Cash and Cash Equivalents

Chapter 2
ash Equivalents
and C
Chapter 2 Cash and Cash Equivalents

b. Revolving fund c Payroll fund . Change fund
Dividend fund
Tax fund & Travel fund h. Interest f und
other types of imprest bank account used in current operations
Learning O bjectives 1. Define cash and identify the items that are included in the
quivalents" line item. 2. Account for petty cash funds and cash
ash and Cash E
"C
shortages/o
verages.
Definition of cash Cash includes money or its equivalent that is readily available for
unrestricted use. Money is the standard medium of exchange and the basis of
accounting measurements. Other n egotiable instruments that can be used to settle
obligations and are readily available for unrestricted use may form part of cash.
Revolving fund is a fund similar to the petty cash fund but is used for a limited or
specific purpose set by management (e.g. revolving funds held by sales
representatives and revolving funds held by field engineers in a construction firm). Tax
fund is a fund set aside to be used i n paying taxes.
n h
Cash includes cash on hand and in banks. a. Cash o an
d - refers to undeposited
collections awaiting
ash i n b
deposit and other current funds held as of the reporting date. b. C ank –
refers to deposits in banks that are available for
immediate withdrawal and unrestricted use.
Examples of items not included as cash:
Postdated checks - checks dated at a future date. TOUs or advances to employees
Cash funds not a vailable for use in current operations, such as Sinking fund, Plant
expansion fund, Depreciation fund, Preference share redemption fund, Contingency
fund, and I nsurance fund. Postage stamps
Examples of cash: 1. Coins and c urrencies 2. Demand deposits (checking or current
accounts) and saving
accounts 3. Checks - such a s Cashier's checks, Personal checks, Manager's
checks, Traveller's checks, and C
ertified checks received from
customers or other external parties. 4. Bank drafts - guarantees by bank to advance
funds on the
demand by the party to whom the draft was directed 5. Money orders - similar to
bank drafts but are drawn from post
offices or other financial institutions. 6. Cash funds set aside for use in current
operations, such as:
a. Petty cash fund
Postdated check s and lou' s ( 'I owe you') or advances to employees are treated as
receivables. D epreciation f und i s a form of asset replacement fund wherein cash payments
to the fund are equal to the periodic depreciation charges on the related asset. When
the asset is fully depreciated, the fund can be used to acquire a r eplacement
• Restricted funds that are excluded from cash are commonly
presented as part of "other assets." Unused postage s tamps are treated as prepaid
supplies.
Chapter
ash Equivalents
want C
Postdated checks received Postdated checks received by an entity do n ot qualify as
ecause postdated checks are not p
cal b resently available for immediate
use. They will only be available for use at a future date
Entities normally record check collections on account by debiting "Cash" and
crediting "Accounts receivable," regardles of whether the checks received are
postdated or not. Thus, at the reporting date, an adjustment is necessary to
revert b
ack postdated checks to accounts r eceivable.
In practice, all check collections are recorded as cash c eipts and adjustments for
postdated checks are made only when financial statements are prepared. No
separate accounting is Teeded for checks that were initially received as postdated but
became due and encashed prior to the preparation of financial Hlements.
Example: You received customers' checks totaling P100,000.

Unused credit line Unused credit line is not included as cash but rather disclosed
only in the notes. Unused credit line is the difference between the amount of line o
f
credi t and the amount that was actually farrowed.
For example, you applied for a line of credit of P100M in a bank. During the year,
you borrowed P70M. The bank automatically credits your account for the P70M
borrowed. This is
luded in your cash. The unused credit line of P30M (P100M less POM) is disclosed only
in the notes because you have not yet
ceived it in cash.
The entry to record the receipt of the checks is as follows: Date C
ash
100,000 Accounts receivable
100,00
At the end of reporting period, you determined that customer's check of P20,000,
included in the collections, postdated.
The adjusting entry is as follows:

Dat e Accounts receivable
Cash
20,000
Unreleased checks drawn and Postdated checks drawn Entities normally record
checks drawn by debiting "Accounts payable and crediting "Cash." However, when
the checks drawn an either (a) unreleased or u
ndelivered to the p
ayee o
r (b)
postdated, no payment has actually been made. Therefore, an adjusting entry is needed
ert back the unreleased check or postdated check for cash and accounts
to rev
payable.
20,00
You will report cash of P80,000 (100,000 less postdate check of 20,000) in your
financial statements.
You might ask "why would I record the postdated check collection when it is
not yet available for use?" Well, i t is to internal control purposes and convenience
of recording. If no recorded, the check might not be presented on time fol
encashment on due date. You might even forget about the ched misplace it, or
someone might take it, and so on. Furthermore maintaining separate records for
postdated checks may
cumbersome.
Hample:
You wrote the following checks today. # Check #1 is drawn for P10,000 and dated today
but yet to b
e
delivered to payee Mr. A next year. + Check # 2 is drawn for P15,000 and was delivered
to payee Mr.
B today but the check is dated 100 y ears f rom now.
entry for the checks drawn is as follows:
Chapter 2
nd Cash E
Cash a quivalents
Dat e
Accounts payable - Mr. A Accounts payable - Mr. B
Cash
10,000 15,000
the period of time before checks become stale can be a matter of company
policy. Stale checks are reverted back to cash.
25,000
If financial statements are prepared today, both the checks drawn should be reverted back
to cash and accounts payable because: a) There is no way Mr. A
can encash check
#1 because you still
hold it. b) Mr. B holds check #
2 but he cannot yet encash it until after 100
years (if he's still alive0).
Ho Remember the following c oncepts:
Cash includes money or its equivalent that is readily available for unrestricted
ostdated check received
use. P
Exclude from cash. from customer. Undelivered check drawn.
Include i n cash. Postdated check drawn.
Include i n cash. Stale checks
Include in cash.
In both cases, you have reduced the balance of cash but no payments have
actually been made. Therefore, t he following adjusting entry is necessary:
Cash equivalents C ash equivalents are "short-term, highly liquid investments that
are radily convertible to k nown amounts of cash and which are subject to an
insignificant risk of changes in value." (PAS 7.6)
Only debt instruments acquired w ithin 3 months o efore their maturity date
r l ess b
can qualify as cash equivalents. Examples of cash equivalents:
Treasury bills, notes, or bonds acquired 3 months b
efore maturity

