Chapter 1

CHAPTER 1
CASH AND CASH EQUIVALENTS
DEFINITION OF CASH
As contemplated in accounting, cash includes money and other negotiable instrument that is payable in
money and acceptable by the bank for deposit and immediate credit.
Unrestricted Cash
PAS 1, paragraph 66, which provides that an entity shall classify an asset as current when the asset is
cash or a cash equivalent unless it is restricted to settle a liability for more than twelve months after
the end of the reporting period.
Accordingly, to be reported as "cash" an item must be unrestricted in use.
Cash items included in cash
a. Cash on hand - This includes undeposited cash collections and other cash items
awaiting deposit such as customers' checks, cashier's or manager's checks, traveler's
checks, bank drafts and money orders.
b. Cash in bank - This includes demand deposit or checking account and saving deposit which
are unrestricted as to withdrawal.
c. Cash fund set aside for current purposes such as petty cash fund, payroll fund and
dividend fund.
Cash equivalents
PAS 7, paragraph 6, defines cash equivalents as 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.
The standard further states that only highly liquid investments that are acquired three
months before maturity can qualify as cash equivalents.
Examples of cash equivalents are:
a. Three-month BSP treasury bill

b. Three-year BSP treasury bill purchased three months before date of maturity
c. Three-month time deposit
Three-month money market instrument or commercial paper
Cash in foreign currency are measured a t foreign currency rate.
Cash is measure at face value.
Measurement of cash
If a bank or financial institution holding the funds of an entity is in bankruptcy or financial difficulty cash
should be written down to estimated realizable value if the amount recoverable as estimated to be
lower than the face value.
Cash fund for a certain purpose
If the cash fund is set aside for use in current operations or for the payment of current obligation, it is
a current asset. It is included as part of cash and cash equivalents.
On the other hand, if the cash fund is set aside for noncurrent purpose or payment of noncurrent
obligation, it is shown as long-term investment.
Bank overdraft
When the cash in bank account has a credit balance, it is said to be an overdraft. The credit balance in
the cash account results from the issuance of checks in excess of the deposits.
A bank overdraft is classified as a current liability and should not be offset against other bank accounts
with debit balances
It is to be stated that generally overdrafts are not permitted in the Philippines.
Excepti on to the rule on overdraft
When an entity maintains two or more accounts in one bank and one account results in an
overdraft, such overdraft can be offset against the other bank account with a debit balance in
order to show cash, net of hank overdraft or bank overdraft, net of other bank account.
An overdraft can also be offset against the other bank account. if the amount is not material.
Under IFRS, bank overdraft can be offset against other bank account when payable on demand
and often fluctuates from positive to negative as an integral part of cash management.
Compensati ng balance
A compensating balance generally takes the form of minimum checking or demand/ deposit account
balance that must be maintained in connection with a borrowing arrangement with a bank.
Classifi cati on of compensati ng balance
If the deposit is not legally restricted as to withdrawal by the borrower because of an informal
compensating balance agreement, the compensating balance is part of cash.
If the deposit is legally restricted because of a formal compensating balance agreement,, the
compensating balance is classified separately as "cash held as compensating balance" under
current assets if the related loan is short-term.
If the related loan is long-term, the compensating balance is classified as noncurrent investment.
Undelivered or Unreleased check
An undelivered or unreleased check is one that merely drawn and recorded but not given to the payee
before the end of reporting period.
Accordingly, an adjusting entry is required to restore the cash balance and set up the liability as
follows:
Cash xx
Accounts Receivable xx
Postdated check delivered
A postdated check delivered is a check drawn, recorded and already given to the payee but it bears a
date subsequent to the end of reporting period.
The original entry recording a delivered postdated check shall also be reserved and therefore restored
to the cash balance as follows:
Cash xx
Accounts payable appropriate account xx
Stale check or check long outstanding
A stale check is a check not encashed by the payee within a r elatively long period of time.
In banking practice. a check becomes stale if not encashed within six months from the time of
issuance. Of course, this is a matter of entity policy.
If the amount of stale check is immaterial, it is simply accounted for as miscellaneous income as
follows:
Cash xx
Miscellaneous income xx
However, if the amount is material and liability is expected to continue, the cash is restored and the
liability is again set up. The journal entry is as follows:
Cash xx
Accounts payable or appropriate account xx
Accounting for cash shortage

