Chapter 2

CASH AND CASH EQUIVALENTS

LEARNING OBJECTIVES

After studying this chapter, the student should be able to:

 Understand the financial nature of cash and cash equivalents.
 Differentiate between cash and cash equivalents.
 Know and apply the principles guiding the initial recognition, subsequent recognition, and
derecognition of cash and cash equivalents.
 Understand the basic internal controls implemented by entities to protect their cash and cash
equivalents.
 Prepare a bank reconciliation statement.

WHAT IS CASH?

Cash in financial accounting is broader in scope than the basic notion of cash in layman’s
terms. Cash is described in various ways and its definition largely depends on the point of view
of the individual or business entity. For individuals, cash could mean the money in one’s wallet
or purse, in an account kept with a bank, or those bills stored for safekeeping inside cash boxes
or vaults. Business owners, on the other hand, have a deeper understanding of this most liquid of
all assets, since cash is the medium of exchange that facilitates the smooth flow of their daily
operations. To properly account and recognize cash in the books of accounts, accountants need
to be guided by standards to correctly report this asset on the financial statements.

Cash is a financial asset. Technically speaking, a financial asset as defined by Philippine

Accounting Standard 32 (PAS 32) Financial Instruments: Presentation, is a contractual right to
receive cash or another financial asset from another entity, or to exchange financial assets or
financial liabilities with another entity under conditions that are potentially favorable to the
entity. In other words, a financial asset allows us to receive cash or another financial asset of
another company. A more thorough discussion of other financial assets is found in Chapter 4. As
mentioned earlier, cash is a medium of exchange. This means that cash is exchanged—either
received or given up—in every cash transaction.

However, for cash to be considered as such, certain conditions must be met. Firstly, it
should be readily available—meaning one can use it anytime and anywhere as the need arises (so
long as it is within the context or reason), such as for payment of current obligations or for use in

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current operations. That is why time deposits, because they have maturity dates that disqualify
them for immediate use, are not considered cash. Portions of cash in bank accounts that are
legally restricted as to withdrawal are not considered cash either.

As a general rule, any instrument that is acceptable for deposit at face value to a bank or
other financial institutions is considered cash. Simply put, if one makes a deposit of₱100,000 at a
bank whether in bank notes or check, his account should increase by the same amount, no more
no less.

GENERAL CATEGORIES OF CASH

Cash is generally categorized into three: cash on hand, cash in bank, and cash set aside
for current use. In some cases, a particular cash item may fall under two or more categories; the
categories are not mutually exclusive from each other.

Cash on hand, as the term suggests, is cash inside one’s wallet and/or coins inside one’s
pocket or purse. Other examples would be checks on hand, manager’s checks, traveler’s check,
cashier’s check, and bank drafts.

Cash in bank is comprised by savings and checking accounts.

Cash set aside for current use include, but not limited to, petty cash fund, payroll fund,
travel fund, interest fund, dividend fund, and tax fund.

For financial reporting purposes, cash is shown as the first item at the current assets
section of the statement of financial position. Cash in local currency is reported at face value.
Foreign currencies and deposits are covered by RA 6426.

REPUBLIC ACT No. 6426 – Foreign Currency Deposit Act of the Philippines

With the passage of the above law on April 4, 1974, any person, natural or juridical, may
open foreign currency deposit accounts with any Philippine bank in good standing, provided the
foreign currencies to be deposited are acceptable as part of the international reserve (Section 2 of
the above Act). Once the account is opened, the usual deposit and withdrawal exclusively in
foreign currencies is allowed thereafter. Should the depositor wish to get the peso equivalent of
his withdrawal, the bank buys back the foreign currency based on the bank’s buying rate for the
day.

Banks allow any person, partnership, or corporation to open a foreign deposit account.
However, most local banks allow foreign currency deposit accounts to be denominated in US
dollar and Euro currencies only. One reason given is that these two foreign currencies are most
actively traded in the foreign currency market. For financial statement purposes, all foreign

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currencies still on hand of the entity at year end (US dollar, euro, won, yuan, yen, etc.) are
converted, totaled, and recorded as part of cash on hand at their peso equivalent based on the
closing rate at year end of each individual foreign currency versus the peso.

The difference between the initial converted peso amount of the foreign currencies and
their year-end converted (translated) peso amount is recorded on the financial statement as either
gain or loss on foreign currency translation. The gain or loss is presented as part of profit or loss
on the Statement of Comprehensive Income.

CASH EQUIVALENT

Cash equivalents, as described by Philippine Accounting Standard No. 7 (PAS 7)

Statement of Cash Flows, are short-term, highly liquid investments that are readily convertible
to known amounts of cash and which are subject to an insignificant risk of changes in value.
These include certain investments that have very short terms, or those that have been purchased
so close to their maturity dates that they present insignificant risk to the holder.