Date
25,000
Cash
Accounts payable - Mr. A Accounts payable - Mr. B
10,000 15,00)
You might ask again "why would I record the unreleased check and postdated check as
payments when the payee cannot yet encash them?" Well, again, it is for internal
control purposes (This will be explained on the discussion of "voucher system.")
Or you might ask "why would I draw a check and nol deliver it to the payee? or
"why would I draw a postdated check in the first place?" Well, in practice,
checks drawn by companies should be signed by at least two authorized
signatories. Either on of those signatories might not be around when the
checks an needed, so some checks are drawn in advance.
Treasury bill i s a short-term obligation issued by the government at a
discount. Treasury bills normally have a maturity of 90 days to less than a year.
Treasury notes and treasury b onds are long-term obligations issued also by the
government. Treasury notes have a maturity of 1 year to less than 10 years. Treasury bonds
have a maturity of 10 years or more.
Stale checks When checks delivered t o payees are not encashed within relatively long
period of time, normally 6 months or more, the checks are referred to as
"stale." It should be noted though that
months b efore matu rity d ate
Money market instrument or commercial paper acquired 3
arket instruments are investments in portfolios of short-term securities.
Money m
Commercial papers consist of short-term, unsecured, notes payable issued in
large denominations by large companies with high credit ratings to other
companies and institutional investors. The maturity date of commercial
Chapter 2
Cash and C
ash Equivalents
49
paper is normally less than 270 days and is traded in money markets and, thus, is
highly liquid. A commercial paper acquired 3 months or less before its maturity date
may qualify as cash equivalent.
C. 3-month t ime deposit

Time deposit is a form of a bank d
eposit normally made in fixed denomination,
bears interest higher than that of regular deposits, and has a pre-agreed maturity.
A time deposit is evidenced by a certificate of deposit.
Checks and equity securities Checks and bank drafts cannot qualify as cash
equivalents because these are not short-term investments. When checks and bank
drafts are available for unrestricted and immediate use, they are Included as cash but not as cash
equivalents.
r ities (investments in stocks) cannot qualify as cash equivalents because
Equity s ecu
shares of stocks do not have a maturity date.
However, redeemable p reference s hares (preference shares with mandatory
redemption) that are acquired 3 months o r l ess N
ef
o
re their specified redemption
date can qualify as cash equivalents because redeemable preference shares are
de bt i nstruments rather than equity instruments.
Illustration: Cash equivalents ABC Co. h olds the following short-term investments as
of December 31, 20x1:
1) 1-year Treasury bill maturing on March 3
0, 20x2 acquired on
July 1, 20x1. 2) 1-year Treasury bill maturing on March 30, 20x2 a
cquired on
December 31, 20x1.
Requirement: Which of the i nvestments may qualify as cash equivalent?
Financial statement presentation Cash and cash equivalents are normally presented
as current unsets unless they are restricted from being exchanged or used to wttle a
liability for at least twelve months a
fter the reporting period.
Unrestricted cash a nd unrestricted cash equivalents are combined and
presented on the statement of financial position in a ingle line item described as "Cas h
ash e
and c quivalents. " The breakdown of the line item is disclosed in the notes. A
Restricted cash is excluded f rom cash and presented under other line item as either current or
non-current asset depending on the nature of the restriction. For example, restricted
cash with fifstriction of more than 12 months may be presented under "o ther
swer:
An
-bill does not q
► The first T ualify as cash equivalent because it is
acquired more th an
3
mont hs b
efore maturity date, i.e. acquired on July 1, 20x1
and matures on March 30, 20x2 - acquired 9 months before maturity. The
second T-bill qualifies a
s cash e quivalent because it is acquired 3 months
or l ess b
efore m aturity d ate, i.e., acquired on December 31, 20x1 and matures
on March 30, 20x1.
de Note that what is important is the d f acquisition which should be 3 months
ate o
or l ess before maturity d ate.
Measurement of cash Cash is measured at face a mount ( f ace v alue) . Cash
denominated in foreign currency i s translated at the current exchange rate at t he
ate.
porting d
Cash maintained in a bank undergoing b ankruptcy is excluded from cash and
presented as receivable measured at
walizable valu
e. R
ealizable value is the amount expected to be recovered from the
deposit and is determined usually by reference
Chapter 2
ash E
Chand C quivalents
to the insured amount of the d

eposit. If the realization is deferred, the amount is
discounted to its present value.
In Remember t he f ollowing concepts:
Cash equivalents - debt instruments acquired 3 m onths or l ess before maturity d ate. The
line item "Cash and cash equivalents" includes only unrestricted c ash and cash
equivalents. Restricted cash is presented u nder other line item (e-8y receivable or other assets,
depending on the nature of the r estricted
sh).
Deposit in foreign banks Unrestric ted d epo
sits i
n f
oreign bank s that are
available for immediate withdrawal are included as cash at face a
mount
translated at the current exchange rate as of the reporting date.
Restricted deposits in foreign banks that are not available for immediate
withdrawal are excluded from cash and presented as receivabl e subject to
appropriate allowances for uncollectability and impairment. The classification of the
restricted deposit as current or noncurrent depends on the nature of the restriction.
ature of the restriction is disclosed i n the notes.
The n
illustration: Cash balance The books o
f ABC Co. show the following b
alances at
December 31, 20x1:
Compensating balance Compensating balance is a minimum amount that

