INTERMEDIATE ACCOUNTING 1 [1]

Unit 1: Cash and Cash Equivalents

CASH AND CASH EQUIVALENTS

CASH
It includes money and any other
negotiable instrument that is payable in
money and acceptable by the bank for
deposit and immediate credit.
CASH EQUIVALENTS
These are 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. (PAS 7, par. 6)
Only highly liquid investments that are
acquired three months before maturity
can qualify as cash equivalents.

VALUATION
• In Local Currency = Face Value
• In Foreign Currency = Current Exchange Rate
• If Recoverable Value < Face Value* = Estimated Realizable Value

Note: *Cash in bank or in financial institutions having financial difficulty or in

bankruptcy should be shown at its recoverable value or estimated realizable value.

FINANCIAL STATEMENT CLASSIFICATION

• Aggregate cash and cash equivalents should be shown as a line item among
the current assets.
• Details comprising the cash and cash equivalents should be disclosed in the
notes to financial statements.

Classified as Cash and Cash Equivalents

§ Unrestricted/Current Use
Note: Classification of cash fund as current or noncurrent should parallel the
classification of the related liability.

§ Investment in Time Deposit, Money Market Instrument and Treasury Bills

If Term ≤ 3 months
Note: There is an assumption of 3 month-term when the problem does not
specify.

§ Informal Compensating Balance ─ not legally restricted

Note: In the absence of any information, compensating balance is always
considered not available for an unrestricted use.

Classified as a separate line item:

1. Restricted/Noncurrent Use → Long-term Investment
Note: If material, foreign bank deposits subject to foreign exchange restriction shall be
classified separately among noncurrent assets and restriction clearly indicated.

2. Investment in Time Deposit, Money Market Instrument and Treasury Bills

• 3 months<Term ≤ 1 year → Short-term Investment
• Term>1 year → Long-term Investment

3. Formal Compensating Balance ─ legally restricted

• If related loan is short-term → Cash held as compensating balance
• If related loan is long-term → Noncurrent Investment

Other Cash Considerations

INTERMEDIATE ACCOUNTING 1 [2]
Unit 1: Cash and Cash Equivalents

1. Bank Overdraft
General Rule: Bank overdraft (Credit Balance Bank Account) → Current Liability
Exception: It can be an offset against other bank account if the amount is immaterial
and/or when the entity maintains 2 or more accounts in 1 bank.

2. Restoration of Cash Balance from:

Check as payment Check as receipt
Unreleased Check ↑Cash ↑Account Payable ↓Cash ↑Account Receivable
Postdated Check ↑Cash ↑Account Payable ↓Cash ↑Account Receivable
Stale Check* ↑Cash ↑Account Payable ↓Cash ↑Account Receivable
Note: *A check becomes stale if not encashed within 6 months from the issuance date.
However, the entity may issue a “stop payment order” for cancelation of stale
check even for less than 6 months.

MISSTATEMENT PRACTICES CONCERNING CASH BALANCE

• Window Dressing is a practice of opening the books of accounts beyond the
close of the accounting period for the purpose of showing a better financial
position and performance.
• Lapping consists of misappropriating a collection from one customer and
concealing this defalcation when collection is made from another customer.
• Kiting is a transfer of cash from one bank to another bank usually employed at
the end of the month.

BANK RECONCILIATION
Book reconciling items
Credit Memos – deposits credited by the bank; not yet recorded as cash
receipts in books
Debit Memos – checks debited by the bank; not yet recorded as cash
disbursements in books

Bank reconciling items

Deposits in transit – already recorded as cash receipts in books; not yet
credited by the bank
Outstanding checks– already recorded as cash disbursements in books; not yet
debited by the bank

Forms
Adjusted balance method – book unadjusted balance and bank unadjusted
balance ± reconciling items → correct cash balance / adjusted cash
balance
Book to bank method – book unadjusted balance ± reconciling items → bank
unadjusted balance
Bank to book method – bank unadjusted balance ± reconciling items → book
unadjusted balance

Adjusted Balance Method:

Bank Book
Unadjusted Balance X Unadjusted Balance X
Deposit in transit + Credit memo* +
Outstanding checks (-) Debit memo** (-)
Errors +/(-) Errors +/(-)
Adjusted balance X Adjusted balance X

*Credit memos include collections by the bank; interest credited by the bank and
matured time deposits transferred to the current account.
**Debit memos include NSF checks, bank service charges and authorized bank debits.