As a general rule, PAS 7 allows investments purchased 90 days or less before maturity
date to be classified as cash equivalents. Examples of cash equivalents are 90-day time deposits,
time deposits purchased three months prior to maturity, treasury bills, commercial papers,
certificate of deposits and money market placements. For an instrument to be classified as cash
equivalent, it should be purchased by the entity three months or 90 days prior to maturity,
regardless of its original term.

Investments whose maturity dates are over ninety days but do not exceed one year are
classified as short-term investment, and those with maturities beyond one year are long-term
investments.

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Illustration:

Assume the following accounts of Pioneer Corporation at the end of 2020:

Account Amount
Undeposited collections ₱ 200,000
Cash in bank – checking account 2,500,000
Cash in bank – payroll account 3,200,000
Cash in bank – savings account 3,000,000
Dividend fund 1,500,000
Manager’s check 300,000
Cash in foreign currency ($125,000) 6,000,000
Commercial papers, purchased December 1, 2020 due March 1, 2021 2,800,000
BSP T-bill, purchased January 1, 2020 due January 1, 2021 3,000,000
Bond sinking fund 2,300,000
IOUs from officers 100,000

Other information:
a. Cash in checking account is restricted for plant expansion to be implemented in 2021.
b. Cash in foreign currency is in US dollars. Upon receipt, the exchange rate was ₱48:$1.
On December 31, 2020, it was ₱52:$1.

The amount of cash and cash equivalents to be reported at the current assets section of the
statement of financial position as of December 31, 2020 should be ₱17,500,000, broken down as
follows:
Undeposited collections ₱ 200,000
Cash in bank – payroll account 3,200,000
Cash in bank – savings account 3,000,000
Dividend fund 1,500,000
Manager’s check 300,000
Cash in foreign currency (125,000 x P52) 6,500,000
Commercial papers 2,800,000
Total cash and cash equivalents ₱ 17,500,000

Cash in checking account is not considered cash, because it is set aside for non-current
use, although it is expected to be disbursed in 2021. Cash in foreign currency is translated into
Philippine peso using the closing US dollar exchange rate on December 31, 2020. The BSP T-bill
(Treasury bill) is not considered as cash equivalent because it was purchased one year prior to its
maturity. Bond sinking fund is cash set aside for the settlement of a bond, a long-term liability;
thus, it does not qualify as cash equivalent. Lastly, IOUs from officers are classified as
receivables.

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OTHER NOTES

Compensating balance

Compensating balance is the minimum balance that an account holder should maintain in
his bank account at all times. Other terms for it are minimum balance or maintaining balance.
Compensating balances are included in an entity’s cash balance if they could be withdrawn by
the depositor without dire penalties. In other words, compensating balance is still considered as
cash if there is no legal restriction as to its withdrawal. Otherwise, they should be treated as other
assets.

Postdated checks

Postdated checks are checks that bear a future date on its face. It has become the practice
of some business entities to issue postdated checks as payment of liabilities and to receive
postdated checks as collection from customers. A postdated check should be recorded as
payment or collection only on the specified date on its face, and not before. The date on the
postdated check signifies the time when it can finally be negotiated with the bank.

If there is a postdated check still on hand at the end of the year, the previous entry
recording the payment of a payable or the collection of a receivable would result to an incorrect
cash balance at the end of the year. For financial statement purposes, the cash balance should be
corrected by reversing the previous payment or collection entry.

Stale checks

Checks received by an entity but are not yet negotiated with the bank within a significant
period of time after the date of issue are called stale checks. In practice, if the check is not
negotiated with the bank after six months from the date written on its face, it is considered stale
check and the bank would no longer accept it. Stale checks should not form part of the cash
balance of the holder. Unless the issuer replaces the stale check with a new one within the
current accounting period, the entity should deduct the amount from its cash account for
financial statement purposes.

NSF check

This is a check previously received by an entity from its customer as collection of the
latter’s account. If the customer’s bank account does not have sufficient balance at the time
when the entity presents the check for negotiation, the check will not be honored by the bank and
subsequently returned to the entity-depositor with a notation of ‘NSF’ or ‘no sufficient fund.’ In

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this case, the check should not be considered part of the cash balance of the entity. The previous
entry recording the collection from the customer should be reversed to reduce the cash balance.

Cash set aside for acquisition of non-current assets

When an entity sets aside cash for the acquisition of noncurrent assets, such fund should
not be part of the entity’s cash and cash equivalents. The reason is that the fund does not meet
the requirement of cash being readily available either for use in the ordinary course of business,
or for settlement of a short-term obligation. It should instead be reclassified as a non-current
asset.