must be maintained in an e ntity's bank account as support for funds borrowed from
the bank. The compensating balance can be used by the bank as cushion for the days
when cash demands are greatest and deposits fail to materialize.
Compensating balances that are legally restricted as to withdrawal by the borrower are
excluded from cash and shown as part of other current assets or other noncurrent
assets depending on the nature o f the restriction.
Compensating balances that are not legally restricted as to withdrawal are included in
cash.
Whether restricted or not, compensating balances are disclosed i n the notes.
Cornpensating balances increase both the yield rate for the lender and the
effective interest rate for the borrower.
Cash on hand Cash in Bank - current account Cash in Bank - peso s avings
deposit Cash in Bank-dollar deposit (unrestricted) Cash in Bank-dollar deposit
(restricted) Cashin money-market account
month Time Deposit Treasury Bill, purchased 12/1/ 20x1, maturing 2/28 /2
0x2
Treasury Bond, purchased 3/1/2 0x1, maturing 2/2 8/20x2 T reasury Note Unused
Credit Line Hadeemable preference shares, purchased 12/1/ 20x1,
fue on 3/1/20x2 Treasury shares, purchased 12/1 5/2
0x1, to be reissued
on W/5/20x2 linking fund
P 100,000
350,000 2,000,000 $ 100,000
20,000 P 250,000 $ 60,000 P800,000
500,000
200,000 2,000,000
370,000
50,000 200,000
Aliitional information:
Cash o nh and includes a P20,000 c ustomer check dated January
10,20x2. . During December 20x1, checks amounting to P60,000 and
sh in b
P40,000 were drawn against the Ca he P60,000 check is dated
ank - current account. T
January 15, 20x2. The P40,000 check In dated December 31, 20x1 b
ut was
delivered to the payee only on January 18, 20x2.
52
Chapter 2
Cash and C
ash Equivalents
eposit includes a deposit in escrow amounting to