Where the cash count shows cash which is less tha n, balance per book, there is a cash
shortage to be recorded follows:
Cash short or over xx
Cash xx
Hence, if the cashier or cash custodian is held responsible for the cash shortage, the adjustment should
be:
Due from cashier xx
However, if reasonable efforts fail to disclose the cause of the shortage, the adjustment is
Loss from cash shortage xx
Accounting for cash overage
Where the cash count shows cash which is more than the
balance per book, there is a cash overage to be recorded as follows:
Cash xx
The cash overage is treated as miscellaneous income if these is no claim on the- same.
Miscellaneous income xx
But where the cash overage is properly found to be the money of the cashier, the journal entry is:

Payable to cashier xx
Imprest System
The imprest system is a system of control of cash which re quires that all cash receipts
should be deposited intact and all cash disbursements should be made by means of
check.
Petty cash fund
The petty cash fund is money set aside to pay small expenses which cannot be paid
conveniently by means of check.
There are two methods of handling the pett y cash, namely:
a. Imprest fund system

b. Fluctuati ng fund system
Imprest fund system
The imprest fund system is the one usually followed in handling petty
cash transactions.
Illustration
2019
Nov. 10 The entity established an imprest fund of P10,000
Petty cash fund 10,000
Cash in bank 10,000
29 Replenished the fund. The petty cash items include the

following:
Currency and coin 2,000

Supplies 5,000
Telephone 1,800
Postage 1,200
29 The journal entry to record the replenishment is:
Supplies 5,000
Telephone 1,800
Postage 1,200
Cash in bank 8,000
Dec 31 The fund was not replenished.
The fund is composed of the following: currency and

coin P7,000, supplies P1,500, postage P500, miscellaneous
expense P1,000.
Supplies 1,500
Postage 500
Miscellaneous 1,000
2020
Jan 1 The adjustment made on December 31,2019 is received.
Supplies 1,500
Postage 500
Miscellaneous 1,000
Feb 1 The fund is replenished and increased to P15,000.
The composition of the fund.
Currency and coins 1,000
Supplies 4,500
Postage 3,000
Miscellaneous expense 1500
Total 10,000
Journal Entry
Petty cash fund
Supplies 5000
Postage 4500
Miscellaneous 3000
Cash in bank 14000
The total amount of the check drawn is P14,000 representing the petty cash disbursements of P9,000
and the fund increase of P5,000.
Fluctuating fund system
The system is called “fluctuating fund system” because the checks drawn to replenish the fund do not
necessarily equal the petty cash disbursements.
Illustration
Nov. 10 The entity established a petty cash fund of P10,000
Cash in bank 10,000
Nov.11-28 Petty cash disbursement amounted to P8,000

Expenses 8,000
Nov. 29 Issued a check for P10,000 to replenish the fund.
Petty Cash fund 10,000
Cash in bank 10,000
At this point, the petty cash balance per book is P12,000
Dec1-30 Petty cash expenses amounted to P9,000
Expenses 9,000
31 Issued a check for P15,000 to replenish the fund.
Expenses 15,000
At this point, the petty cash balance is P18,000.

