account with the same bank to cover the overdraft,.

NORTHEASTERN COLLEGE If there are, overdraft maybe offset against cash.

d. Equity securities cannot qualify as cash
Santiago City, Philippines
equivalents because shares do not have a maturity
CONCEPTUAL FRAMEWORK & date.
(1) Preference shares with specified redemption
ACCOUNTING STANDARDS date and acquired 3 months before redemption
Jimmy I. Peru, JD,MBM,MICB,CPA
date can qualify as cash equivalent.

CASH AND CASH EQUIVALENTS 7. Undelivered checks at the end of the reporting period
should be included in cash.
A. Cash.
1. Cash is the standard medium of exchange in business 8. Information about compensating balance should be
transactions. included in the financial statement notes. (see section F)
2. To include as cash, it must be unrestricted in use.
9. Foreign currency
3. Composition of cash a. Cash in foreign currency should be translated to
a. Coins – 10, 5, .25, .10, .05, .01 Philippine Pesos using the current exchange rate.
b. Currency – 1000, 500, 200, 100, 50, 20 b. Deposits in foreign currencies which are not subject
c. Available funds on deposit at the bank to any foreign exchange restriction are in included
(1) checking accounts in cash.
(2) savings accounts c. Deposits in foreign currencies which are subject to
d. Negotiable instruments foreign exchange restriction, if material should be
(1) bank drafts classified separately among noncurrent assets and
(2) money orders the restriction is clearly disclosed.
(3) checks
i. certified check B. Financial statement presentation.
ii. cashier’s check a. A single “cash and cash equivalents” balance is
iii. manager’s check usually reported.
iv. traveler’s check b. Cash is reported at its face value.
e. Cash Equivalents – (PAS 7) are short term and c. Cash is usually listed first in the current asset
highly liquid investments that are readily section.
convertible into cash and so near their maturity that d. Restricted cash should be reported in the
they represent insignificant risk of changes in value investments section. (see section F)
because of changes in interest rates.
i. Three-month BSP treasury bill C. Management of cash.
ii. Three-year BSP treasury bill purchased 1. Effective cash management involves a balance between
three months before date of maturity risk and profitability.
iii. Three-month time deposit a. Too little cash on hand runs the risk of not meeting
iv. Three-month market instrument or of obligations.
commercial paper b. Too much cash on hand leads to missed earnings.
2. Effective cash management requires careful planning
4. Money Market Instruments and control.
a. Treasury bills (issued by the government) a. The major tool of cash planning is the cash budget,
b. Treasury bonds (issued by the government) an internal statement of projected cash flows.
c. Treasury notes (issued by the government)
d. Commercial paper (issued by corporation of good D. Petty Cash.
credit rating) 1. As a general rule, all business payments should be
e. Time deposit (issued by a bank or cooperative) made by check, but this is impractical for some
small payments.
5. Presentation of Money Market Instruments
a. Cash Equivalents – investments with original 2. Some small payments may be handled through a
maturities of 3 months or less. petty cash fund.
b. Temporary Investments – investments with maturity a. Imprest fund-- A fund that is established for a
of more than 3 months to 12 months fixed amount.
c. Long-term Investments – investments with maturity (1) A petty cashier is appointed.
of more than 12 months (2) The fund is established by a debit to Petty Cash
Fund and a credit to Cash in Bank.
6. Items which are NOT cash. (3) Money is disbursed from the fund in exchange
a. Postdated checks, NSF checks and IOUs should be for a receipt. No entry is made.
listed as receivables. (4) When the cash is low, the fund is replenished.
b. Travel advances and postage stamps should be The receipts are removed and cash is added to
reported as prepaid expenses. achieved the total fund amount. An entry is
c. A bank overdraft should be reported as a current made to record the expenses (debit)
liability, unless there are sufficient funds in another represented by the receipts and to credit Cash.