Bank overdraft

When an entity makes withdrawals or writes checks that would exceed the balance of the
amount it currently has with the bank, the resulting negative balance is called an overdraft.
Generally speaking, such an occurrence is not accepted by the banks here in the Philippines.
However, should this occur, an overdraft should be recognized as a current liability, and not as a
negative balance in an entity’s cash account.

INTERNAL CONTROL

Cash is one of the most significant resources of a company. However, it is also the asset
most vulnerable to theft or misappropriation. This high vulnerability of cash to irregularities
should compel an entity to closely monitor its cash transactions. A company must implement
effective internal control measures to minimize, if not totally eliminate, employee fraud and
accounting errors involving cash.

The need to safeguard cash from internal and external wrongdoers prompts companies to
create a group of employees who would dedicate themselves to installing and monitoring internal
controls. This group usually works under the entity’s internal audit office or department and
closely collaborates with the controller or accountant for the smooth conduct of operations and
proper handling of books of accounts. Enumerated below are basic internal control measures
normally observed by business entities:

1. Separation of cash duties. Separating cash duties makes it difficult for dishonest
employees to conceal their fraudulent transactions. The one in charge of receiving and
depositing cash receipts should be separate from the one preparing the reconciliation.
This prevents one employee to have access to both cash and the accounting records.
Furthermore, error in cash deposits may be discovered and fraud uncovered in the course
of preparing the bank reconciliation statement. In companies with few employees, the
segregation of duties may still be implemented, and should involve the active

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 participation of supervisors like the cashier and accountant. Nevertheless, it is the
manager who should check all transactions daily, as summarized by the accountant.

2. Limiting access to cash. Total cash receipts for the day should be deposited immediately
to the bank on the same day to prevent the cash custodian from using the cash for
personal purpose. Any cash received from customers after the bank’s cut-off time should
be placed temporarily inside lockbox, the combination of which should be known only to
the cash custodian.

3. Proper documentation of cash receipts. For cash receipts, the cash processing clerk
should immediately record the receipt in a logbook. Cash receipts are easily recorded
and monitored if the entity is using special journals like the cash receipts journal.
Official receipts should be prepared for every cash inflow as supporting document in
posting the collection to specific customer accounts. Official receipts are accountable
forms and their issuance should be carefully monitored. Identity of persons making
payments to the entity should be properly verified to prevent issuance of official receipts
to wrong customers.

4. Strict control of cash disbursements. A company should ensure that all disbursements
with a significant amount should be done through issuance of checks and the identity of
the creditor’s representative receiving the check payment is verified and confirmed. This
is to ensure that the check is received by the authorized representative only and that the
payment is a legitimate transaction based on supporting documents, properly
signed/countersigned by approving authorities, and verified as to availability of funds.
For smaller disbursements, a petty cash fund should be set up and controlled by a petty
cash custodian.

Voucher System
A voucher system is a method for authorizing and controlling cash disbursements. A
cash voucher is a document that supports a cash transaction. It is filled out to identify what is to
be paid, the amount to be paid, and the accounts to be recorded. Once the voucher is approved,
the authorized disbursing employee prepares the payment check. Basically, the voucher system
prevents indiscriminate and unauthorized purchases and incurrences of expense because the
whole cycle of purchasing, verifying/checking, paying, and recording requires the involvement
of various employees and departments.

The significant feature of the voucher system as a control measure for cash disbursement
is that cash or check is NOT immediately paid upon purchase of goods or incurrence of expense.
The accounting processes involved under the voucher system are as follows:

1. Purchase order is prepared, approved by an officer, and sent to the supplier (seller).

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 2. Supplier prepares a sales invoice and ships out to the entity the goods ordered together
with a copy of the sales invoice.
3. Receiving clerk of the entity prepares a receiving report, which is a document
acknowledging receipt of goods. This is sent to the seller.
4. The sales invoice of the seller, a copy of the purchase order, and a copy of the receiving
report are given to the accountant for final verification.
5. If the accountant finds no error or mismatch in the documents, he instructs his
bookkeeper to record the transaction as a purchase on account in the voucher register.
Since a check is not immediately issued for the transaction, the entity is given ample time
to schedule check payments for previous account purchases in such a way that cash
discounts offered by the seller are regularly availed of. This also ensures that the entity
has enough cash balance in its bank account to chronologically pay its payables based on
the agreed credit terms. For every creditor, the bookkeeper prepares an unpaid vouchers
file which replaces the accounts payable ledger account normally used under the non-
voucher system.
6. On the scheduled date of payment, check is prepared by the payment clerk for approval
by a duly authorized officer. Once the check is signed, the payment is recorded in the
check register.