PROBLEMS
CASH AND CASH EQUIVALENTS
Problem 1
Tranvia Company had the following balances on December 31,2018
Cash in checking account 350,000
Cash in money market account 750,000
Treasury bill, purchased November 1, 2018 maturity January 31 2019 3,500,000
Time deposit purchased December 1, 2018 maturing March 31 2019 4,000,000
What amount should be reported as cash and cash equivalents on December 31, 2018?
a) 1,100,000
b) 3,850,000
c) 4,600,000
d) 8,600,000
Solution: C
Cash in checking account 350,000
Cash in money market account 750,000
Treasury bill, purchased November 1, 2018 maturity January 31 2019 3,500,000
Total cash and cash equivalents 4,600,000
Under PAS 7, treasury bills, money market placement and time deposit normally qualify as cash
equivalents only when they have short maturity of three months or less from the date of acquisition.
In the absence of specific term, money market account is short term investment of three months or less.
The treasury bill is classified as cash equivalent because the term is three months.
The time deposit is not a cash equivalent because the term is four months.
Problem 2
At year-end, Myra company reported cash and cash equivalents which comprised the following:
Cash on hand 500,000
Demand deposit 4,000,000
Certificate of deposit 2,000,000
Postdated customer check 300,000
Traveler’s check 200,000
Manager’s check 100,000
Money order 150,000
What total amount should be reported as “cash” at year-end?
a) 7,000,000
b) 4,800,000
c) 6,800,000
d) 5,000,000
Solution: D
Demand deposit 4,000,000
Travelers check 200,000

Managers check 100,000
Money order 150,000
Total cash 5,000,000
Technically, the bcertificate of deposit is a cash equivalent.
The postdated customer check is reverted to accounts receivable.
Problem 3
Everlast Company reported the following information at year end:
 Share investments of P1,000,000 that are very actively traded in the stock market
 Government treasury bills of P2,000,000 with a 10 year term but purchased on December 31 at
which time they had two months to go until maturity
 Cash of P3,400,000 in the form of coin, currency, savings account and checking account
 Commercial papers of P1,500,000 with term of nine months but purchased on December 31 at
which time they had three months to go until maturirty.
1. What total amount should be reported as cash?

a) 3,400,000
b) 4,900,000
c) 4,400,000
d) 5,400,000
2. What total number amount should be reported as cashequivalents?
a) 2,000,000
b) 1,500,000
c) 3,500,000
d) 4,500,000
Solution: 1. A 2. C
Cash-Coin,currency,saving and checking 3,400,000
Government treasury bills 2,000,000
Commerical papers 1,500,000
Total cash equivalents 3,500,000
The share investments cannot qualify as cash equivalents because although very actively traded the
investments do not have a maturity.
The commercial papers are actually money market placements.
Problem 4
Campbell Company had the following account balances on December 31,2018
Cash in bank – current account 4,000,000
Cash in bank – payroll account 1,200,000
Cash in bank – sinking fund 2,000,000
Cash in bank – restricted account for plant addition and expected to be distributed in 2019 1,500,000
Treasury bills 1,000,000
The petty cash fund included unreplenished December 2018 petty cash expense vouchers P5,000 and
employee OIU P 5,000
The cash on hand included a P100,000 customer check payable to Campbell dated January 15, 2019
In exchange for a guaranteed line of credit, the entity has agreed to maintain a minimum balance of
P200,000 in the unrestricted current bank account.
The sinking fund is set aside to settle a bond payable that is due on June 30,2019.
What total amount should be reported as cash and cash equivalent on December 31,2018?
a) 8,640,000
b) 7,440,000
c) 7,640,000
d) 5,640,000
Solution: A
Petty Cash Fund 40,000
Current account 4,000,000
Payroll Account 1,200,000
Sinking fund 2,000,000
Treasury bills 1,000,000
Petty Cash Fund 50,000
Unreplenished petty cash vouchers (5,000)
Employees IOU (5,000)
Adjusted petty cash 40,000