Jimmy I. Peru, Juris Doctor,MBM,MICB,CPA CASH AND CASH EQUIVALENTS page 1

 (5) The Cash Short and Over account is used when
the amount of the receipts do not match the
amount of cash disbursed from the fund.
(a) Any difference usually results from errors
in making change or failing to get a receipt
for very small amounts.
(b) At the end of the period, a small debit
balance in Cash Short and Over is
classified as Miscellaneous Expense on the
financial statements. A credit balance is
Miscellaneous Revenue. A material
shortage is classified as a receivable if
recovery is expected and as a loss if no
recovery is expected.
(6) If the fund is not replenished at the end of the
period, the receipts should be still be removed
and recorded as expenses, but the credit is to
Petty Cash.
(7) A change in the basic petty cash amount should
be made if it runs out early or lasts too long.
E. Cash in Bank.
1. A business should keep most of its cash in the bank.
Cash on hand normally includes only petty cash,
change funds and undeposited receipts.
2. Keeping the cash in the bank provides a double
record of cash transactions.
3. A bank reconciliation should be prepared each time
a bank statement is received, to verify the cash in
the bank and to determine any necessary journal
entries.
4. A bank reconciliation is a schedule that explains
any differences between the bank’s record of the
cash in the account and the company’s record of the
cash in the account.
a. Undeposited collections.
b. Bank collections for the company.
c. Bank charges, such as service charges.
d. Errors by the bank or the company.
5. The preferred format is to reconcile both the bank’s
balance and the company’s balance to the corrected
balance.
6. Journal entries will generally be necessary once the
bank reconciliation is complete in order to update
the company’s records. These entries are based on
the information in the “balance per books”
section.
7. A bank reconciliation should be prepared for each
checking account.
8. The amount listed as cash at the end of the
reporting period will be the sum of all checking
account balances plus any cash on hand.
9. Proof of cash. An expanded reconciliation in that it
includes proof of receipts and disbursements.
a. Four-column bank reconciliation:
(1) Reconciliation of beginning balances.
(2) Reconciliation of checks for the current
month.
(3) Reconciliation of receipts for the current
month.
(4) Reconciliation of ending balances.
b. The proof of cash is a stronger control because
it provides a reconciliation of transactions as
well as cash balances.
Jimmy I. Peru, Juris Doctor,MBM,MICB,CPA
c. This approach is particularly useful when there
have been cash transferred between accounts.
F. Restricted Cash
1. Compensating Balances- a portion of any demand
deposit maintained by a corporation which
constitutes support for existing borrowing
arrangements of the corporation with a lending
institution.
a. legally restricted deposits held as
compensating balances against short term
borrowing arrangements be stated separately
among the “cash and cash equivalent items” in
Current Assets as “cash held as compensating
balance”
b. legally restricted deposits held as
compensating balances against long-term
borrowing arrangements be stated separately as
noncurrent investment.
c. Arrangement without legal restriction should
be classified as cash with disclosure.
2. Other types of Restrictions
a. Cash set aside for a particular purpose. These
fund balances are not material and therefore,
are not segregated from cash when reported in
the financial statement.
(1) Petty Cash Fund
(2) Payroll Fund
(3) Tax Fund
(4) Dividend Fund
b. Cash classified as noncurrent asset:
(1) plant expansion fund
(2) long-term debt retirement fund
(3) insurance fund
(4) contingent fund
(5) sinking fund.
G. Malpractices related to handling of cash
1. Window-dressing. It is the showing of a better
picture of the financial highlights and profit
activities of the company through deliberate
misstatement of the assets, liabilities, capital,
income and expenses. It is usually accomplished as
follows:
a. By recording as of the last day of the
accounting period collections made subsequent
to the close of the period.
b. By recording as of the last day of the
accounting period payments of accounts made
subsequent to the close of the period.
2. Lapping
a. This is a practice used for concealing a cash
shortage. It consists of misappropriating a
collection from one customer and concealing
this defalcation by applying a subsequent
collection made from another customer.
b. Lapping involves a series of postponements of
the entries for the collection of receivables.
This is possible when a company has poor
internal control and especially when the
bookkeeper and cashier are one and the same
person.
CASH AND CASH EQUIVALENTS page 2
 3. Kiting Oversized checks are often used in public events such as
a. It is another device used to conceal a cash donating money to charity or giving out prizes. The checks
shortage. This practice is possible when a are commonly 18 by 36 inches (46 cm × 91 cm) in
company maintains current accounts in size. Regardless of the size, such checks can still be
different banks. Kiting is usually employed redeemed for their cash value as long as they have the same
at the end of the month. It occurs when a parts as a normal check, although usually the oversized
check is drawn against a first bank and check is kept as a souvenir and a normal check is
depositing the same check in a second bank to provided. A bank may levy additional charges for clearing
cover the shortage in the latter bank. No entry an oversized check.
is made for both the drawing and deposit of the
check.
b. This fraudulent device is made possible
because when the check is drawn against the
first bank at the end of the month, the bank
statement for such month does not yet show the
check drawn because the said check is yet to be
cleared or presented for payment to the first
bank. As such, the cash balance in the first
bank at the end of the month is not affected.
c. On the other hand, when the check is deposited
in the second bank at the end of the month, the
bank statement for such month will already
show the deposit thereby increasing the cash in
said bank and covering the cash shortage
therein.
d. This practice is uncovered by simultaneous
preparation of bank reconciliation statements.

APPENDIX

A certified check is a form of check for which the bank

verifies that sufficient funds exist in the account to cover the
check, and so certifies, at the time the check is written.
Those funds are then set aside in the bank's internal account
until the check is cashed or returned by the payee.

A cashier's check (managers check, bank draft, treasurer's

check) is a check guaranteed by a bank, drawn on the bank's
own funds and signed by a cashier. Cashier's checks are
treated as guaranteed funds because the bank, rather than the
purchaser, is responsible for paying the amount. They are
commonly required for real estate and brokerage
transactions.

A traveler's check is a preprinted, fixed-amount check

designed to allow the person signing it to make an
unconditional payment to someone else as a result of having
paid the issuer for that privilege. They were generally used
by people on vacation instead of cash as many businesses
used to accept traveler's check as currency. If a traveler's
check were lost or stolen, they could be replaced by the
issuing financial institution. Alternatives, such as credit
cards, debit cards and automated teller machines became
more widely available and were easier and more convenient
for travelers.

A check sold by a post office for payment by a third party

for a customer is referred to as a money order or postal
order. These are paid for in advance when the order is
drawn and are guaranteed by the institution that issues them
and can only be paid to the named third party. This was a
common way to send low value payments to third parties,
avoiding the risks associated with sending cash via the mail,
prior to the advent of electronic payment methods.
Jimmy I. Peru, Juris Doctor,MBM,MICB,CPA CASH AND CASH EQUIVALENTS page 3
PROBLEMS AND CASES
PROBLEM 1. (Determine Cash Balance) The controller
for ABC Co., is attempting to determine the amount of cash
to be reported on its December 31, 2020, statement of
financial position. The following information is provided.
1. Commercial savings account of P600,000 and a
commercial checking account balance of P900,000 are
held at First National Bank.
2. Money market fund account held at Volonte Co. (a
mutual fund organization) that permits ABC Co., to
write checks on this balance, P5,000,000.
3. Travel advances of P180,000 for executive travel for the
first quarter of next year (employee to reimburse
through salary reduction).
4. As separate cash fund in the amount of P1,500,000 is
restricted for the retirement of long-term debt.
5. An I.O.U from Marianne Koch, a company officer, in
the amount of P190,000.
6. Petty cash fund of P1,000.
7. A bank overdraft of P110,000 has occurred at one of the
banks the company uses to deposits its cash receipts. At
the present time, the company has no deposit at this
bank.
8. The company has two certificates of deposit, each
totaling P500,000. These certificates of deposit have a
maturity of 120 days.
9. ABC Co., has received a check that is dated January 12,
2021, in the amount of P125,000.
10. ABC Co., has agreed to maintain a cash balance of
P500,000 at all times at First National Bank to insure
future credit availability.
11. ABC Co., has purchased P2,100,000 of commercial
paper of Metro Bank which is due in 60 days.
12. Currency and coin on hand amounted to P7,700.
INSTRUCTION: Compute the amount of cash to be
reported on December 31, 2020. Indicate the proper
reporting for items that are not reported as cash at the end of
the reporting period. Use the format below.
CCE Other accounts
Item no. 1
Item no. 2
Item no. 3
Item no. 4
Item no. 5
Item no. 6
Item no. 7
Item no. 8
Item no. 9
Item no. 10
Item no. 11
Item no. 12
Jimmy I. Peru, Juris Doctor,MBM,MICB,CPA
PROBLEM 2: (Determine Cash Balance)
Presented below are a number of independent situations. For
each individual situation, determine the amount that should
be reported as cash. If the item is not reported as cash,
explain the rationale.
1. Checking account balance P925,000;
certificate of deposit of P1,400,000; cash
advance to subsidiary of P980,000; cash in
bank closed by BSP P180,000.
2. Checking account balance P600,000; an
overdraft in special checking account at
same bank as normal checking account of
P17,000; cash held in a bond sinking fund
P200,000; petty cash fund P300; coins and
currency on hand P1,350.
3. Checking account balance P590,000;
postdated check from customer P11,000;
cash restricted due to maintaining
compensating balance requirement (short-
term loan) of P100,000; certified check
from customer P9,800; postage stamps on
hand P620.
4. Checking account balance at bank
P37,000; money market balance at mutual
fund (has checking privileges)P48,000;
NSF check received from customer P800.
5. Checking account balance P700,000;
cash restricted for future plant expansion
P500,000; 120 days treasury bills
P180,000; cash advance received from
customer P900 (not included in checking
account balance); cash advance of P7,000
to company executive, payable on demand;
refundable deposit of P26,000 paid to the
government to guarantee performance on
construction contract.
Problem 3: On December 31, 2020, Earnest Company
provided the following data:
Cash in bank 1,500,000
Time deposit- 30 days 500,000
Money market placement due on June 30,
2021 1,000,000
Saving deposit in closed bank 50,000
Pension fund 400,000
Petty cash fund 10,000
 The cash in bank included customer check of P80,000
outstanding for 18 months
 Check of P100,000 in payment of accounts payable was
dated and recorded on December 31, 2020 but mailed to
creditors on January 15, 2021
 Check of P50,000 dated January 31, 2021 in Payment of
accounts payable was recorded and mailed December
31, 2020.
 The reporting period is the calendar year. The cash
receipts journal was held open until January 15, 2021
during which time P230,000 was collected and recorded
on December 31, 2020.
Required:
1. Prepare adjusting entries on December 31, 2020
2. Compute the total amount of cash and cash equivalents
that should be reported on December 31, 2020.
CASH AND CASH EQUIVALENTS page 4
Problem 4: Affable Company provided the following Problem 7: On December 31, 2020, ABC Co., had the
information at year-end comprising its cash account: following cash balances:

Cash in bank-checking account 5,000,000 Cash in bank P15,000,000

Cash on hand 400,000 Petty cash fund 50,000
Postage stamps unused 5,000 Time deposit 5,000,000
Certificate of time deposit with maturity Savings deposit 2,000,000
of 3 months 1,500,000
Money order 50,000 Cash in bank includes P500,000 of compensating
Manager’s check 100,000 balance against short-term borrowing arrangement at
December 31, 2020. The compensating balance is
What total amount should be reported as “cash” at year-end? legally restricted as to withdrawal by ABC Co. A check
a. 5,550,000 of P300,000 dated January 15, 2021 in payment of
b. 7,050,000 accounts payable was recorded and mailed on
c. 5,400,000 December 31, 2020. In the current assets section of the
d. 5,450,000 December 31, 2020 statement of financial position,
what amount should be reported as “cash and cash
Problem 5: Ablaze Company provided the following data at equivalent”?
year-end: a. P21,850,000
b. P16,850,000
Cash balance in checking account with Bank A 5,000,000 c. P21,800,000
Overdraft in checking account with Bank B (500,000) d. P14,850,000
Cash in a special fund for plant expansion 2,000,000
Change fund 50,000 PROBLEM 8: (Petty Cash Fund) The accountant of ABC
Currency and coins in petty cash fund 15,000 Company established a petty cash fund of P2,000. During
March, the fund was depleted with the following
What total amount should be reported as “cash” at year-end? disbursements.
a. 4,565,000 Delivery expense P120
b. 5,065,000 Entertainment expense 300
c. 7,065,000 Miscellaneous office supplies 450
d. 5,070,000 Postage 270

Problem 6: Abyss Company provided the following In addition to the above vouchers, the petty cash box has
information on December 31, 2020: currency totaling P730, coins for P10, and a note from
secretary handling the fund for P85, is unaccounted for. The
Cash on hand 200,000 company’ s policy is to collect shortage from the person
Cash in bank 2,000,000 accountable for the shortage.
Petty cash fund 10,000
Commercial paper with maturity of 2 months 500,000 INSTRUCTIONS: Provide the necessary entries
Treasury bill with maturity of 6 months 1,000,000 under the imprest fund system
Postdated customer checks 100,000 a. to establish the petty
cash fund.
What total amount should be reported as “cash and cash
equivalents”?
b. to replenish the fund
a. 2,710,000
b. 3,710,000
c. 2,210,000 c. to account for the
d. 2,700,000 shortage

Jimmy I. Peru, Juris Doctor,MBM,MICB,CPA CASH AND CASH EQUIVALENTS page 5