Cash and Cash Equivalents

Cash
&
Cash
Equivalents
CASH & CASH EQUIVALENTS
PAS 1, paragraph 66 - “an entity shall classify an asset as current when the
asset is cash or a cash equivalent unless it is restricted from being exchanged
or used to settle a liability for at least twelve (12) months after the end of the
reporting period”
Important characteristics of CASH

1. Unrestricted – readily available for use in the current operations
2. Acceptable by the bank for deposit and immediate credit (dated and in
good form).
CASH includes the following items:

1. Cash on hand - undeposited cash collections and negotiable
instruments awaiting deposit such as checks, bank drafts and money
orders
2. Cash in bank - demand deposit (checking account) and savings

deposit that are unrestricted as to withdrawal
3. Cash fund set aside for current purposes – includes, among others, petty
cash fund, payroll fund, change fund, dividend fund
Which of the following items will qualify as cash?
- Undeposited cash and checks
- Savings account with BDO, earmarked for the purchase of a delivery

equipment
- Current account with BPI
- Savings account in a closed bank
- Petty cash fund
- Change fund
- Savings account set aside for the payment of currently maturing debt
- Post – date check from a customer
- Dated check from a customer, undeposited due to lack of required

signature
- Mutilated check received from customer, dated and properly signed

CASH EQUIVALENTS
PAS 7, paragraph 6 – “cash equivalents are short-term highly liquid
investments that are readily convertible into cash and so near their maturity
that they represent insignificant risk of changes in value because of
changes in interest rates”
Examples for cash equivalents:
1. 3-month BSP treasury bill

2. 3-year BSP T-bill purchased 3 months before date of maturity
3. 3-month time deposit
4. 3-month money market instrument or commercial paper
Important notes on cash equivalents:

1. Equity securities (investment in shares), as general rule, cannot qualify as
cash equivalents since they don’t have maturity date.
2. Exception to the general rule under Item No, 1 - Preference shares with
mandatory redemption date and acquired 3 months before redemption
date can qualify as cash equivalents.
CASH EQUIVALENTS
Which of the following investments qualify as cash equivalents as at

December 31, 2020?
- 3-month BSP treasury bill, maturing on January 31, 2021
- 3-year BSP T-bill purchased on December 1, 2020, maturing on January 31,

2021
- 3-year BSP T-bill purchased on February 1, 2020, maturing on January 31,

2021
- 3-month time deposit
- 3-month money market instrument or commercial paper
- Investment in ordinary shares
- Investment in preference shares acquired on December 1, 2020,

redeemable on February 28, 2021 at the option of the issuer
- Investment in preference shares acquired on December 1, 2020,

mandatorily redeemable on February 28, 2021
Measurement rules for cash and cash equivalents:

1. Cash is measured at face value.
2. Cash in foreign currency is measured at the current exchange rate.
3. Cash of an entity held by a bank or financial institution in the brink of

bankruptcy or financial difficulty is written down to estimated realizable value
if the same is lower than the face value.
Financial statement presentation:

1. “Cash and cash equivalents” line item is presented as the first item
among the current assets, details comprising the same should be disclosed
in the notes to financial statements.
2. Deposits in foreign countries that are not subject to foreign exchange

restriction are included as part of cash.
3. Deposits in foreign (bank) countries that are subject to foreign exchange

restriction, if material, are classified separately among noncurrent assets
with the restriction clearly indicated.
Classification of excess cash invested in time deposits, money market

instruments and treasury bills:
1. Term is three (3) months or less – cash and cash equivalents
2. Term is more than three (3) months but not over one (1) year – short term
financial assets or temporary investments and presented among current
assets
3. Term is more than one (1) year – noncurrent or long term investment
Classification of cash fund set aside for a certain purpose:
1. Held for current operations or for the payment of a current obligation –

cash and cash equivalents among current assets
2. Held for noncurrent purpose or for the payment of a noncurrent

obligation – long term investment among noncurrent assets
3. Cash held for the payment of a liability should parallel the classification of
the liability for which the related fund is established.
Which of the following qualify as cash and cash equivalents as at December 31,
2020?
- 1 year money placement acquired on March 1, 2020 and maturing on

