,000 of delivery cost for ABC as an accommodation. On June 11,
2005, Amulung received from ABC full remittance of
a. P3,420,000 c. P3,600,000
b. P3,620,000 d. P3,800,000

7. Baggao Company’s accounts payable balance at December 31, 2005 was P8,000,000 before
considering the following data:

 Goods shipped to Baggao FOB shipping point on December 15, 2005 were lost in transit. The
invoice cost of P500,000 was not recorded by Baggao. On January 15, 2006, Baggao filed a
P500,000 claim against the common carrier.

 On December 30, 2005, a vendor authorized Baggao to return for full credit goods shipped and billed
at P200,000 on December 15, 2005. The returned goods were shipped by Baggao on December 31,
2005. A P200,000 credit memo was received and recorded on January 5, 2006.

What should Baggao report as accounts payable on December 31, 2005?

a. P8,300,000 c. P7,800,000
b. P8,500,000 d. P7,500,000

8. Ballesteros Company began operations late in 2004. For the first quarter ended March 31, 2005,
Ballesteros made available the following information:

Total merchandise purchased through March 15, recorded at net P4,900,000 Merchandise
inventory at December 31, 2004, at selling price 1,500,000

All merchandise was acquired on credit and no payments have been made on accounts payable since
the inception of the company. All merchandise is marked to sell at 50% above invoice cost before time
discounts of 2/10, n/30. No sales were made in 2005.

How much cash is required to eliminate the current balance in accounts payable?
a. P6,000,000 c. P6,400,000
b. P5,900,000 d. P5,750,000

9. Calayan Company has determined its December 31, 2005 inventory on a FIFO basis at P9,500,000.
Information pertaining to that inventory follows:

Estimated selling price P14,000,000

Estimated cost to complete and cost of disposal 5,000,000
Normal profit margin 2,000,000
Current replacement cost 8,000,000

Calayan records losses that result from applying the lower of cost or market rule. At December 31,
2005, Calayan should report inventory at
a. P9,500,000 c. P9,000,000
b. P8,000,000 d. P7,000,000

10. Claveria Company installs replacement siding, windows, and louvered glass doors for family homes. At
December 31, 2005, the balance of raw materials inventory account was P502,000, and the allowance
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for inventory writedown was P33,000. The inventory cost and market data at December 31, 2005, are as
follows:

Cost Replacement Sales Price Net Normal

Cost Realizable Profit
value
Aluminum siding
89,000 86,000 91,500 87,000 5,000
Mahogany siding 94,000 92,000 93,000 85,000 7,000
Louvered glass door
125,000 135,000 129,000 111,000 10,000
Glass windows 194,000 114,000 205,000 197,000 20,000
Total 502,000 427,000 518,500 480,000 32,000

The correct balance of the raw materials inventory after any allowance for write down is
a. P427,000 c. P480,000
b. P486,500 d. P477,000
11. Enrile Company had 180,000 units of Product A on hand at January 1, 2005 costing P20 each.
Purchases of product A during the month of January were as follows:

Units Unit cost

January 5 160,000 30
15 200,000 40
31 140,000 50

A physical count on January 31, 2005 shows 200,000 units of product A on hand. The inventory on
January 31, should be

FIFO LIFO
a. P9,400,000 P4,200,000
b. P4,200,000 P9,400,000
c. P9,400,000 P5,800,000
d. P4,200,000 P7,000,000

12. Gonzaga Company uses the weighted average method to determine the cost of its inventory. Gonzaga
recorded the following information pertaining to its inventory:

Units Units cost Total cost

Balance 1/1 160,000 60 9,600,000
Sold on 1/15 140,000
Purchased on 1/31 80,000 90 7,200,000

What amount of inventory should Gonzaga report in its January 31, 2005 balance sheet?
Perpetual Periodic
a. P8,400,000 P7,000,000
b. P7,000,000 P8,400,000
c. P8,400,000 P7,500,000
d. P7,000,000 P7,500,000

13. Lasam Company sells one product, which it purchases from various suppliers. The trial balance at
December 31, 2005, included the following accounts:

Sales (100,000 units at P150) P15,000,000

Sales discount 1,000,000
Purchases 9,300,000
Purchase discount 400,000
Freight in 100,000
Freight out 200,000

The inventory purchases during 2005 were as follows:

Units Unit cost Total cost

Beginning inventory, January 1 20,000 P60 P 1,200,000
Purchases, quarter ended March 31 30,000 65 1,950,000
Purchases, quarter ended June 30 40,000 70 2,800,000
Purchases, quarter ended Sept. 30 50,000 75 3,750,000
Purchases, quarter ended Dec. 31 10,000 80 800,000
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150,000 P10,500,000

Lasam’s accounting policy is to report inventory in its financial statements at the lower of cost or market,
applied to total inventory. Cost is determined under the first-in, first-out method.

Lasam has determined that, at December 31, 2005, the replacement cost of its inventory was P70 per
unit and the net realizable value was P72 per unit. The normal profit margin is P10 per unit.

What should Lasam report as cost of goods sold for the year 2005?
a. P6,400,000 c. P6,700,000
b. P6,600,000 d. P7,100,000

14. The following quarterly cost data have been accumulated for Pamplona Mfg. Inc.

Raw materials – beginning inventory (Jan. 1, 2005) 10,000 units @P6.00

Purchases 8,500 units @P7.00
11,000 units @P7.50

Transferred 21,500 units of raw materials to work in process:

Work in process – beginning inventory (Jan. 1, 2005) 5,600 units @P13.50

Direct labor P250,000
Manufacturing over head P325,000
Work in process – ending inventory (Mar. 31, 2005) 4,200 units @P13.75

If Pamplona uses the FIFO method for valuing raw materials inventories, compute for the cost of goods
manufactured for the quarter ended Mar. 31 2005
a. P699,150 c. P734,850
b. P717,000 d. P746,850

15. Total debits and total credits in selected accounts of Piat Company, after closing entries were posted on
December 31, 2005 are given below.

Debits Credits
Materials P 600,000 P 200,000
Goods in process 500,000 300,000
Material purchases 2,500,000 2,500,000
Purchase discounts 100,000 100,000
Transportation in 200,000 200,000
Direct labor 3,000,000 3,000,000
Manufacturing overhead 1,500,000 1,500,000
Finished goods 700,000 400,000

Cost of goods sold was

a. P7,100,000 c. P6,900,000
b. P7,000,000 d. P7,400,000

16. On August 30, 2005, Sta. Ana Company purchased a tract of land for P12,000,000. Sta. Ana incurred additional
cost of P3,000,000 during the remainder of 2005 in preparing the land for sale. The tract was subdivided into
residential lots as follows:

Lot class Number of lots Sales price per lot

A 100 240,000
B 100 160,000
C 200 100,000

Using the relative sales value method, what amount of cost should be allocated to Class C lots?
a. P6,000,000 c. P7,500,000
b. P5,000,000 d. P4,000,000

17. On November 17, 2005, Solana Airways entered in to a commitment to purchase 3,000 barrels of aviation fuel for
P9,000,000 on March 23, 2006. Solana entered into this purchase commitment to protect itself against the volatility
in the aviation fuel market. By December 31, 2005, the purchase price of aviation fuel had fallen to P2,200 per
barrel. However, by March 23, 2006, when Solana took delivery of the 3,000 barrels, the price of aviation fuel had
risen to P2,500 per barrel. How much should be recognized as loss on purchase commitment on December 31,
2005?
a. P1,500,000 c. P2,400,000
b. P 900,000 d. P 0