Imprest system
Imprest system is a control measure for both cash receipts and cash disbursements.
Under this internal control measure, cash receipts are deposited intact daily to the bank and all
payments of assets, liabilities, and expenses should be made by check except for small or petty
expenditures.

The control of cash receipts becomes more effective if a merchandising concern business
is using special journals, particularly the cash receipts journal (CRJ) as mentioned earlier. Total
cash receipts for the day are summarized in this journal, which essentially serves as the basis for
the total cash to be deposited daily to the bank. The word intact means that no portion of the
total cash collections for the day should be used for payment of assets, liabilities, or expenses.
This is to prevent the cash custodian from using the readily available cash for personal purposes.
To ensure that this process is strictly followed, the auditor or accountant should see to it that the
total for the day of the CRJ, and the combined total for the day of official receipts and/or cash
sales invoices all match up with the bank’s machine validation on the deposit slip for the day.

The control of cash disbursement, which requires that disbursements should be made by
check instead of outright payment in cash, is taken care of by the voucher system. To ensure the
legitimacy of a particular check payment, both the accountant and the auditor should verify the
information recorded in the voucher register and check register.

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Petty Cash Fund
The imprest system also provides an alternative method for recording small expenditures.
Since it is impractical and inconvenient for small expenditures to be paid by check, a petty cash
fund is set up by the entity, out of which petty expenses are to be paid. Purchase of small items
like office supplies, fare of the company’s messenger, and snack items for officers and
employees during staff meetings are usually paid out of the petty cash fund. The petty cash fund
is an essential part of the imprest system.

The petty cash fund is under the responsibility of a petty cashier or petty cash custodian.
Whenever a payment is to be made from the fund, the party who needs the fund fills out a petty
cash voucher and thereafter signs the same upon receipt of the requested amount. Receipt(s) or
any proof of purchase is later given to the petty cash custodian as supporting document. The
petty cash custodian files the receipt together with the petty cash voucher and records the
expense in the petty cash book. If the firm is using special journals, the petty cash book serves
as a schedule for small expenses. The specific expense accounts are individually recorded in the
entity’s cash payments journal (CPJ) upon replenishment of the petty cash fund.

When the petty cash fund is already depleted or reduced to a very low balance, the petty
cash custodian requests for replenishment of the fund. By replenishment, the actual amount of
cash is increased to equal the original amount of the fund. This is done through issuance of
check payable to the petty cash custodian at an amount equal to the total of all the petty cash
vouchers issued as supported by receipts and other documents.

As an internal control measure, the cashier, accountant, auditor, or any supervisor may
undertake a surprise audit of the fund, as follows:

1. Cash count is made of the remaining coins and bills in the cash box of the fund custodian.
2. Supporting receipts are verified and the total amount of all petty cash vouchers is taken.
The supervisor should take note of any questionable markings or erasures on the
vouchers and receipts. Since petty cash vouchers are printed forms bearing serial
numbers, the custodian should be made to explain for any missing or cancelled voucher
number.
3. The total amount of all the vouchers issued is deducted from the original amount of the
petty cash fund. The resulting difference should be the total amount of the remaining
bills and coins.
4. If the total amount of the actual bills and coins is less that the “should be” balance, the
difference is a shortage; otherwise, there is an overage.
5. The shortage is paid by the petty cash custodian. Any overage, however, is usually
refunded to the petty cash custodian if it can be proven that the excess cash is his/her own

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 money. If the cause of the overage cannot be ascertained, the amount is recorded as
miscellaneous income.

Bank Reconciliation

Banks offer three major types of deposit accounts to the public. A savings account earns
interest and may either be a passbook savings account or an ATM savings account. Deposits and
withdrawals are transacted by the depositor either at the bank’s counter or through the automated
teller’s machine.

Time deposit or certificate of time deposit account earns a higher interest than a savings
account. This type has a maturity date and withdrawal is allowed only upon its maturity.
Depending, however, on the policies of the bank, depositors may be allowed to withdraw before
maturity date or preterminate their time deposit. Since the pretermination would constitute non-
compliance of the condition for a held-to-maturity type of deposit, banks impose a penalty
charge called pretermination fee. Interest to be paid on preterminated time deposits is computed
at a reduced interest rate.

The third type of deposit is the checking account. It is also known as current account or
demand deposit account. Traditional checking accounts do not earn interest; however, the
current practice of banks is to allow a minimal rate of interest to encourage depositors to put in
more funds to their checking accounts. Deposits to this account are made by filling out the usual
bank deposit slips while withdrawals are effected either by issuance of checks or through the
ATM. Checking account is the focus of the topic on bank reconciliation.