PROOF OF CASH is an expanded reconciliation in that it includes proof of receipts and

disbursements.
INTERMEDIATE ACCOUNTING 1 [3]
Unit 1: Cash and Cash Equivalents

PETTY CASH FUND

Imprest Fund System
• Petty cash expenses are recorded upon replenishment.
• Replenishment amount = Petty Cash Balance – Replenishment Check and
Currencies and Coins

Fluctuating Fund System

• Petty cash expenses are immediately recorded.
• Replenishment amount = or > or < Petty cash disbursements

IMPREST CONTROL SYSTEM – Implemented as a control system where all cash receipts is
including checks to be deposited intact and all cash disbursements be made by the
issuance of a check. Although a petty cash fund will also be used to settle small
expenses.

Cash Short or Over

• Accountability = the amount of cash that MUST BE present.
• Accounted for = the amount of cash COUNTED.
• Cash Shortage if Accountability > Accounted for
• Cash Overage if Accountability < Accounted for
• In computing for the cash shortage or overage, do not account for cash that
you did not include in the accountability.

END
INTERMEDIATE ACCOUNTING 1 [4]
Unit 1: Cash and Cash Equivalents

ACTIVITY:
Determination of Correct Cash Balance:
In determining the amount to be reported on its December 31, 2020 balance sheet as
cash and cash equivalents, the following items were identified:
• Undeposited receipts (currency and coins on hand), P50,000
• Postal money orders, P90,000
• Traveler’s checks on hand, P120,000
• Money market fund held at BPI that permits the company to write – checks on
this fund, P400,000
• Utility deposit receipt (made to electron company), P100,000
1. The amount reported by under cash and cash equivalents is

In determining the amount to be reported on its December 31, 2020 balance sheet as
cash and cash equivalents, the following items were identified:
• BPI demand deposit account, P200,000
• Travel advances of P150,000 for executive officer’s travel for the first quarter of
next year
• Petty cash fund (includes P5,000 in expense receipts ) 25,000
• BDO cash fund in the amount of P200,000 is restricted for the acquisition of
machinery to be made in 2021
2. The amount reported by the company under cash and cash equivalents is

In determining the amount to be reported on its December 31, 2020 balance sheet as
cash and cash equivalents, the following items were identified:
• Correct cash balance in BPI, restricted for payroll payment, P500,000
• Special account in BDO used as a bond sinking fund, P250,000
• Treasury warrants, P100,000
• Check from a customer on hand dated January 2, 2021; P90,000
• Checks to suppliers on hand, dated December 29, 2020; P60,000
3. The amount reported by the company under cash and cash equivalents is

In determining the amount to be reported on its December 31, 2020 balance sheet as
cash and cash equivalents, the following items were identified;
• BDO checking account, include a P50,000 compensating balance
Maintained in relation to an existing short-term, loan which is not
Restricted as to withdrawal 800,000
• AUB checking account, includes a P100,000 compensating balance
Maintained in relation to an existing long-term loan which is legally
restricted as to withdrawal 1,000,000
• Bank of commerce checking account, in which the company is required to
maintain a minimum average balance of P120,000 at all times to insure future
credit availability 1,000,000
4. The amount reported by the company under cash and cash equivalents is

Fred company has the following investments of excess cash as of December 31, 2020
• 3-month treasury bill, P200,000
• 6-month treasury bill, maturing on February 28, 2021, P300,000
• 1-year treasury bill, acquired on December 15, 2020, maturing on February 28,
2021, P400,000
• 90-day money market placement, P200,000
• 30day certificate of time deposit, P240,000
• 180-day certificate of time deposit, P180,000
5. The amount that may be included as cash and cash equivalents in its December 31,
2020 statement of financial position is