The Cash in Bank - peso s avings d
00 and a compensating balance of
P340,0
P250,000 which is legally restricted.
• The Cash in Bank - d ollar d eposit (u nrestricted) account includes
interest of $2,000, net of tax, directly credited to ABC Co.'s account. The
exchange rate at year-end is $1
is to P52.
m
they do not meet the "acquired 3 onths or l ess b
efore maturity" criterion. The
hare
ine i s disclosed only in the notes. The Treasury s
redit L
Unused C s are excluded
t assets but rather contra-equity, i.e., deduction in shareholders
because these are no
equity.
ompute for the amount of cash and cash equivalents to be
Requirement: C
reported in the 20x1 financial statements.
Solution:
80,000
450,000
Cash on hand (100K - 20K postdated customer check) Cash in Bank - current
account (350K + 60K postdated
company check + 40K undelivered company check) Cash in Bank - peso savings
(2M - 340K deposit in
escrow* - 250K restricted compensating balance) Cash in Bank - dollar deposit ($100K X
P52) Cash in money-market account Treasury bill, purchased 12/1/2 0x1, maturing 2/28/20x2
/ 2
Redeemable preference shares, purchased 12/1 0x1,
nd cash equivalents - adjusted balance
due on 3/1/20x2 Cash a
1,410,000 5,200,000
250,000 800,000
verdraft (cash overdraft) is a negativ e ( credit) balance
Bank overdraft Bank o
in the cash in bank account resulting f rom overpayment of checks i n
ay occur only in checking
excess of the amount of deposit. Overdrafts m
accounts, but not in savings and t ime deposits.
Overdrafts are payable on demand; thus, they are presented as current
liabilities, except in cases where offsetting is permitted.
Some banks offer overdraft privileges on their checking accounts. This means that if a
depositor writes a check in excess of the checking account balance, the bank will advance the
required funds to "cover" the check, rather than have the check "bounce." Such advances are
considered as current liabilities.
When two or more bank accounts are maintained in the Name bank a nd one
account results to an overdraft, the overdraft may be offset o r deducted from the other
bank account with a positive balance - provided the other bank account is also
unrestricted. Offsetting is not permitted if the other bank account w
ith a
positive balance is restricted.
n Integral part o
Bank overdrafts that are repayable on demand and form a f the
tity' s c ash
en m anagemen
t, a
re included as
370,000 8,5 60, 000
Notes:
• The postdated check received is excluded w hile the postdated
check drawn and the undelivered check drawn are i ncluded. * D eposit in
escrow is a restricted a mount held in trust for another party, e. g., a deposit
required by a court of law for a pending labor case. This is excluded f rom cash because
it is restricted. The restricted compensating balance is excluded fr om cash.
The Cash in Bank - dollar d eposit (r estricted) a re excluded f r om
nd Sinking f und a
cash because they are restr icted. T he 6-m onth T ime D eposit, Treasury bond,
pu rchased 3/ 1/ 2 , maturing 2/ 2
0x1 8/ 2
0x2, and Treasury N ote a re excluded
because
(PAS 7)
An example is the zero- balancing checking account, which is a disbursement
account offered by some banks. The account is maintained at zero balance until a check
comes in. The resulting overdraft is covered by a transfer from a ma
ster ( p ccount earning
arent) a
interest. Any resulting overdraft at reporting date due to outstanding
checks may be offset to cash.
54
Chapter 2
nd C
Cash a ash Equivalents
The example above is a form of c ash management. Checking accounts do not
normally pay interest (or pay interest but at very low interest rates) so entities
would rather maintain c ash in savings accounts.
It should be noted that offsetting of assets and liabilities is appropriate only when
permitted by a PFRS. Financial assets and financial liabilities may be o
ffset if the entity has
f setoff, and b. an intention to settle the amounts on a net
both: a. a l egal r ight o
basis or
simultaneously
Notes :
Undeposited collections are properly included in cash on hand.
The BPI savings account properly includes the compensating balance
because the compensating balance is not restricted. The overdraft in the BPI current
account can be properly offset with the BPI savings account. The overdraft in the
Metrobank current account cannot be offset with the Metrobank savings
account because the savings a ccount is restricted. The overdraft is presented
as current liability while the restricted a ccount may be presented in " other
assets." The overdraft in the BDO account is presented as current liability.
Illustration: Bank overdraft The cash balance of ABC Co. comprises the following:
Cash on hand Cash in bank-savings - BPI Cash in bank - current - BPI Cash in bank -
deposit in escrow - Metrobank Cash i n bank-current - Metrobank lods Cash in bank -
current - BDO Total
00) 100,000 (20,000) (30,000) 270,
100,000 200,000 ( 80,0 0
00
Internal controls over cash I nternal control is any action or process effected
by management that is designed to help an entity achieve its objectives. Such
objectives may be categorized as follows: # Reliability of financial reporting,
Effectiveness and efficiency of operations, Compliance with laws and regulations,
and Safeguarding of assets.
Additional i nformation:
Cash on hand includes undeposited collections of P20,000.
• The cash in bank - savings maintained at BPI includes
P50,000 compensating balance w hich is not restricted.
Inherent risk is normally higher for cash compared to other assets because cash
is exposed more to risk of theft and other types of fraud. Adequate and effective
internal controls should be in place to ensure that cash is reasonably
safeguarded.
Requirement: Compute for the a
mount of cash to be reported in the financial
statements.
Solution:
Cash on hand Cash in bank - savings - BPI Cash in bank - current - BPI Adjusted
balance of c
ash
100,000 200,000
(80,000) 220,00
0
Namples of internal controls over cash
f incompatible d
Segregation o uti es -
The duties of (a) authorization, (b)
execution, (c) recording, and (d) custody over cash should be segregated.
For example, in a typical organization, purchases are authorized by the man ager
(authorization), purchases are made by the purchasing dep artment
(execution), check
Chapter 2
w and C
ash Equivalents
aside for a limited purpose, such as for the payment of payroll, interest, or
taxes. Maintaining excessive cash balances may increase the risk of embezzlement.
payments are released to payees by the treasurer (custody), and purchase
ccountant ( recording).
transactions are recorded by the a
The custody over cash should be given only to the treasurer. Neither the purchasing
department, manager, nor the accountant should h ave access to cash. If the
incompatible duties are not segregated, the risk o f embezzlement is greatly
increased.
ccounts - Entities often utilize lockbox accounts to expedite cash collections and to
Lockbor a
ensure that cash collections are deposited intact. A l ckbox is rented for a fee
o
and customers are advised to remit their payments directly to the lockbox account.
The bank empties the box at least once a day and immediately credits the entity's
account for collections.
2. Imprest s ystem - The imprest s ystem requires that all cash
receipts should be deposited intact and all cash disbursements should be made
through checks. > Collections should be deposited intact within a reasonable
period of time from the date of collection and should not
be used for any type of disbursement. >Disbursements should be made through checks and not
from cash collections. Disbursements for small amounts are made through the
petty cash f und.
Non- encashment of p er son
al checks f
rom p
e
t
ty cas h
f
und - e
ncashment
of personal checks from the petty cash fund should be prohibited to discourage
concealment of cash shortages.
Voucher system - The voucher system is an internal control over all cash
disbursements. U
nder this system, a voucher is prepared for every cash
disbursement in order to ensure that each disbursement is properly authorized,
nd properly recorded.
made for a valid expenditure, a
nk reconciliation - Bank reconciliation s hould be prepared
3. Ba
regularly, immediately upon the receipt of the monthly bank statement, to reconcile
on a timely basis the differences between the cash balance per books and the cash
balance per bank statement. The differences should be duly investigated and
accounted for.
4. Cash counts - Periodic cash counts should be performed to
provide reasonable assurance that actual cash tallies with the balance per records.
Reconciliation of any difference should be made immediately after the count. Surprise
counts should also be performed at irregular i ntervals as part of internal a
udit.
Voucher system Voucher (c heck disbursement voucher o r CDV) is a business
document or written authorization that supports every disbursement made by an entity.
Supporting documents (e.g. purchase order, purchase invoice, delivery receipt)
are attached to the voucher to form the
voucher package." Unpaid vouchers are filed in the order of their required payment
dates so that available cash discounts are not missed.
The supporting documents are reviewed and compared t o determine their validity
before each check disbursement is drawn. The individual preparing the check (i.e.,
treasurer) stamps the supporting documents as "paid" to ensure that they are
not presented for payment more than once.
5. Minimum c ash b
alance - Minimum cash balance should be
maintained, especially for cash funds, sufficient only to defray specific business
requirements. For example, entities often use imprest ban k a
ccounts which are
amounts specifically set
Chapter
ash E
and C quivalents
belonging to an employee that was commingled with the entity's ash or to "gain" if the
investigation was without merit.
The check number and journal entry are indicated in the voucher. One c
heck is drawn for
each voucher to ensure propol audit trail. Also, vouchers are pre-numbered to help
ensure the completeness. Cancelled vouchers or cancelled checks are noi
destroyed or removed from the file.
Accounting for cash shortages and overages When the cash count results to an
amount less than the balana per records, there is cash shortage. Cash shortage i s
initially debited to a suspense account c alled "Cash shortage or overage pending
proper investigation of the cause of s hortage.
Concealment of cash shortages Cash shortages are fraudulently
concealed in various ways.
samples include, but not limited to, the following:
Lapping - occurs when collection of receivable from one customer is
misappropriated and then concealed by applying a subsequent collection from
another customer. Lapping is m ade possible when the incompatible duties of
recording and
cash custody are combined.
The shortage is initially recorded as follows:
e
Dat Cash shortage or overage
Cash on hand
When financial statements are prepared the "Cash shortage or overage account is
closed to either a nominal or real account. Suspense accounts should not
appear in the financial statements.
Depending on the result of investigation, the shortage may be: a. closed to a
"receivable" account if the shortage was due to the
fault of an employee; or b. c harged to "loss " if the investigation was without
merit.
Illustration: Lapping
Cashier/Bookkeeper collects P10,000 from Customer A, puts money in her purse, and makes
no journal entry.
Cahier/Bookkeeper goes on a date with security guard and spends all money.
Cashier/Bookkeeper collects P15,000 f rom Customer B, puts 15,000 in her purse, and makes the
following journal entry:
Cash
F 10,000 Accounts receivable - Mr.
A R 10,000 Mr. Auditor comes to audit, confirms only "material" accounts, and won't
detect lapping. Mr. Auditor is happy audit is finished. Cashier/Bookkeeper is happier (LOL -
lapping out loud); plans date with janitor.
Receivable from cashier/
The entry to close the suspense account is as follows: Date
Loss on cash shortage
Cash shortage or overage
When the cash count results to an amount more t han the balance per records, there
is cash overage. Cash overage is initially credited t o the "Cash shortage or
overage" account pending proper investigation of the cause of overage.
ayab
Depending on the result of investigation, the overage may be closed to a "p le"
account if the overage was due to cash
Observe from the above transactions that the misappropriation of the
collection from Mr. A is concealed by applying the collection from Mr. B to Mr. A's
account.
In effect, the initial discrepancy in Mr. A's account is transferred to Mr. B's account.
The current discrepancy in Mr. B's account will then be transferred again to another
ays (i.e., overlapping).
account when another customer p
Lapping m ay be discovered through various audit p
rocedures which may
include a nalytical procedures and confirmation u sing proper sampling
techniques.
Chapter 2
and Cash E
quivalents
In the illustration above, if Mr. B's account is confirmed, Alustration 1: Kiting he will
dispute the balance being confirmed as he had already
Bookkeeper draws P100,000 check from Metrobank account made payment. This
leads to the detection of the lapping.
for herself. No journal entry is made. In most cases though, lapping is concealed in more than
Bookkeeper encashes check and spends all money shopping one account and
amounts are broken down into s
maller amounts
at Ladaza and Chopee. to void being selected for audit. Small amounts, even when
a
detected, may still be waived by an inexperienced auditor for
Fearing auditors will detect the f raud, the bookkeeper: further substantive t esting
due to "immateriality."
00 from BPI account Although,
1. Draws unrecorded check of P100,0 technically not
considered lapping cash
and deposits it to Metrobank account. The shortage is shortages are often times
concealed by improperly writing-off
concealed because Metrobank increases the account receivables and misappropriating
subsequent collections. T
his is
balance upon deposit while the check drawn does not yet
clear at BPI (not yet deducted) until the following month. also made possible when the
incompatible duties of authorization, recording, and cash custody are combined.
No entry is made until after year-end.
ccount showing no 2.