An entity opens a checking account with a particular bank and records the same as Cash
in Bank in its books. Cash shown in the company’s records is called balance per ledger or
balance per books. The cash in bank account is a current asset and any deposit made with the
bank increases its balance while any check issued reduces its balance.

On the other hand, the bank records a liability account in its books to recognize the initial
amount deposited by the entity to its checking account. Every time the entity makes a deposit,
the liability account increases while checks issued by the depositor decrease the balance of the
liability. At the end of the month, this account shown in the records of the bank is called balance
per bank. All increases and decreases in the entity’s checking account are summarized in a bank
statement which is normally issued by the bank to the depositor on a monthly basis.

To confirm that cash is not misappropriated in any way, the accountant normally
undertakes a detailed comparison of all transactions recorded by the entity against those recorded
in the bank statement. It seldom happens that the cash balance per books and cash balance per
bank would be equal. As part of internal control, the accountant prepares a bank reconciliation,

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a process that shows the items or factors which caused the two cash balances to be unequal.
These factors are called reconciling items.

Reconciling items are of two types: (I) Reconciling items due to timing difference; and
(II) reconciling items due to error.

I. Reconciling items due to timing difference. This arises when only one party has recorded a
particular transaction as of the end of the month. Examples of this type are as follows:

1. Deposit in transit – this deposit is already recorded by the entity but is not yet recognized
by the bank. This transaction increased the balance per books but has no effect yet in the
balance per bank; thus, the balance per books is greater than the balance per bank. In
preparing the bank reconciliation, this reconciling item is added to the balance per bank.

2. Outstanding check – check issued and recorded by the depositor but the payee has not
yet negotiated it with the bank. This transaction decreased the balance per books but has
no effect yet in the balance per bank; thus, the balance per books is less than the balance
per bank. This reconciling item is deducted from the balance per bank in preparing the
bank reconciliation.

3. Bank debit memos – these are items deducted by the bank from the entity’s account but
not yet recorded by the entity itself. These transactions decrease the balance per bank but
have no effect yet in the balance per books; thus, the balance per books is greater than the
balance per bank. Examples of debit memos are NSF check, cost of check books, service
and penalty charges, and reduction of loans. In preparing the bank reconciliation, these
reconciling items are deducted from balance per books.

4. Bank credit memos – these are items added by the bank to the entity’s account but not
yet recorded by the entity. These transactions increased the cash balance per bank but
have no effect yet in the cash balance per books; thus, the cash balance per books is less
than the cash balance per bank. Examples of credit memos are collections of the entity
that are directly made to the bank, interest earned on the entity’s account, and proceeds of
loan granted by the bank to the entity. In preparing the bank reconciliation, these
reconciling items are added to the cash balance per books.

II. Reconciling items due to errors. Errors may be committed by either the depositor or the
bank. The general guidelines in the treatment of errors are as follows:

A. Determine who committed the error:

1. If the depositor committed the error, the balance per books should be corrected.
2. If the bank committed the error, the balance per bank should be corrected.

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 B. Determine the type of error committed and its effect on the cash balance. The error is
corrected as follows:

1. If the error is an overstatement of deposit, the error is deducted from the cash balance.
2. If the error is an understatement of deposit, the error is added to the cash balance.
3. If the error is an overstatement of check issued, the error is added to the cash balance.
4. If the error is an understatement of check issued, the error is deducted from the cash
balance.
5. Posting to the wrong depositor’s account is an error that can only be committed by
the bank. Apply A2, then analyze the type of error and its effect on the cash balance
per bank and correct accordingly.

FORMAT OF BANK RECONCILIATION STATEMENT (Adjusted Balances Method)

There are three formats used by accountants in the process of reconciling the cash
balance per bank with the cash balance per books (depositor’s cash ledger). These are: (1) Book-
to-bank balance method, (2) Bank-to-book balance method, and (3) Adjusted balances method.
The adjusted balances method is the preferred method as this would present the cash balance that
should be presented on the statement of financial position of the entity. This method facilitates
the preparation of adjusting entries in the entity’s books. The reconciliation format for the
traditional adjusted balances method is presented below.