A company has the following investments of excess cash as of December 31, 2020
INTERMEDIATE ACCOUNTING 1 [5]
Unit 1: Cash and Cash Equivalents

• 8% one-year term bonds, issue date February 1, 2020 acquired on October 1,

2020, P400,000
• 9% one-year term bonds, issue date March 1, 2020 acquired on December 1,
2020, P350,000
• 100,000, ordinary shares acquired on December 20, 2020, P300,000
• 5,000, 8%, P50 par value redeemable preferred shares acquired on November 1,
2020. The redemption date will be on April 1, 2021.
6. The amount that may be reported as cash equivalents on its December 31, 2020
balance sheet is

In determining the amount to be reported on its December 31, 2020 balance sheet as
cash and cash equivalents, the following items were identified;
Philippine National Bank
CA-000-T722W-000111000 4.660,000
CA-000-T722W-000112000 (220,000)
Standard chartered bank (70,000)
7. The amount reported under cash and cash equivalents is

In determining the amount to be reported on its December 31, 2020 balance sheet as
cash and cash equivalents, the following items were identified;
• Manhattan Bank, opened in December 17, 2020 $10,000
• Montreal bank, opened in December 23, 2020 $20,000
• Urban Bank (a closed Bank) 100,000
The Dollar account in Manhattan Bank is currently restricted as to withdrawal
December 23, P48; December 31, P50; January 8, 2021, P51 (date the financial
statements were prepared)
8. The amount reported under cash and cash equivalents is

On December 31, 2020, Omar company’s cash and cash equivalent” account
balance were composed of the following items:

Cash on hand 200,000

Petty cash fund 20,000
HSBC current account 1,000,000
BPI, current account 850, 000
SBC, current account (90,000)
PNB, 60-day time deposit 150,000
The examination of the above-mentioned items revealed the following:
• The cash on hand account includes a customer’s check of P30,000 dated
January 2, 2021 and a P25,000 postal money order
• The petty cash fund includes unreplenished vouchers for P10,000, an employee
check for P8,000 dated January 15, 2021 and a P5,000 company check in
bearing the name of the petty cash custodian.
• Included among the checks drawn by Omar Company against its HSBC current
account and recorded in December 2020 are:
• Check no. 1001208001 written and a dated December 23, 2020 which was
delivered to the payee on January 6, 2021 P120,000
• Check no. 100012250001 written December 28, 2020 dated January 12, 2021
which was handed to the payee on December 29, 2020, P190,000
• The BPI current was composed of the following items:
Current account No. 2908356 P 1,000,000
Current account No. 2908357 (150,000)
• The PNB time deposit was set aside for the acquisition of a manufacturing
equipment to be purchased by the end of March 2021
9. The amount to be reported as cash and cash equivalent at December 31, 2020 is

Bank Reconciliation
INTERMEDIATE ACCOUNTING 1 [6]
Unit 1: Cash and Cash Equivalents

In determining the amount to be reported on its December 31, 2020 balance sheets as
cash and cash equivalents, the following items were identified;
• MBTC current account, per ledger balance, company’s checks of P90,000 are
outstanding as of December 31, 2020 960,000
• BPI current account, per bank statement, company’s checks of P12,000 are
outstanding as of December 31, 2020 750,000
10. The amount reported by Damien Company under cash and cash equivalents is

Information in relation to the bank reconciliation for July

Deposits made by Ant Company in July P 950,000
Deposits recorded by bank in July 1,020,000
Deposit in transit, June 30, 2020 225,000
Credit memo – loan proceeds in June 150,000
Credit memo – loan proceeds in July 100,000
11. The amount of deposits in transit at July 30, 2020 is

The following were provided for the month of June:

• Deposits and credit memos recorded by the bank in June, including interest of
P2,500; P480, 000
• Total debits to Cash in all journals during June, P555,000
• Deposit in transit as of May 31, P60,000
• Interest income reflected in the May bank statement, recorded only in the books
in June, P4,000
• Loan proceeds reflected in the May bank statement recorded only in the books
in June, P82,000
• Direct payment to the bank by Bat Company’s customers. Bat Company was
not informed of the said payment as of June 30, P47,000
12. The deposit in transit at June 30 is