2. Prepares bank reconciliation for BPI a Kiting - occurs when cash
shortage is concealed by
outstanding check. overstating the balance of cash. Kiting is made possible by
exploiting the float period (i.e., the time it takes for a check to
Kiting may be detected by preparing a bank transfer clear at the bank where
it was drawn).
wchedule, obtaining a cutoff bank statement, or preparing a proof His Kiting
normally occurs at month-end when a check isil written to transfer funds from one bank
account to another
A bank t ransfer s chedule s
hows the dates of all transfers of cash bank account
where the misappropriation was made. The
rimary purpose is to "fraudster"
among the various bank accounts. Its p would include the
check as a deposit (addition) to
help auditors detect k iting. See I llustration b elow for a sample the account where he
misappropriated the money. Because o f
bank transfer schedule. the float period, the check drawn on the other bank account
ff bank s tatement i s a bank statement prepared a few will not yet b
A cut-o e reported
(not yet deducted) in the month-end
ank statement. The
days after month-end. Its purpose is to help auditors verify b
overstatement of cash conceals the
reconciling i tems on the year-end bank reconciliation. shortage.
Proof of c ash i s discussed in the next chapter. A fund transfer should not affect
the total cash balance because it just involves transferring funds from one
bank
Kiting is done by recording only the receipt portion of the account to another. However,
by increasing the balance of one
und transfer but not the disbursement portion. In effect, cash i s bank
account and not decreasing the o ther, the cash shortage
uverstated in order to conceal a s hortage. is concealed.
Kiting is done in various ways but there is only one purpose and that is to conceal
cash shortage by overstating the cash b
alance.
Chapter 2
Cash and C
ash E
quivalents
Illustration: Kiting Given the data below, identify the transfers that
might indicate
kiting.
Analyses: C 0: N
10
heck # :
tep 1
Transfers From
To Bank A Bank B
ooks P
Disbursement date Per b er b
ank
Dec. 30
Receipt date Per books Per bank D
ec. 30 Jan. 3
Check #
100 200
Transfers From To Bank A Bank B Bank C Bank D Bank B Bank L
Bank E Bank
Disbursement date Receipt date Per books Per bank | Per books Per bank Dec. 30
Jan. 4 Dec. 30 Jan. 3
an. 2 Jan. 2 Jan. 2 Dec. 31 Dec. 31 Jan. 3 Jan. 2 Jan 2
Jan. 3 Jan. 2 Dec, 30 Dec. 31 J
300
400
Disbursement per book s and re ceipt pe
r books are recorded in the same
period, i.e., both December of current year - "Dec. 30" and "Dec. 30."
nd p
Concepts a etect kiting, we will compare the following:
rocedures: T
o
d
ate per b
1. Disbursement d ooks with the receipt date p er books 2.
Disbursement date p er b
ank with the receipt date per b ank
:
Ntep 2
Transfers
Front Bank A
To Bank B
ec. 30 Jan. 4
Disbursement date Pe r book s Pe r bank D
Receipt date Per b oo k s Per b ank D
ec. 30 Jan. 3
100
Fund transfers should not affect the total balance of cash Therefore,
receipt per books must be recorded in t he same period the
disbursement per book s is recorded (i.e., plus and minus in the same
period do not affect the cash balance). Similarly, receipt per bank
must also be recorded in the same period the disbursement p er b
an
k
is recorded.
Disbursement per b nd receipt per bank are also recorded in the same Mriod,
ank a
i.e., both January of subsequent year - "Jan 4" and "Jan. 3."
►
ot indicate kiting, although it indicates both a deposit
Check #100 does n
in transit and an outstanding check because the recording per
bank came later than the recording per books.
If the receipt is recorded in the current period (December) but the
disbursement is recorded in the next period (January), the balance of
d (i.e., plus
cash as of year-end (December 31) is overstate
without minus overstates the cash balance). This i ndicates
kiting If the rece
ipt is recorded in the next period but the
disbursement is recorded in the current period, the balance of
d
cash as of year-end is un erstated (m
inus without plus understates
cash balance). This does not i ndicate kiting but rather deposit in
transit and/or outstanding check.
200: N
Check # tep 1:
Transfers Disbursement date
From То Per b
ooks P
er b
ank 10 Bank Bank
B DA30. Jan 200 Bank C Bank D | Jan. 3 Jan. 2
Receipt date Per books P
er bank Dec. 30 lan, a Dec 30 Dec. 31
er b
Dwursement p ooks is recorded in the subsequent year, i.e., "Jan. 3,"
while
wipt per book s is recorded in the current year, i.e., "Dec. 30."
Chapter 2
ash E
and C quivalents
Check #200 indicates kiting. Cash as of the end of current year is overstated b ecause
receipt i s recorded in the current year bul disbursement is recorded in the subsequent year
lus without a 'm
(a "p inus' overstates cash).
period's profit and current ratio or to increase management bonuses that are
based on sales.
Window dressing can also be used to conceal cash whortages as of the reporting date
by: & including collections in the subsequent period to the
current period; or b. by deferring the r ecording of current year's disbursements
to the subsequent period.
Check #300:
Disbursement per books and receipt p er b
ooks are recorded in the same period, i.e.,
both January of subsequent year - "Jan. 2" and "Jan. 2."
However, disbursement per bank i s recorded in the subsequent year, i.e., "Jan. 2," while
receipt pe r bank is recorded in the current year, i.e., "Dec. 31." Check #300 also
indicates k iting. C
ash as of current year-end is overstated because receipt is
recorded in the current year but disbursement is recorded in the subsequent year
(plus without minus results to overstatement).
Patty cash fund The imprest s ystem r equires all cash receipts to be d eposited
intact and all cash disbursements to be made through checks. However, requiring
cash disbursements for relatively small amounts to be made through checks is
inexpedient. Thus, it becomes necessary
for an entity to establish a petty c ash fund.
Petty cash fund (P
CF) is money set aside to defray relatively small amounts of cash
disbursements. What constitutes a "small" amount is a matter of company policy. For
example, an entity may M ovide f or a policy that all disbursements amounting to P5,000 or more
should be made through checks w hile disbursements below P5.000 may be
made through the petty cash fund.
Check #4
00:
Disbursement per b ooks is recorded in the current year, i.e. "Dec. 31" while receipt p
er
ks is recorded in the subsequent period, i.e., "Jan. 2." This results to
boo
understatement cash as of year-end (minus w ithout plus results to
understatement). Check #400 does n ot indicate kiting, although it indicates an
outstanding check.
Accounting for petty cash fund The accounting procedures for PCF are as
follows:
3. Window dressing. In a broad sense, window dressing is a