FORMAT COMPANY
Bank Reconciliation Statement
December 31, 2020

Balance per bank ₱ xxx

Add: Deposit in transit ₱ xxx
Bank errors that understated the bank balance xxx xxx
Sub-total ₱ xxx
Less: Outstanding checks ₱ xxx
Bank errors that overstated the bank balance xxx xxx
Adjusted bank balance ₱ xxx

Balance per books ₱ xxx

Add: Bank credits ₱ xxx
Book errors that understated the book balance xxx xxx
Sub-total ₱ xxx
Less: Bank debits ₱ xxx
Book errors that overstated the book balance xxx xxx
Adjusted balance per books ₱ xxx

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ILLUSTRATIVE PROBLEM ON BANK RECONCILIATION:

Lauricella Company’s books at the end of October 2020 reports cash balance of
₱1,466,000 before any adjustments. Its bank statement shows a balance of ₱1,340,000 on the
same date. The following pieces of information are available for the preparation of the bank
reconciliation:

1. Total deposits by Lauricella that did not reach the bank’s cut-off time amounted to
₱250,000.
2. Total amount of outstanding checks was ₱150,000.
3. Lauricella’s account was debited for the following items:
a. ₱500 bank service charge
b. Interest on an outstanding loan of ₱3,500
c. Returned check marked ‘NSF’ amounting to ₱50,000
d. Partial loan payment of ₱100,000
4. The bank collected Lauricella’s notes receivable of ₱200,000. An interest of ₱5,000 was
also credited to Lauricella’s account in the bank.
5. Cash receipts of ₱173,000 were erroneously recorded as ₱137,000 in Lauricella’s books.
6. A check drawn by Lauricella amounting to ₱70,000 was erroneously recorded by the
bookkeeper as ₱17,000.
7. A check payable to Lauricella, amounting to ₱80,000, was erroneously credited or added
by the bank to Lauricello Co.
8. A payment by Lauricella to a customer of ₱10,000 was inadvertently credited by the bank
to the firm’s account.

Required: Prepare a bank reconciliation statement

SOLUTION:
Traditional presentation

LAURICELLA CO.
Bank Reconciliation Statement
October 31, 2020

Balance per bank ₱ 1,340,000

Add: Deposit in transit ₱ 250,000
Check deposit of firm credited by bank to another account 80,000 330,000
Sub-total ₱ 1,670,000
Less: Outstanding checks ₱ 150,000
Check issued erroneously credited by bank (P10,000 x 2) 20,000 170,000
Adjusted bank balance ₱ 1,500,000

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Balance per books ₱ 1,466,000
Add: Bank collection in favor of the firm (P200,000+P5,000) ₱ 205,000
Understatement of cash receipts (P173,000-P137,000) 36,000 241,000
Sub-total ₱ 1,707,000
Less: Service Charge ₱ 500
Interest on loan 3,500
NSF Check 50,000
Partial payment of loans 100,000
Understatement of check issued (P70,000-P17,000) 53,000 207,000
Adjusted balance per books ₱ 1,500,000

Alternative presentation:

LAURICELLA CO.
Bank Reconciliation Statement
October 31, 2020

Bank Book
Unadjusted balances ₱ 1,340,000 ₱ 1,466,000
Deposit in transit 250,000
Outstanding checks (150,000)
Bank service charge (500)
Interest on outstanding loan (3,500)
NSF check (50,000)
Partial loan payment (100,000)
Note collected by bank plus interest in favor of depositor 205,000
Depositor’s error in recording cash receipt (understatement) 36,000
Depositor’s error in recording check (understatement) (53,000)
Bank error in posting check deposit of firm to wrong account 80,000
Bank error in posting check issued as deposit (double effect) (20,000)

Adjusted balances ₱ 1,500,000 ₱ 1,500,000

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FINANCIAL STATEMENT PRESENTATION
As mentioned earlier, cash and cash equivalents are presented on the statement of
financial position under the current assets section. Below is an example of the presentation of
cash and cash equivalents (in million pesos) of PLDT, a publicly-listed company

2017 2016
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents (Note 16) 32,905 38,722
Short-term investments (Note 28) 1,074 2,738
Trade and other receivables (Note 17) 33,761 24,436
Inventories and supplies (Note 18) 3,933 3,744
Current portion of derivative financial assets (Note 28) 171 242
Current portion of investment in debt securities and other long-term investments (Note 12) 100 326
Current portion of prepayments (Note 19) 10,673 7,505
Current portion of advances and other noncurrent assets (Notes 20 and 28) 8,087 8,251
Total Current Assets 90,704 85,964
TOTAL ASSETS 459,262 475.119

This is the note accompanying the account:

Note 16 – Cash and cash equivalents

As at December 31, 2017 and 2016, this account consists of:

2017 2016
(Unaudited) (Audited)
(In million pesos)
Cash on hand and in banks (Note 28) 6,351 6,384
Temporary cash investments (Note 28) 26,554 32,338
32,905 38,722

Cash in banks earn interest at prevailing bank deposit rates. Temporary cash investments are made for varying periods up to
three months depending on our immediate cash requirements, and earn interest at the prevailing temporary cash investment
rates. Due to the short-term nature of such transactions, the carrying value approximates the fair value of our temporary cash
investments. See Note 28 ‒ Financial Assets and Liabilities.