The following were provided for the month of October

• Total book debits for the month of October P510,000
• Total bank credits for the month of October P575,000
• Deposit in transit at October 30, P39,600
• October deposits for P43,000 was recorded in the books at P34,000
• A deposit in October by Cat Company for P12,000 was recorded by the bank in
another account
• Credit memo for the month of September, P6,000 was recorded by Cat
Company only in October
• Interest income for the month of October, P3,500 has not been recorded in the
books
13. The deposit in transit at the beginning of October is

The following were provided related to December:

Checks issued by Dog Company in December P780,000
Checks paid by the bank in December 820,000
Outstanding checks, November 30, 2020 70,000
Debit memo – NSF checks in December 14,000
Debit memo – NSF checks in November 22,000
14. The amount of outstanding checks at December 31, 2020 is

The following were provided related to August:

• Total bank debits for the month of August, P675,000
• Total book credits for the month of August, P647,000
• Outstanding checks at July 31, P140,000
• Debit memo – July service charges/NSF checks, P28,000
• Debit memo – August service charges/NSF checks, P33,000
15. The amount of outstanding checks at August 31, 2020 is:
INTERMEDIATE ACCOUNTING 1 [7]
Unit 1: Cash and Cash Equivalents

The following information was gathered in relation to its checking account in BDO for
the month of April
• Balance per books April 30, P125,000; per bank statement April 30, P104,000
• Deposits still in transit at April 30 was P47,000
• NSF checks returned by the bank in April was P28,000 and April charges
amounted to P6,000
• Checks issued but have not yet cleared by April 30 was P33,000
• Proceeds from loan directly credited to Goose Company’s account amounted
to P25,000, while interested on deposits amounted to P2,000
16. The adjusted balance per book is
17. The adjusted balance per bank is

The following information was gathered in relation to its current account in BPI for the
month of June
• Cash in bank – BPI, P147,000; BPI bank statement balance, P175,500.
• Proceeds of note sent by Horse Company to BPI for collection, P75,000. No entry
has been made when the note was sent for collection.
• Outstanding checks at the end of June, P37,000
• Deposit in transit at the end of June, P62,000
• Customers’ checks totaling P35,000, deposited in June 26 were returned marked
as “Drawn Against Unfunded Deposits”
• A deposit of Horse Company for P7,500 was recorded by the bank in another
account; subsequently to Horse Company’s account
• Deposit in June 25 for P19,000 was recorded at P14,000; deposits in June 18 for
P56,000 was recorded at P65,000
• Checks written and issued in June 27 for P6,000 was recorded at P600; while
checks written and issued in June 28 for P2,200 was recorded at P22,000
• Checks issued by Horse Company for P4,500 was charged erroneously by the
bank against Hearse Company
• Interest income for the month of June P3,900; service charges for the month of
June P2,400
18. The adjusted balance per book is
19. The adjusted balance per bank is

The following were provided for the month of August.

• Cash balance per ledger, August 31, P857,600
• Note collected by the bank not yet recorded by Jaguar Company, P64,300,
including interest of P2,900
• NSF check returned with the bank statement P38,200
• Outstanding checks at the end of August, P79,500
• Bank service charge for August, P4,200
• Deposit in transit, August 31, P56,600
20. Cash Balance per bank statement is:

The following were provided by Kiwi Company for the month of August
• Cash balance per bank statement, August 31, P358,000
• Check to suppliers for P1,350 was recorded in the books as P13,050
• Note including interest of P1,200 collected by the bank and not yet taken up in
the books: P15,400
• NSF check returned with the banks statement; P22,100
• Customers’ deposits as reflected in the bank statement P7,000 was recorded in
the books as P700
• Deposit in transit as of August 31, 2020; P62,400
• Check drawn against the account of Key Company was erroneously debited
against Kiwi Company’s account by the bank; P16,200
• Outstanding checks as of August 31, 2020; P44,300
• Bank service charge for august 2020; P1,900
INTERMEDIATE ACCOUNTING 1 [8]
Unit 1: Cash and Cash Equivalents