form of fraudulent financial reporting and not primarily a method of concealing cash
shortages. Window dressing occurs when books are not closed at year-end and
transactions in the subsequent period are deliberately recorded in the current
period in order to improve the entity's financial performance or financial ratios. This
fraudulent reporting is also called "cooking the books."
For instance, sales in subsequent period are recorded as current period sales in
order to improve the current
Petty c ash fund i s e
stablished PCF is established by means of a check in conformance
with the imprest system of internal control over cash. The check is typically drawn to
the order of a petty cash custodian who is responsible for the custody of the fund.
The entry to record the establishment of a petty cash fund is as follows:
le
petty cash fund
Cash in bank
Chapter 2
ash Equivalents
al C
the entry to record the replenishment is as follows:

Various expense accounts
Cash in bank
XX
The amount of PCF initially established is supported by a board resolution. Such
amount is fixed, meaning if the original amount established is P10,000 and
disbursements during the period reduced the fund balance to P2,000, the amount of
subsequent replenishment is 18,000, the amount needed to bring the fund balance
back to its original amount o
f P10,000.
Any subsequent increase or decrease to the fixed a mount of the fund
should also be supported by a board resolution.
Adjustment f or u
nreplenished f und at reporting date When preparing
financial statements, any u nreplenished p etty cash fund should be adjusted in
order not t o overstate c ash and Hot to u
nderstate e
xpenses.
TW adjusting entry is as follows:
Petty cash fund
YOX
ut of t he p
b. Disbursements o etty cash f und
No j ournal e ntries are recorded when disbursements are made out of
the petty cash fund. Instead, petty cash payments are initially recorded in
a petty c ash register (e.g, a log book) and supported by signed petty cash
vouchers.
The types of expenditures that can be paid out of the PCF are normally
predetermined by management; thus, petty cash vouchers may require only the
or the petty cash requester's immediate
authorization of the PCF custodian
supervisor rather than the entity's CEO. The petty cash requester signs the
petty cash v oucher to acknowledge the receipt thereof.
Bubsequent c hanges i n ledger b
alance o
f petty cash fund T
C subsequently, a board
resolution is made to change the ledger balance of the petty cash fund, the
entries are:
To increase the petty cash fund b

alance:
Petty cash fund
Cash in bank
XX
Inte
To decrease the petty cash fund balance:
Cash in bank
Petty cash fund
XX
XX
f petty c ash disbursements The PCF is replenished when its

Replenishment o
balance becomes low. T he replenishment is made through check and is
supported by a check disbursement v oucher (CDV). This time, a journal
entry i s made for the disbursements d uring the period that were initially recorded
in the petty cash register.
The petty cash custodian shall not retain the supporting documents for
replenished petty cash disbursements but rather surrenders them to
the accounting department. This is to avoid presenting supporting documents for
replenishment more than once.
If there is no shortage or overage, the amount of replenishment i s
equal to the petty cash disbursements.
Again, the PCF balance should stay relatively fixe
d i n the almance of a board resolution
authorizing a change in its original palance. This is to promote best internal control
over cash disbursements.
For example, if the established petty cash fund is P10,000, at any given
point of time, the balance of coins and currencies and petty cash vouchers
in the petty cash box should be equal to
10.000. If the total of cash and vouchers in the petty cash box is Full equal to the
fixed balance of P10,000, there is either a shortage If an overage. If the balance of
P10,000 is frequently changed
Chapter
and Cash Equivalents
without proper authorization, any shortage or overage may not be
readily detected
Cash s hort or over Cash in bank
|
Summary: The "P
etty c ash fund" account is:
Debited
Credited W
hen stablished.
it is initially e
rior to the preparation of financial
When the fund is not replenished but adjusted p
statements. When it is subsequently
When it is subsequently i ncreased t hrough a board
decreased (through a board resolution)
resolution) The etty c
"P ash f un
d" a
ccount is unaffected w
hen disbursements are
made out of the fund.
Notice that the "Ca sh shortage or o
v erage" account is iled when there is an
overage . This is because a cash overage closed either to a p ayable or a gain
account which has a normal Hadit balance.
Shortages/overages in the PCF are normally treated as e ivable from/payable
to the petty cash custodian because the pily cash custodian is responsible for the
PCF at all times.
Shortage in p
etty c ash fund When t here is a petty cash shortage, the
amount of replenishment is increased b y the cash shortage in order to
maintain the fixed balance of the fund.
The entry to record the replenishment when there i shortage is as follows:
Date Various expense accounts
Cash s hortage o
r ove
rage
Cash in bank
Illustration 1: Petty cash fund - journal entries On September 1, 20x1, the
board of directors of ABC Co. p assed a enlution for the establishment of a
P10,000 petty cash fund. Diyle disbursements amounting to le ss than P2,000
will be made through this fund. Those amounting to P2,000 or more will be
made through checks. The following were the transactions during the period.
.
Established P10,000 petty cash fund.
through 21.
MONT
Notice that the "Cash shortage o ro

verage" account is debite d when there
is a shortage. This is because a cash shortage is closed either to a receivable or
a loss account which has a normal d
ebil balance.
Disbursements are made for the following: | - Groceries for use of employees in the pantry
P1,400 - Transportation of Mang Benny, the messenger boy 500 - Snacks
during meetings and conferences
1,000 - Gasoline for company vehicles
Pedicure of Ms. Ana (secretary of the
3,000 -
boss) - authorized
3,000 Total
P8,900
Total coins and currencies in the petty cash box is P500. Replenishment is made.
Ov erage in p
etty c ash f und W
hen there is a petty cash overage, the amount
of replenishment is d ecreased by the cash shortage in order to maintain the
fixed balance of the fund.
The entry to record the replenishment when there is an o verage is as
follows:
Requirement : Provide the journal entries.
Solutions:
Chapter
nd C
Cush a ash E
quivalents
1,400
3,500
The pertinent entries are: Sept. 1. Petty cash fund
10,000 2011
Cash in bank
10,000 Sept. 1
to No journal e
ntry. PCF disbursements are recorded in 2 1, 20x1
petty cash register or log book.
The unreplenished PCF is adjusted as follows: spr.30, Pantry supplies
10x1
Transportation expense (500 +3,000) Meetings and conferences Miscellaneous
expense R eceivable from custodian
Petty cash fund
1,000 3,000 600
9,500
The summary of petty cash count on Sept. 22, 20x1 is shown
below: Coins and currencies Petty cash vouchers
8,900 Total cash c ount
9,401 Less: Total accountability (Ledger balance of PCF)
hortage
(10,000 PCF s
001
(6
When the PCF is not r eplenished, the amount of petty cash to be presented in the
September 30, 20x1 financial statements is equal to the coins a nd c urrencies of
alance minus 79,500 credit adjustment).
P500 (or P10,000 fixed b
Illustration 2: Petty cash fund As of December 31, 20x1, t he petty cash fund
of ABC Co. with a general leger balance of P5,000 comprises the following:
Ledger balance Coins and currencies Cash n eeded t o b
ring t he P
CF back t o i ts
PIOK f ixed b
alance
10,000 (500) 9,500
P850
1,680
1,400 3,500
The entry to record the replenishment is as follows: Sept. 2
2, Pantry supplies

20x7
Transportation expense (500+ 3,000 gas) Meetings and conferences

Miscellaneous expense Cash shortage or overage
Cash in bank
1,000
740
3,000 600
Coins and currencies Petty cash v ouchers: Gasoline for delivery equipment
1,000 Medical supplies for employees
680
lou' s: Advances to employees A s heet of paper with names of several
employees
together with contribution to bereaved employee,
attached is a currency of Checks : A
BC Co.'s check drawn to the order of the PCF
custodian Personal check drawn by the petty cash custodian
9,500
800
>> Assume that the petty cash custodian admits to have taken
money from the fund but forgot to replace it.
1,000
800
The entry to close the suspense account is as follows:
Sept. 22, Receivable from custodian
20x1
Cash shortage or overage
600
600
Requirements: 4. How much petty cash fund will be included as part of cash in
the December 31, 20x1 statement of financial position? b. What is the entry
to replenish the fund on December 31, 20x1?
Assume that the PCF is not r eplenished and financial statements
are prepared on September 30, 2
0x1.
72
Chapter
T
w
ist Equivalents
Solutions:
When this check is included in the cash count, no shortage will be
Requirement ( a ) : Petty cash f und i ncluded in c

ash Coins and currencies ABC
Co.'s check drawn to the order of the PCF custodian Petty c ash fund included
as part o f cash
850
1,000 1,850
In the count shown above, the personal check drawn by the petty cash
custodian is not i ncluded in the count because it is
viously placed there to conceal the cash shortage. If the check was erroneously
included in the count, the shortage would not have been identified. There
would even be an overage of P70!
Usually, only coins and currencies are included as part of cash. However, the
check d rawn t o t he order o
f the p
etty c ash c ustodian is actually a petty cash fund
replenishment, so it is also included as part of cash.
680
antry to record the replenishment is as follows:
Transportation expense
1,000 Medical supplies Advances to employees
740 Cash shortage or o
verage
730 Cash in bank
Requirement ( b ): R
eplenishment journal e ntry Before replenishment, a petty
cash count should be performed as shown below:
3,150
P 850 1,000
After making the replenishment entry the petty cash fund I brought to its ledger
balance of P5,000 (1:1,850 s ee requirement 'a
' +
plenishment of P3,150).
Coins and currencies ABC Co.'s c heck drawn to the order of the P
CF custodian
Petty cash vouchers: Gasoline for delivery equipment
1,000 Medical supplies for employees
680 IOU' s : Advances to employees Total a s accounted ( c ash count) Total accountability
alance) Shortage
(ledger b
1,680
740
4,270 (5,000) (P
730)
The contribution to a bereaved employee is not included in the count because,
clearly, this money does not belong to ABC Co.
For best internal control, encashment of checks from the petty cash fund should
be strictly prohibited because this provides an opportunity to conceal
shortage. For example, if a count is performed and the custodian knows that she
has a shortage of say P800, she would just draw a personal check for the same
amount.
Chapter
Cash and Cash E
quivalents
PROBLEMS
Chapter 2: Summary
Postdated checks received f ro m customers a re exclud ed from cash and
reverted back to accounts receivable. Undelivered checks drawn a nd
postdated checks drawn a n included in cash and reverted back to accounts
payable. O nly highly liquid investments that are acquired 3 m efore
onths or less b
maturity c a n qualify as c ash equivalents. Shares of stocks generally cannot
qualify as cash equivalent except for redeemable p reference s hares
acquired 3 months of less before redemption date. Bank overdrafts are
reported as current l iabilitie s except in cases where offsetting is permitted.
Compensating balances that a re exclud
re legally restricted a e from cash. Those that are not
legally restricted are included in cash. W hether restricted or not, compensating balances are
disclosed in the notes. The voucher s ystem i s an internal control over cash
disbursements which require t hat every disbursement should be supported by a
ocument called the voucher. Cash shortages are
written authorization embodied in d
initially debited, while cash overages an initially credited, to the "Cash shortage
or overage" accoun pending due investigation.
PROBLEM 1: TRUE OR FALSE 1. Money, whether restricted or not, is p resented as cash. 2.
Postdated checks received from customers are reverted from
cash back to receivable. 3. An i nvestment in debt securities that is acquired 3 months or
less before maturity date is presented as cash equivalent. 4.
hecks drawn that are
C
postdated should be reverted back to
cash even if the checks are already delivered to the payees. 5. Entity A
acquired debt securities 2 years ago. At the reporting
date, the debt securities have a remaining term of 2 months.
Entity A can present the debt securities as cash equivalents. 6. C
ompensating
balances that are legally restricted as to
withdrawal by the borrower are excluded from cash. For best internal control, the duties
of cash custody, cash disbursements authorization and cash recording should be
delegated to one and same personnel. # The "Petty Cash Fund" account is credited
each time a petty
cash disbursement is made. 9
. An e
ntity's petty cash fund (PCF) has an imprest
balance of
P100. At the end of the period, the PCF consists of P20 coins and currencies. To
replenish the PCF, the entity should write a
check amounting to P80. 10. A
n entity's PCF has an imprest balance of P100. At
the end of
the period, the PCF includes P30 unreplenished disbursements. The amount
of PCF to be reported in t he financial statements is P70.
PROBLEM 2: MULTIPLE CHOICE - THEORY

Which of the following should not be included in cash? a. p
ostdated checks
drawn and delivered to payees b. checks drawn but not yet delivered to the
payees c. postdated checks received from customers d. cash collections not
deposited at year-end

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Chapter 2

Chapter 2 Cash and Cash Equivalents

Example: You received customers' checks totaling P100,000.

The adjusting entry is as follows:

entry for the checks drawn is as follows:

C. 3-month t ime deposit

to the insured amount of the d

Compensating balance Compensating balance is a minimum amount that

eposit includes a deposit in escrow amounting to

ccount showing no 2.

3. Window dressing. In a broad sense, window dressing is a

the entry to record the replenishment is as follows:

To increase the petty cash fund b

f petty c ash disbursements The PCF is replenished when its

Notice that the "Cash shortage o ro

Transportation expense (500+ 3,000 gas) Meetings and conferences

Requirement ( a ) : Petty cash f und i ncluded in c

PROBLEM 2: MULTIPLE CHOICE - THEORY

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Cash and Cash Equivalents

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Cash and Cash Equivalents

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Chapter ​2

Chapter ​2 ​Cash ​and ​Cash ​Equivalents

Example​: ​You ​received ​customers​' ​checks ​totaling ​P100​,​000​.

The ​adjusting ​entry ​is ​as ​follows​:

e​ntry ​for ​the ​c​hecks ​drawn ​is ​as ​follows​:

C​. ​3​-​month t​ ime ​deposit

to ​the ​insured ​amount ​of ​the d

Compensating ​balance ​Compensating ​balance ​is ​a ​minimum ​amount ​that

​ eposit ​includes ​a ​deposit ​in ​escrow ​amount​ing ​to

​ ccount ​showing ​no ​2​.

3​. ​Window ​dressing​. In ​a ​broad ​sense​, ​window ​dressing ​is ​a

the ​entry ​to ​record ​the ​replenishment ​is ​as ​follows​:

To ​increa​se ​the ​petty ​cash ​fund b

​ f ​petty c​ ash ​disbursements ​The ​PCF ​is ​replenished ​when ​its

Notice that ​the ​"​C​ash ​shortage o ​ ro

Transportation ​expense ​(​500​+ ​3​,​000 ​gas​) ​Meetings ​and ​con​ferences

Requirement (​ a ​ )​ :​ Petty ​cash f​ und i​ ncluded ​in c

PROBLEM ​2​: ​MULTIPLE ​CHOICE ​- ​THEORY

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Chapter 2

Chapter 2 Cash and Cash Equivalents

Example: You received customers' checks totaling P100,000.

The adjusting entry is as follows:

entry for the checks drawn is as follows:

C. 3-month t ime deposit

to the insured amount of the d

Compensating balance Compensating balance is a minimum amount that

eposit includes a deposit in escrow amounting to

ccount showing no 2.

3. Window dressing. In a broad sense, window dressing is a

the entry to record the replenishment is as follows:

To increase the petty cash fund b

f petty c ash disbursements The PCF is replenished when its

Notice that the "Cash shortage o ro

Transportation expense (500+ 3,000 gas) Meetings and conferences

Requirement ( a ) : Petty cash f und i ncluded in c

PROBLEM 2: MULTIPLE CHOICE - THEORY