February 28, 2021
- 5-year time deposit
- Investment in highly marketable ordinary shares
- 3-year BSP T-bills dated and acquired on March 1, 2018 and maturing on March
1, 2021
- 1-year treasury bill acquired on November 30, 2020 and maturing on February
1, 2021
- Sinking fund set aside for the payment of a 5-year liability that is scheduled to
mature on June 30, 2022
- Sinking fund set aside for the payment of a 3-year liability that is scheduled to
mature on June 30, 2021
- Savings account earmarked for the scheduled purchase of land on January 02,
2021
Special cases and issues related to cash and cash equivalents:
1. BANKOVERDRAFT – a credit balance in the cash in bank account of the

depositor
Rules on Overdraft
a. An overdraft should not be offset against other cash in bank accounts of
the entity and shall be presented separately among current liabilities
b. However, offsetting is allowed if:

(1) several cash in banks are maintained in the same bank; or
(2) the amount of overdraft is immaterial, even if the accounts are

held in different banks
1. BANKOVERDRAFT
The following cash in bank accounts were available as at December 31,

2020 for No-Fera Company:
BDO Current Account No. 001 500,000

BDO Current Account No. 002 ( 50,000)
BPI Current Account No. 14344 400,000
MBTC Current Account No. 5254 (40,000)
How much cash in bank should No-Fera report as at December 31, 2020?
2. COMPENSATING BALANCE– minimum checking or demand deposit

account balance that must be maintained in connection with a borrowing
arrangement with a bank.
Rules on Compensating Balance

a. Compensating balance is not legally restricted as to withdrawal –
presented as part of cash
b. Compensating balance is legally restricted as to withdrawal:
i. Related loan or borrowing is short term – presented separately

among current assets as “cash held as compensating balance
ii. Related loan or borrowing is long term – presented as noncurrent

investment
2. COMPENSATING BALANCE
Which of the following compensating balances qualify as part of cash?
- Unrestricted compensating balance related to a long-term loan
- Unrestricted compensating balance related to a short-term loan
- Restricted compensating balance related to a long-term loan
- Restricted compensating balance related to a short-term loan
- Compensating balance related to a long-term loan

3. UNDELIVERED/UNRELEASED CHECKS - Checks written/drawn and recorded

by the entity but are undelivered or unreleased as at end of the reporting
period should be added back to cash.
Adjustment (only if an entry for the payment/collection was made)
Accounts payable xx
Cash in bank xx
(Entry to record the payment)
Adjusting entry:
Cash in bank xx
Accounts payable xx
(Entry to adjust for the effects of undelivered checks)

4. POST-DATED CHECKS ISSUED TO PAYEES - Checks written/drawn and
recorded by the entity but are post-dated as at end of the reporting period
should be added back to cash.
Payor’s record (payment):
Accounts payable xx
Cash in bank xx
Adjusting entry:
Cash in bank xx
Accounts payable xx
(Entry to adjust for the effects of PDCs)

4. POST-DATED CHECKS ISSUED TO PAYEES - Checks written/drawn and
recorded by the entity but are post-dated as at end of the reporting period
should be added back to cash.
Payee’s record (collection):
Cash in bank xx
Accounts receivable xx
(Entry to record the collection)
Adjusting entry:
Cash in bank xx
(Entry to adjust for the effects of PDCs)
5. LONG OUTSTANDING (STALE) CHECKS - Checks written/drawn and

recorded by the entity but are long outstanding or stale should be treated as
follows:
a. Amount involved is immaterial – Amount is reverted back to cash

with a credit to miscellaneous income
b. Amount involved is material – Amount is reverted back to cash

with a credit to accounts payable
Payor’s record (payment) - check amount is immaterial:
Accounts payable xx
Cash in bank xx
Adjusting entry:
Cash in bank xx
Miscellaneous income xx
(Entry to adjust for the effects of long outstanding checks)

follows:


Payor’s record (payment) - check amount is material:
Accounts payable xx
Cash in bank xx
Adjusting entry:
Cash in bank xx
Accounts payable xx

follows:


Payee’s record (collection) - check amount is immaterial:
Cash in bank xx
Adjusting entry:
Other expense xx
Cash in bank xx

follows:


Payee’s record (collection) - check amount is material:
Cash in bank xx
Adjusting entry:
Cash in bank xx
6. WINDOW DRESSING is a practice of opening the books of accounts beyond

the close of the reporting period for the purpose of showing a better financial
position and performance.
Illustration: MANLU – LOCO Co. applied for a bank loan in December 2020
which is scheduled to be released in January 2021 should the bank deem the
financials of the Company worthy of a loan. To enhance the Company’s
liquidity at December 31, 2020, it authorized its accountant to keep the books
for 2020 open till the 1st week of 2021 where obligations with suppliers
amounting to P10,000,000 which were paid on January 2021 were reflected
as if they occurred during the last week of December 2020.
Entry made:
Accounts payable 10,000,000
Cash in bank 10,000,000
Adjusting entry:
Accounts payable 10,000,000
7. LAPPING involves a series of postponements on the recording of the entries

for collections from customers.
Illustration: Mr. Payabyab, the bookkeeper – collector for DUMB Co., made
the following collections from the Company’s customers during December
2020:
December 05 Customer A P100,000
December 10 Customer B 150,000
December 20 Customer C 200,000
ENTRIES made by Mr. Payabyab in the books of DUMB Co.
Dec 05 No Entry
Dec 10 Cash in bank 100,000

Accounts receivable 100,000
Dec 20 Cash in bank 150,000

Solutions:
(1) Segregation of incompatible functions
(2) Monitoring and supervision
(3) Confirmation of accounts with customers
8. KITING occurs when a check is drawn against a first bank and depositing
the same check in a second bank to cover the shortage in the latter bank.
No entry is made for both drawing and deposit of the check.
Illustration:
DUMB Co. maintains bank accounts with 2 different banks. As at end of the
year, a fraud was perpetrated by the accountant which resulted to a cash
shortage in its account with Bank A. To conceal the shortage, the
accountant drew a check against Bank B and deposited the check to its
account with Bank B. Due to timing differences, the deposit will already be
reflected in the records of Bank A, thus covering up for the shortage while the
check drawn against the account with Bank B will only be reflected in the
bank’s record after it successfully cleared in the bank. Hence, the balance
of the account with Bank B will not be affected yet at year-end.
Solutions:
(1) Simultaneous preparation of bank reconciliation/ proof of cash
9. CASH SHORTAGE/ OVERAGE - Cash shortage occurs when the cash

balance per book is higher than the cash actually counted. An overage
occurs if it’s otherwise. A suspense account, “cash short or over” is used upon
discovery of the discrepancy pending investigation.
On Shortage
Entry upon discovery of the cash shortage:
Cash short/over xx
Cash xx
Entry after the investigation:

Findings – cashier’s fault
Receivable from cashier xx
Cash short/over xx
Findings – not the cashier’s fault

Loss from cash shortage xx
Cash short/over xx
9. CASH SHORTAGE/ OVERAGE - Cash shortage occurs when the cash

balance per book is higher than the cash actually counted. An overage
occurs if it’s otherwise. A suspense account, “cash short or over” is used upon
discovery of the discrepancy pending investigation.
On Overage
Entry upon discovery of the cash overage:
Cash xx
Cash short/over xx
Entry after the investigation:

Findings – overage was the cashier’s personal money
Cash short/ over xx
Payable to cashier xx
Findings – not the cashier’s personal money