Customer check postdated January 31 2019 (100,000)
Adjusted cash on hand 400,000
The customer postdated check should be reverted to accounts receivable.
The minimum balance of 1'200,000 to he maintained in the current account is included in cash because
the current account is unrestricted.
The sinking fund is included in cash and cash equivalents because the bond payable is already due within
one year from the end of the reporting period.
The classification of a cash fund should parallel the classification of the related liability.
The cash in bank restricted for plant addition is classified as noncurrent regardless of the expected year
of disbursement.
Problem 5
On December 31, 2018, Roma Company reported cash of P9,950,000 with the following details:
Undeposited collections 600,000
Cash in bank – BDO checking account 4,000,000
Undeposited NDF Check received from customer, dated December 1, 2018 150,000
Undeposited check from a customer dated January 15,2019 250,000
Cash in Bank – BDO fund for payroll 1,000,000
Cash in bank – BDO money market instrument, 90 days 2,000,000
Cash in foreign bank restricted 1,500,000
Cash in bank – BDO value added tax account 450,000
Total 9,950,000
On December 31 2018 what total amount should be reported as cash and cash equivalents?
a) 7,600,000
b) 8,200,000
c) 6,050,000
d) 8,050,000
Solution: D
Undeposited collections 600,000
BDO checking account 4,000,000
BDO payroll fund 1,000,000
BDO Money market 2,000,000
BDO Value added tax account 450,000
The NSF customer check and postdated customer check dated January 15, 2019 should be reverted to
accounts receivable.
The restricted cash in foreign bank is classified as noncurrent.
Problem 6
Timex Company reported petty cash fund which comprised the following:
Coins and Currency 3,300
Paid Vouchers:
Transportation 600
Gasoline 400
Office Supplies 500
Postage stamps 300
Due from employees 1,200 3,000
Manager’s check returned by bank marked “NSF” 1,000
Check drawn by the entity to the order of petty cash custodian 2,700
What is the correct amount of petty cash fund for statement presentation purposes?
a) 10,000
b) 7,000
c) 6,000
d) 9,000
Solution: C
Coins and Currency 3,300
Check drawn by the entity to the order of petty cash custodian 2,700
Correct amount of petty cash 6,000
Problem 7
On December 31, 2018, Erika Company reported cash accounts balance per ledger of P9,500,000
included the following:
Cash in bank- demand deposit 3,000,000
Time deposit – 30 days 500,000
NSF check of customer 200,000
Money market placement due on June 30, 2019 2,000,000
Saving deposit 1,000,000
IOU from an employee 300,000

Pension fund 1,500,000
Customer check dated January 31, 2019 600,000
Customer check outstanding for 18 months 400,000
9,500,000
 Check of P100,000 in payment of accounts payable was dated and recorded on December 31,
2018 but mailed to creditors on January 15, 2019.
 Check of P300,000 dated January 31,2019 in payment of accounts payable was recorded and
mailed December 31, 2018.
 The cash receipts journal was held open until January 25,2019, during which time P200,000 was
collected and recorded on December 31,2018.
What total amount should be reported as cash and cash equivalents on December 31, 2018?
a) 4,700,000
b) 6,700,000
c) 4,900,000
d) 5,100,000
Solution: A
Cash in bank – demand deposit 3,200,000
Time deposit – 30 days 500,000
Savings deposit 1,000,000
Cash in bank – demand deposit 3,000,000

Undelivered check dated and recorded on 100,000
December 31 2018 but mailed on January 31, 2019
Check postdated January 31 2019 recorded on Dec 31 2018 300,000
Collections during January 2019 recorded on Dec 31 2018 (200,000)
Adjusted cash in bank 3,200,000
The undelivered check and postdated check should be restored to cash by debiting cash in bank and
crediting accounts payable.
The window dressing of collections during January 2019 should be reversed by debiting accounts
receivable and crediting cash in bank
The NSF customer check, postdated customer check dated January 31, 2019 and the customer check
outstanding for 18 months should be reverted to accounts receivable.
The money market placement is not a cash equivalent because the term is more than 3 months.
The pension fund is a noncurrent investment.
Problem 8
Liwanag Company reported an imprest petty cash fund of P50,000 with the following details:
Currencies 20,000
Coins 2,000
Petty cash vouchers:
Gasoline payments for delivery equipment 3,000
Medical supplies for employees 1,000
Repair of office equipment 1,500