Interest income earned from cash in banks and temporary cash investments amounted to Php612 million. Php582 million and
Php579 million for the years ended December 31, 2017, 2016 and 2015, respectively.

DISCUSSION QUESTIONS
1. Briefly define cash.
2. Differentiate cash and cash equivalents.
3. What are the basic characteristics of cash?
4. Define a compensating balance. How should it be reported?
5. Discuss bank reconciliation. What purpose does it serve?

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THEORY

MULTIPLE CHOICE:
1. Cash includes
a. Money only
b. Money and negotiable instruments
c. Any negotiable instrument including promissory notes.
d. Money and any instrument that is immediately payable in money and acceptable by the
bank for deposit and immediate credit.

2. To be reported as “cash and cash equivalents”, the cash equivalent must be

a. Deposited in a financial institution, particularly a bank
b. Available for the redemption of preference shares or bonds
c. can be freely used in current operations
d. Set aside for acquisition of construction of items of property, plant and equipment

3. Which of the following should be presented as cash in the statement of financial position?
a. Postdated checks received
b. IOUs from officers to be deducted from their salaries of the following month
c. Undelivered checks
d. NSF checks
4. Which of the following cannot be shown as part of cash in the current assets section of the
statement of financial position?
a. Cash in special checking account for payroll
b. Compensating balances
c. Cash deposited with utility company
d. Customer’s checks

5. Unreleased checks
a. Are outstanding checks
b. Are treated as certified checks
c. Are part of the payor’s cash balance
d. Should be a book-reconciling item since the bank has deducted this amount at arriving
at the cash balance in the bank statement.

6. Which of the following should not be considered cash?

a. Petty cash fund
b. Money orders
c. Coin, currency and funds awaiting deposits
d. Postdated checks

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7. Which of the following is incorrect with regard to the valuation of cash and cash equivalents?
a. Cash is valued at face value
b. Cash denominated in foreign currency is translated using the closing rate
c. Cash equivalents include interest that is to be received
d. cash deposited in a bank that has filed for bankruptcy should be written down to its net
realizable value.

8. Deposits in foreign countries that are also subject to certain foreign exchange restrictions
should be
a. Valued at current exchange rates and shown as current assets
b. Valued at historical exchange rates and presented as noncurrent assets
c. Valued at current exchange rates and presented as noncurrent assets
d. Valued at historical exchange rates and presented as current assets

9. Which of the following should be considered cash equivalents?

a. Certificates of deposit
b. Money market with checking account privileges
c. Legally restricted compensating balances
d. Postdated checks

10. Travel advances should be reported as

a. Supplies.
b. Cash because they represent the equivalent of money.
c. Investments.
d. None of these.

PROBLEM SOLVING

Exercise 2 – 1

As of December 31, 2020, Grimmie Company’s general ledger reported a total cash balance of
₱695,000. Breakdown of the amount is as follows:

Currencies and coins awaiting deposit ₱ 45,000

Checking account balance 185,000
NSF Check returned by the bank 40,000
Undeposited receipts, including a postdated check of ₱35,000 160,000
Savings account balance 250,000
IOUs signed by personnel 15,000

What amount should be reported as “cash” on Grimmie’s Statement of Financial Position as of

December 31, 2020?

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Exercise 2 – 2

Hatch Company shows the following account balances in its financial records as of December
31, 2020:
Cashier’s check ₱ 46,000
IOU from the president’s sister 65,000
Bank draft 40,000
Traveler’s check 40,000
Undeposited checks (includes a ₱100,000 check not accepted by the bank
due to lack of countersignature) 220,000
Money order 50,000
Petty cash fund (bills and coins of ₱4,000) 12,000
Checking account- Unibank 450,000
Checking account- Tribank (85,000)
Savings account- Unibank 325,000
Postage stamps 6,500

What is the cash balance to be reported on the statement of financial position?

Exercise 2 – 3

Striker Company has the following balances at fiscal year ended September 30, 2020:

Cash in checking account per bank statement (₱26,000 check is still not
presented to the bank by the payee) ₱100,000
Cash in money market account – 120 days 200,000
Treasury bill, purchased August 1, 2020 maturing October 30, 2020 600,000
Treasury note, purchased September 1, 2020 maturing December 15, 2020 800,000
What amount should Striker Company report as cash and cash equivalents in its September 30,
2020 statement of financial position?