Cash short/over xx
Miscellaneous income xx
10. PETTY CASH FUND - A petty cash fund is money set aside to pay small
expenses which cannot be paid conveniently and practically by means of
check. The fund may be accounted for under any of the following methods:
Fluctuating fund system Imprest fund system
Establishment Petty cash fund xx Petty cash fund xx

Cash in bank xx Cash in bank xx
Charges vs. PCF Charges/expenses xx No Entry

Petty cash fund xx
Replenishment Petty cash fund xx Charges/ expenses xx

Adjustment at
year-end No entry (so long there is Charges/ expenses xx
no shortage/overage) Petty cash fund xx
Reversing entry No entry (no adjustment) Petty cash fund xx

Charges/expenses xx
Increase in PCF Petty cash fund xx Petty cash fund xx

Decrease in PCF Cash in bank xx Cash in bank xx

Petty cash fund xx Petty cash fund xx
Problem No. 1
On December 31, 2020, NO FERA Co. provided the following data:

Time deposit – 30 days 3,000,000
Money market placement due on June 30, 2021 2,000,000
Saving deposit in a closed bank 100,000
Sinking fund for bond payable due on June 30, 2022 1,500,000
Petty cash fund 20,000
Additional information:
1. The cash in bank included customer check of P100,000 outstanding for 18-months.
2. Check of P200,000 in payment of accounts payable was dated and recorded on

December 31, 2020 but mailed to creditors only on January 15, 2021.
3. Check of P100,000 dated January 31, 2021 in payment of accounts payable was
recorded and mailed on December 31, 2020.
4. The reporting period of the entity is the calendar year. The cash receipts journal was
held open until January 15, 2021 during which time an amount of P500,000 was
collected and recorded on December 31, 2020.
REQUIRED:
1. Prepare the adjusting entries related to the cash items on December 31, 2020.
2. Compute the total amount of cash and cash equivalents that should be reported on
December 31, 2020.
3. Explain the presentation of the items excluded from cash and cash equivalents.
Problem No. 1

Answers to Requirement No. 1

1. The cash in bank included customer check of P100,000 outstanding for 18-months.

Cash in bank 100,000
2. Check of P200,000 in payment of accounts payable was dated and recorded on

December 31, 2020 but mailed to creditors only on January 15, 2021.

Accounts payable 200,000
3. Check of P100,000 dated January 31, 2021 in payment of accounts payable was
recorded and mailed on December 31, 2020.

Problem No. 1


4. The reporting period of the entity is the calendar year. The cash receipts journal was
held open until January 15, 2021 during which time an amount of P500,000 was
collected and recorded on December 31, 2020.


1. Money market placement – short term investment
2. Savings deposit in a close bank – noncurrent asset
3. Sinking fund – noncurrent investment
Problem No. 2
Cash on hand 2,000,000
Security bank – current account 3,000,000
PNB - current account 1,200,000
BDO – current account (overdraft) ( 300,000)
BSP – treasury bill (120 days) 1,000,000
BPI – time deposit 500,000
Bond sinking fund 1,500,000
1. The cash on hand included a customer post-dated check of P150,000 and postal
money order of P40,000.
2. The petty cash fund included unreplenished petty cash vouchers for P10,000 and an
employee check for P5,000 dated January 31, 2021.
3. The BPI – time deposit is set aside for the acquisition of land to be made in early
January 2021.
4. The bond sinking fund is set aside for the payment of bond payable due on
December, 31, 2021.
REQUIRED:
1. Prepare the adjusting entries related to the cash items on December 31, 2020.
2. Compute the total amount of cash and cash equivalents as at December 31, 2020.
3. Explain the presentation of the items excluded from cash and cash equivalents.
Problem No. 2
Answers to Requirement N. 1
1. The cash on hand included a customer post-dated check of P150,000 and postal
money order of P40,000.