Loans to employees 3,500
A check drawn by the entity payable to the
order of Grace de la cruz, petty cash
custodian, representing her salary 15,000
An employee check returned by the bank
for insufficiency of fund 3,000
A sheet of paper with names of several
employees together with contribution
for a birthday gift of a co-employee
attached to the sheet of paper is a currency of 5,000
What amount of petty cash fund should be reported in the statement of financial position?
a) 42,000
b) 27,000
c) 37,000
d) 22,000
Solution: C
Currencies 20,000
Coins 2,000
Check drawn to the order of the petty cash custodian 15,000
37,000
The check drawn payable to the order of the petty cash custodian representing her salary is actually an
accommodation check.
Thus, the amount is included as part of cash.
Problem 9
Karla Company provided the following information on December 31, 2018:
Security Bank current account 1,000,000
PNB Current account No. 1 400,000
PNB Current account No. 2 (overdraft) (50,000)
BSP treasury bill – 60 days 3,000,000
 The cash on hand included a customer postdated check of P100,000 and postal money order of
P40,000.
 A check for P200,000 in payment of account was drawn against Security Bank account, dated
January 15, 2019, delivered to the payee and recorded December 31, 2018.
What total amount of cash and cash equivalents should be reported on December 31,2018?
a) 4,550,000
b) 5,050,000
c) 4,750,000
d) 1,950,000
Solution: A
Cash on hand (500,000-100,000 postdated check) 400,000
Security Bank current account (1,000,000+200,000) 1,200,000

PNB current account No. 1 400,000
PNB current account No. 2 (50,000)
BSP treasury bill – 60 days 3,000,000
The bank overdraft is netted because it is in the same bank.
The postal money order is part of cash.
The postdated check delivered of P200,000 drawn against security bank is restored to cash in bank by
debiting cash in bank and crediting accounts payable.

Chapter 1

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Chapter 1

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CHAPTER 1

CASH AND CASH EQUIVALENTS

Accordingly, to be reported as "cash" an item must be unrestricted in use.

Cash items included in cash

a. Three-month BSP treasury bill

Three-month money market instrument or commercial paper

Cash in foreign currency are measured a t foreign currency rate.

Cash is measure at face value.

Cash fund for a certain purpose

Excepti on to the rule on overdraft

Classifi cati on of compensati ng balance

Undelivered or Unreleased check

Postdated check delivered

Accounts payable appropriate account xx

Stale check or check long outstanding

Accounts payable or appropriate account xx

Accounting for cash shortage

Cash short or over xx

Due from cashier xx

Cash short or over xx

Loss from cash shortage xx

Cash short or over xx

Accounting for cash overage

Cash short or over xx

Cash short or over xx

Cash short or over xx

Petty cash fund

There are two methods of handling the pett y cash, namely:

a. Imprest fund system

Imprest fund system

Nov. 10 The entity established an imprest fund of P10,000

Petty cash fund 10,000

Cash in bank 10,000

29 Replenished the fund. The petty cash items include the

Currency and coin 2,000

29 The journal entry to record the replenishment is:

Dec 31 The fund was not replenished.

The fund is composed of the following: currency and

Petty cash fund 3,000

Feb 1 The fund is replenished and increased to P15,000.

The composition of the fund.

Currency and coins 1,000

Miscellaneous expense 1500

Petty cash fund

Cash in bank 14000

Fluctuating fund system

Nov. 10 The entity established a petty cash fund of P10,000

Petty cash fund 10,000

Cash in bank 10,000

Nov.11-28 Petty cash disbursement amounted to P8,000

Petty cash fund 8,000

Nov. 29 Issued a check for P10,000 to replenish the fund.

Petty Cash fund 10,000

Cash in bank 10,000

At this point, the petty cash balance per book is P12,000

Dec1-30 Petty cash expenses amounted to P9,000

Petty cash fund 9,000

31 Issued a check for P15,000 to replenish the fund.

Petty cash fund 15,000

At this point, the petty cash balance is P18,000.

CASH AND CASH EQUIVALENTS

Tranvia Company had the following balances on December 31,2018

Cash in checking account 350,000