21. Deposit made by Kiwi Company’s collector was erroneously credited to Kitty
Company by the bank; P9,200
The unadjusted cash balance per ledger on August 31 is

Proof of Cash
The following format was to be used in preparing of the two-date bank reconciliation:

Balance December December Balance

Nov. 30 receipts disbursements Dec. 31
Balance per bank statement xx xx xx xx
Items to be added: (1) (2) (3) (4)
Items to be deducted: (5) (6) (7) (8)
Adjusted bank balance xx xx xx xx

Balance per books xx xx xx xx

Items to be added: (9) (10) (11) (12)
Items to be deducted: (13) (14) (15) (16)
Adjusted bank balance xx xx xx xx

Indicate in which the reconciling items would appear:

22. Deposits of P1,000 in November recorded by the bank in

December
23. Deposits in transit at December 31, 2020, P2,000
24. P3,000 checks written in November that cleared the bank in
December
25. Outstanding checks at December 31, 2020, P4,000
26. Proceeds of a bank loan of P10,000 was credited by the bank to
Lion Company’s account in November but recorded by Lion Company only in
December
27. Proceeds of a bank loan of P11,000 was credited by the bank to
Lion Company’s account in December.
28. Customer’s NSF check of P12,000 was returned by the bank in
November and recorded by Lion Company in December
29. Bank service charges for December, P1,300

You have been hired as the new assistant controller and assigned the task of providing
the cash account balance. As of December 31, 2020, you have obtained the following
information relative to the December cash operations.

A. Balance per bank Balance per books

November 30, 2020 P138,300 November 30,2 016 P101,162
December 31, 2020 115,716 December 31, 2020 105,046

B. Receipts for the month of December 2020

Per bank P714,330 Per book 742,415

C. Outstanding Checks
November 30, 2020 P37,958 December 31, 2020 P45,297
7
D. Dishonored checks returned by the bank and recorded by Eagle Inc. amounted
to P3,125 during the month of December 2020; according to the books P2,500 was
redeposited. Dishonored checks, recorded on the bank statement but not on the
books until the following months, amounted to P820 at November 30, 2020, and
P1,150 at December 31, 2020.
INTERMEDIATE ACCOUNTING 1 [9]
Unit 1: Cash and Cash Equivalents

E. On December 31, 2020, a P1,162 check of the Dove Company was charged to
Eagle Inc. account by the bank in error.
F. Proceeds of a note of Maya Company collected by the bank for Eagle on
December 10, 2020, were not entered on the books, P,2065
G. Interest on a bank loan for the month of December charged by the bank but not
recorded on the books amounted to P4,230
H. Deposit in transit: December 31, 2020, P30,150.

30. Prepare a proof of cash.

The following information for the month of February was provided to you in your
attempt to determine an apparent shortage
Cash balance per books, 02/01/2020 P2,200,000
Cash balance per bank; 02/28/2020 1,600,000
Receipts for Feb. per books 1,200,000
Disbursements for Feb, per books 1,400,000
Deposit in transit, 02/28/2020 400,000
Outstanding checks, 02/28/2020 100,000
Bank charges for February 20,000
31. The amount of the suspected cash shortage is

Petty Cash Fund

On December 1, 2020, a company established an imprest petty cash fund of P10,000
by writing a check drawn against its general checking account. On December 31, the
fund contained the following:
Currenry and coins P 3,500
Receipts for miscellaneous expenses 2,200
Receipts for office supplies 2,300
Envelope containing contributions of employees 500
On December 31, the company wrote a check to replenish the fund.
32. The amount of the replenishment check is

A company established a petty cash fund of P5,000 for incidental expenses on June 1,
2020. At the end of the month he count of cash on hand indicated that P575 remained
in the fund. A sorting of the petty cash vouchers disclosed the following expenses had
been incurred during the month:
Office supplies P 380 Transportation P 1,360
Postage 1,690 Miscellaneous 770
33. The amount of cash shortage (overage) is