Cash on hand 150,000
2. The petty cash fund included unreplenished petty cash vouchers for P10,000 and an
employee check for P5,000 dated January 31, 2021.

Expenses 10,000
January 2021.
December, 31, 2021.
Problem No. 2
Answers to Requirement N. 1
January 2021.
“No adjusting entry is necessary”
December, 31, 2021.
“No adjusting entry is necessary”
Requirement No. 2
Requirement No. 3 (See discussion handouts on CCE)

Problem No. 3
Savings deposit 3,000,000
1. The cash on hand included the following:
(a) Customer check of P100,000 returned by bank on December 26, 2020 due to
insufficient fund but subsequently redeposited and cleared by bank on
January 05, 2021.
(b) Customer check for P150,000 dated January 20, 2021, received on December
23, 2020.
(c) Postal money orders received from customers, P250,000.
2. The petty cash fund is comprised of the following items as at end of the year:
Currency & coins 2,000
Employees’ IOUs 10,000
Currency in envelope marked “collections for Christmas party” 5,000
Check drawn by NO FERA payable to the PCF cashier 33,000
Total petty cash fund 50,000
3. A check written, dated and delivered to the payee on December 23, 2020 was
recorded during 2020 and was found to lack one of the required signatures.
REQUIRED: (1) Adjusting entries related to the cash items on December 31, 2020
(2) Total cash on December 31, 2020
Problem No. 3

1. The cash on hand included the following:
(a) Customer check of P100,000 returned by bank on December 26, 2020 due to
insufficient fund but subsequently redeposited and cleared by bank on
January 05, 2021.
(b) Customer check for P150,000 dated January 20, 2021, received on December
23, 2020.
(c) Postal money orders received from customers, P250,000.
(a) Accounts receivable 100,000

(b) Accounts receivable 150,000

(c) No adjusting entry is necessary

Problem No. 3

2. The petty cash fund is comprised of the following items as at end of the year:
Currency & coins 2,000
Employees’ IOUs 10,000
Currency in envelope marked “collections for Christmas party” 5,000
Check drawn by NO FERA payable to the PCF cashier 33,000
Total petty cash fund 50,000
Receivable from employees 10,000

Cash short/over 5,000
3. A check written for P200,000, dated and delivered to the payee on December 23, 2020 was
recorded during 2020 and was found to lack one of the required signatures.
Answer to Requirement No. 2

Problem No. 4
CDO current account 5,000,000
Tsinabank current account No. 1 4,000,000
Tsinabank current account No. 2 (overdraft) (100,000)
Waterbank savings account 250,000
Waterbank time deposit - 90 days 2,000,000
A. Cash on hand included the following items:
(1) Customer check for P30,000 returned by bank on December 26, 2020 due to insufficient
fund but subsequently redeposited and cleared by the bank on January 10, 2021.
(2) Customer check for P20,000 dated January 15, 2021, received on December 22, 2020.
B. The petty cash fund consisted of the following items:
Currency and coins 5,000
IOUs from employees 2,000
Unreplenished PC vouchers 12,000
Total 19,000
C. Included among the checks drawn by NO FERA against the CDO current account and
recorded in December 2020 were the following:
(1) Check written and dated December 21, 2020 and delivered to payee on January 07,
2021, P 100,000.
(2) Check written on December 27, 2020 dated January 08, 2021, delivered to payee on
December 28, 2020, P75,000.
REQUIRED: (1) Adjusting entries related to the cash items on December 31, 2020
(2) Total cash and cash equivalents on December 31, 2020
Problem No. 4
Answers to No. 1
A. Cash on hand included the following items:
(1) Customer check for P30,000 returned by bank on December 26, 2020 due to
insufficient fund but subsequently redeposited and cleared by the bank on January
10, 2021.

Cash on hand 30,000
(2) Customer check for P20,000 dated January 15, 2021, received on December
22, 2020.