Exercise 2 – 4

Aguas Company reported total cash and cash equivalents of ₱5,465,000 on December 31, 2020,
which includes the following:

Two 180-day certificates of deposit, totaling ₱ 650,000

Check dated January 6, 2021 amounting to 225,000
Cash accumulated in special fund that will be used for plant expansion 1,200,000
Commercial paper due in 100 days 1,000,000
Currency and coins in petty cash fund (including unreplenished vouchers of ₱2,500) 16,000

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Aguas Company has agreed to maintain a cash balance of ₱450,000 which will not be available
for withdrawal to ensure future credit availability. The said amount was included in the balance
above.

What is the total amount that Aguas Company should report as “cash and cash equivalents” in
the current assets section of the statement of financial position on December 31, 2020?

Exercise 2 – 5
The statement of financial position of Mandela Company as of December 31, 2020 shows cash
balance of ₱900,000. It was found to include the following items:

Currencies and coins on hand ₱ 80,000

Notes receivable in the possession of a collection agency 150,000
Customer’s check, dated February 1, 2021, not yet presented to the bank 45,000
Customer’s checks returned by bank marked “NSF” 60,000
Postal money orders from clients 70,000
Petty cash fund (includes vouchers worth ₱2,500 for transportation expenses) 10,000

Mandela drew a check for ₱145,000 against its checking account last December 28, 2020
representing payment for a subscription contract. The said check was only delivered January 2 of
the following year. What is the correct cash balance of Mandela Company as of December 31,
2020?

Exercise 2 – 6

David Company’s checkbook balance on December 31, 2020 was ₱1,200,000. In addition, David
Company supplied the following information as of December 31:

Check drawn on David Co.’s account in payment of a transaction with a vendor,

dated and recorded December 31 but not mailed until January 6. ₱ 300,000
Check payable to David Co., deposited December 23, excluded from the
December 31 checkbook balance because it was returned by bank on December
28, stamped “NSF”. The check was redeposited on the same day and cleared on 50,000
December 29, 2020.
Check payable to David Co. for goods sold to a client, dated January 4, 2021 still
on hand. The said check was included in the checkbook balance above. 150,000

What is the proper amount to be shown as cash on David Co.’s statement of financial position on
December 31, 2020?

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Exercise 2 – 7
The cash balance of Mendoza Company consists of the following on December 31, 2020:

Cash on hand, including stale check of ₱60,000 and postdated check of ₱30,000 ₱650,000
Cash in bank, net of bank overdraft of ₱40,000 in a checking account with
another bank 450,000
Petty cash, including unreplenished receipts of ₱12,500 18,000
Savings deposits, earmarked for plant expansion 550,000

What is the correct cash balance?

Exercise 2 – 8

Wimbledon Company provided the following information regarding the composition of its cash
account on December 31, 2020:

Checking account- BPI ₱1,200,000

Savings account- BPI 1,500,000
Cash on hand 10,000
Travel advances of employee to be paid through salary deduction 120,000
Separate cash fund, restricted for the retirement of long-term assets 1,000,000

Savings account includes ₱200,000 holdout against short-term borrowing arrangements. In the
current assets section of Wimbledon Co.’s December 31, 2019 statement of financial position,
how much should be reported as cash?

Exercise 2 – 9

Hechter Company’s checkbook balance as of December 31, 2020 was ₱1,750,000. On the same
date, Hechter had the following items on its safe, together with 18 blank checks:

a. A ₱70,000 check payable to Hechter Co., dated January 2, 2021 that was included in the
December 31 checkbook balance.
b. A ₱300,000 check payable to a supplier and drawn on Hechter Co.’s account that was dated
and recorded December 31 but not mailed until January 3, 2021.

What amount of cash should Hechter Co. report on its December 31, 2020 statement of financial
position?

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Exercise 2 – 10

The cash account of Pistachio Co. showed a ledger balance of ₱158,794 on June 30. The bank
statement on the same date showed a balance of ₱166,100. Upon comparing the bank statement
with the cash records, the following facts were determined:

a. June bank service charge was ₱1,000.

b. A bank memo stated that a note having a face value of ₱48,000 and interest of ₱1,440 had
been collected on June 29, and the bank had made a charge of ₱220 on the collection. No
entry had been made on Pistachio’s books when the note was collected.
c. Receipts for June 30 for ₱135,600 were not deposited until July 2.
d. Checks outstanding on June 30 totaled ₱85,442.
e. The bank had charged Pistachio’s account for a customer’s uncollectible check amounting to
₱10,128.
f. A customer’s check for ₱3,600 had been entered as ₱2,400 in the cash receipts journal by
Pistachio on June 15.
g. Check No. 742 in the amount of ₱19,640 had been entered in the cash journal as ₱16,760,
and Check No. 747 in the amount of ₱2,328 had been entered as ₱23,380. Both checks had
been issued to pay for purchases of equipment.

Prepare bank reconciliation statement.

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