Cash on hand 20,000
Problem No. 4
B. The petty cash fund consisted of the following items:

Currency and coins 5,000
IOUs from employees 2,000
Unreplenished PC vouchers 12,000
Total 19,000
Receivable from employees 2,000

Expenses 12,000
Cash short/over 1,000
C. Included among the checks drawn by NO FERA against the CDO current account and
recorded in December 2020 were the following:
(1) Check written and dated December 21, 2020 and delivered to payee on January 07,
2021, P 100,000.
Problem No. 4
(2) Check written on December 27, 2020 dated January 08, 2021, delivered to payee on
December 28, 2020, P75,000.
Cash in bank 75,000

Answer to Requirement No. 2

Problem No. 5
Problem No. 5
Problem No. 5

Cash and Cash Equivalents

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Cash and Cash Equivalents

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Cash

Important characteristics of CASH

CASH includes the following items:

2. Cash in bank - demand deposit (checking account) and savings

Which of the following items will qualify as cash?

- Undeposited cash and checks

- Savings account with BDO, earmarked for the purchase of a delivery

- Current account with BPI

- Savings account in a closed bank

- Petty cash fund

- Post – date check from a customer

- Dated check from a customer, undeposited due to lack of required

- Mutilated check received from customer, dated and properly signed

Examples for cash equivalents:

1. 3-month BSP treasury bill

Important notes on cash equivalents:

Which of the following investments qualify as cash equivalents as at

- 3-month BSP treasury bill, maturing on January 31, 2021

- 3-year BSP T-bill purchased on December 1, 2020, maturing on January 31,

- 3-year BSP T-bill purchased on February 1, 2020, maturing on January 31,

- 3-month time deposit

- 3-month money market instrument or commercial paper

- Investment in ordinary shares

- Investment in preference shares acquired on December 1, 2020,

- Investment in preference shares acquired on December 1, 2020,

Measurement rules for cash and cash equivalents:

2. Cash in foreign currency is measured at the current exchange rate.

3. Cash of an entity held by a bank or financial institution in the brink of

Financial statement presentation:

2. Deposits in foreign countries that are not subject to foreign exchange

3. Deposits in foreign (bank) countries that are subject to foreign exchange

Classification of excess cash invested in time deposits, money market

1. Term is three (3) months or less – cash and cash equivalents

Classification of cash fund set aside for a certain purpose:

1. Held for current operations or for the payment of a current obligation –

2. Held for noncurrent purpose or for the payment of a noncurrent

- 1 year money placement acquired on March 1, 2020 and maturing on

- 5-year time deposit

- Investment in highly marketable ordinary shares

Special cases and issues related to cash and cash equivalents:

1. BANKOVERDRAFT – a credit balance in the cash in bank account of the

b. However, offsetting is allowed if:

(2) the amount of overdraft is immaterial, even if the accounts are

Special cases and issues related to cash and cash equivalents:

The following cash in bank accounts were available as at December 31,

BDO Current Account No. 001 500,000

Special cases and issues related to cash and cash equivalents:

2. COMPENSATING BALANCE– minimum checking or demand deposit

Rules on Compensating Balance

b. Compensating balance is legally restricted as to withdrawal:

i. Related loan or borrowing is short term – presented separately

ii. Related loan or borrowing is long term – presented as noncurrent

Special cases and issues related to cash and cash equivalents:

Which of the following compensating balances qualify as part of cash?

- Unrestricted compensating balance related to a long-term loan

- Unrestricted compensating balance related to a short-term loan

- Restricted compensating balance related to a long-term loan

- Restricted compensating balance related to a short-term loan

- Compensating balance related to a long-term loan

Special cases and issues related to cash and cash equivalents:

3. UNDELIVERED/UNRELEASED CHECKS - Checks written/drawn and recorded

Adjustment (only if an entry for the payment/collection was made)

Special cases and issues related to cash and cash equivalents: