CHAPTER 1: “Cash & Cash Equivalents” Q: How do we account company’s drawn check but not withdrawable?

A: These should be reverted (added back) to cash in bank.

Topic 1: “Composition” 1. Company’s stale check
2. Company’s postdated check
• There are many compositions of cash and cash equivalents, to easily understand 3. Company’s undelivered check
the composition we break it down first to (1) cash and (2) cash equivalents Q: What are the items to be included as part “cash in bank”?
Q: What is the composition of “cash”? A:
A: To qualify as cash, it should be immediately available for unrestricted 1. Checking account / demand deposit / current account
use. Cash is composed of three (3) groups: 2. Savings deposit
§ Cash on hand
Q: What are the items to be excluded as part “cash in bank”?
§ Cash in bank
A:
§ Cash fund
1. Time deposit
2. Deposit in closed bank
Q: What is the composition of “cash on hand”?
3. Deposit in foreign bank – restricted
A: 1. Currencies (bills) and coins.
4. Compensating balance – legally restricted
2. Money order
5. Bank overdraft – different bank
3. Bank drafts
4. Checks Q: What is the treatment to compensating balance?
A:
Q: What are the checks to be included as part of cash on hand?  If not legally restricted, it should be included as part of cash.
A:  If legally restricted, it should be excluded as part of cash.
1. Certified checks 4. Cashier’s check § If relates to short term borrowing, it is presented as part of current asset.
2. Manager’s check 5. Customer’s check § If relates to long term borrowing, it is presented as part of non-current asset.
3. Personal check 6. Traveler’s check  If the problem is silent, assume it is not legally restricted.

Q: What is the treatment to bank overdraft?

Q: What are the checks that is not included as part of cash on hand? A:
A:  Different bank = current liability, (ignore in computing cash composition)
 Checks that are not withdrawable as of balance sheet date.  Same bank = offset to cash in bank (include as deduction in computing cash)
 These checks should be included as part of receivables.  If the problem is silent, it is assumed to be in different bank.
1. Customer’s checks NSF/DAIF/DAUD check Q: What are the cash funds that should be included as part of your cash?
2. Customer’s postdated check A:
3. Customer’s stale check  Cash funds are classified into two (2):
§ Cash fund for current operation – included as part of cash
§ Cash fund not available for current operation – excluded as part of cash

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 Q: What are the other items to be excluded from cash and cash equivalents?
Q: What are the items classified as cash fund for current operation (included)? A:
A: These are cash set aside for payment of (1) current liability or (2) operating expenses 1. IOUs from employees – presented as receivable
2. Postage stamps – presented as supplies
1. Petty cash fund 5. Tax fund
3. Credit memo from suppliers – presented as deduction from liability
2. Revolving fund 6. Interest fund
4. Cash surrender value (CSV) – presented as non-current asset
3. Payroll fund 7. Dividend fund
4. Travel fund 8. Change fund Summary of inclusion and exclusion as general rule
Q: What are the items classified as cash fund for not for operation (excluded)?
Included as part of C & CE Excluded as part of C & CE
A: These are cash set aside for payment of (1) non-current liability or (2) non-current asset
1. Currencies and coins 1. Customer’s NSF checks
1. Sinking fund 4. PPE acquisition fund 2. Money order 2. Customer’s postdated checks
2. Pension fund 5. Depreciation fund 3. Bank draft 3. Customer’s stale checks
3. Preference share redemption fund 6. Insurance fund 4. Certified checks 4. Deposit in closed bank
7. Contingency fund 5. Manager’s checks 5. Deposit in foreign bank – restricted
6. Personal checks 6. Compensating balance restricted
Notes: 7. Cashier’s check 7. Overdraft
• Cash fund for settlement of liability (1-3) expected to disburse within 12 months, 8. Customer’s check 8. Sinking fund
included as part of cash. 9. Traveler’s check 9. Pension fund
• Cash fund set aside for acquisition of asset (1-4), always excluded as part of cash. 10. Company’s stale checks 10. Preference share redemption fund
• Cash fund for settlement of NCL (1-3), if silent, should be excluded as part of cash. 11. Company’s postdated checks 11. PPE acquisition fund
12. Company’s undelivered checks 12. Depreciation fund
Q: What are the cash equivalents to be included as part of cash? 13. Checking account 13. Insurance fund
A: 14. Savings account 14. Contingency fund
15. Compensating bal. not restricted 15. IOUs
 Cash equivalents are investment that are highly liquid and readily convertible into cash.
16. Petty cash fund 16. Postage stamps
 Subject to insignificant risk of change in value.
17. Revolving fund 17. Credit memo from supplier
 To be qualified as highly liquid, the duration should be three (3) months from the date
18. Payroll fund 18. Cash surrender value
of purchase up to maturity date. 19. Travel fund
 In the event it exceeds 3 months, it should be presented as 20. Tax fund
§ Current asset, if the maturity is within 12 months from reporting date. 21. Interest fund
§ Noncurrent asset, if the maturity is beyond 12 months from reporting date. 22. Dividend fund
• If the problem is silent as to the duration or date of acquisition and maturity, it is 23. Change fund
24. Time deposit/certificate of deposit
assumed to be highly liquid (within 3 months) therefore, included as part of C & CE. 25. Commercial paper
1. Time deposit / certificate of deposit 26. Money market
2. Commercial paper / money market 27. Treasury bills
3. Treasury bills / treasury warrants / treasury bonds 28. Investment in redeemable
preference shares
4. Investment in preference share with specific redemption date

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Topic 2: “Petty Cash Fund”
Q: What is the journal entry involving petty cash fund (PCF)?
Establishment: Disbursement coming from the petty
Dr. Petty cash fund XX = imprest balance cash No journal entry.
Cr. Cash in bank XX = imprest balance
Increase of imprest balance: Decrease of imprest balance:
Dr. Petty cash fund XX = increase of imprest balance Dr. Cash in bank XX = decrease of imprest balance
Cr. Cash in bank XX = increase of imprest balance Cr. Petty cash fund XX = decrease of imprest balance
Replenishment of petty cash fund: Year-end adjustment of petty cash fund:
Dr. Various expenses XX = amount of vouchers Dr. Various expenses XX = amount of vouchers
Cr. Cash in bank XX = note A Cr. Petty cash fund XX = note B
Note A: the amount credited to cash in bank upon replenishment is computed below: Note B: the amount credited to petty cash at year-end adjustment is equal to:
Imprest balance of petty cash fund XX Imprest balance of petty cash fund XX
Remaining petty cash fund (XX) Remaining petty cash fund (XX)
Amount credited to cash in bank XX Amount credited to petty cash fund XX

Q: How to compute petty cash “shortage” or “overage”?

• Petty cash shortage arises when the cashier’s accountability > accounted.
• Petty cash overage arises when the cashier’s accountability < accounted.
Accountability Accounted
(1) Imprest balance (1) Remaining currency
(2) Undeposited customer currency collection (a) (2) Undeposited customer currency collection
(3) Undeposited customer check collection (3) Undeposited customer check collection
(4) Unclaimed employee salary (4) Paid vouchers
(5) Excess of travel advances (5) Replenishment checks (b)
(6) Employee contribution (7) Envelop containing Employee contribution (c)
(8) IOUs
Accommodation check (d)
Total Total

(a) – undeposited customer’s check only includes those check that are withdrawable, meaning it excludes: (1) NSF; (2) postdated; and (3) stale checks.
(b) – replenishment checks are checks that are payable to the custodian.
(c) – employee contribution will be included in the accounted only if it the envelop actually contains the employee contribution. (sealed, closed)
(d) – accommodation checks are checks made by the employee payable to the company.
(e) – checks issued by the company are ignored in computing the cash shortage.

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Q: How to compute the adjusted petty cash fund balance at year-end? (for auditing)
Currencies and coins at the date of cash count XX Topic 3: “Bank Reconciliation & Proof of Cash”
+ petty cash disbursement from January 1 to count date XX
– currency collections from January 1 to count date (XX) Q: How to compute the adjusted cash in bank balance and the unadjusted balance?
Currency and coins at year-end XX
Currencies and coins not belonging in the petty cash fund Per book Per bank
1. Undeposited customer currency collection XX Unadjusted balance per ledger + + Unadjusted balance per bank statement
2. Unclaimed salary XX Credit memos + Deposit in transit
3. Excess of advance travel expense XX 1. loan proceeds
4. Employee contribution (in the there were no currency in the envelop) XX (XX) 2. note collection in behalf of Co.
Currencies and coins belonging to petty cash fund XX 3. interest earned from bank
+ petty cash fund not in the form of currencies Debit memo – – Outstanding checks
1. Replenishment checks XX 1. NSF check
2. Accommodation check that are withdrawable at year-end XX 2. Bank service charge
Adjusted petty cash fund at year-end XX 3. Automatic debit
Book errors Bank errors
1. Understatement of receipt + + 1. Erroneous bank disbursement
2. Overstatement of disbursement + + 2. Unrecorded bank receipt
Simplified (for FAR)
3. Overstatement of receipt – – 3. Erroneous bank receipt
Currencies and coins XX 4. Understatement of disbursemnt – – 4. Unrecorded disbursement
+ vouchers dated January 1 onwards (or after year-end) XX Adjusted cash in bank balance Adjusted cash in bank balance
+ replenishment check XX
+ accommodation check (withdrawable as of year-end) XX Q: How to proof of cash?
– employee contribution (in case the envelop is opened) (XX)
First, compute for the unadjusted balances if not given.
Adjusted petty cash balance at year-end XX
Q: How to compute the unadjusted book and bank receipt and disbursement?
Per bank
Checks withdrawn (per record) XX XX Deposits received (per record)
Debit memo, current month XX XX Credit memo, current month
Correction of over receipt XX XX Correction of over disburse
Correction of under disburse XX XX Correction of under receipt
Unadjusted debit / disbursement XX XX Unadjusted credit / receipt

Per book
Collection from customer (per record) XX XX Checks issued to supplier (per record)
Credit memo, prior period XX XX Debit memo, prior month
Correction of over receipt XX XX Correction of over disbursement
Correction of under disbursement XX XX Correction of under receipt
Unadjusted debit / disbursement XX XX Unadjusted credit / receipt

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Q: How to compute the adjusted balances?
Per bank
Beginning Receipt Disbursement Ending
Unadjusted xx xx xx xx
Deposit in transit, beg + –
Deposit in transit, end + +
Outstanding check, beg – –
Outstanding check, end + –
Erroneous debit last month corrected current month + –
Erroneous credit last month corrected current month – –
Erroneous debit last month not yet corrected + +
Erroneous credit last month not yet corrected – –
Erroneous debit this month corrected current month – –
Erroneous credit this month corrected current month – –
Erroneous debit this month not yet corrected – +
Erroneous credit this month not yet corrected – –
Unrecorded debit last month, recorded current month – –
Unrecorded credit last month, recorded current month + –
Unrecorded debit last month, not yet recorded – –
Unrecorded credit last month, not yet recorded + +
Per book
Beginning Receipt Disbursement Ending
Unadjusted xx xx xx xx
Credit memo, last month recorded this month + –
Credit memo, last month not yet recorded + +
Credit memo, this month + +
Debit memo, last month recorded this month – –
Debit memo, last month not yet recorded – –
Debit memo, this month + –
Overstatement of receipt last month corrected current month – –
Overstatement of receipt last month not yet corrected – –
Overstatement of receipt this month not yet corrected – –
Overstatement of disbursement last month corrected this month + –
Overstatement of disbursement last month not yet corrected + +
Overstatement of disbursement this month not yet corrected – +
Overstatement of disbursement or receipt this month correct current month – –
Understatement of receipt last month corrected this month + –
Understatement of receipt last month not yet corrected + +
Understatement of receipt this month not yet corrected + +
Understatement of disbursement last month corrected this month – –
– –
Understatement of disbursement. last month not yet corrected
Understatement of disbursement. this month not yet corrected + –
Understatement of disbursement or receipt dis mo. correct dis mo. none none none none

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Special Adjustments

(1) NSF check redeposited in the same month without entry made on the return and Topic 4: “Shortage”
redeposit. Q: How to compute cash shortage from in a “accrual to cash problem”?
Alternative 1 Beginning cash balance XX
Per book Cash receipts during the year XX
Beginning Receipt Disbursement Ending Cash disbursements during the year (XX)
NSF check redeposited in the + + Ending cash balance – should be (accountability) XX
same month Unadjusted cash balance per bank XX
 Alternative 2 Deposit in transit XX
Per bank Outstanding checks (XX)
Beginning Receipt Disbursement Ending Ending cash balance – actual (accounted) XX
NSF check redeposited in the – – Ending cash balance – should be (accountability) XX
same month Ending cash balance – actual (accounted) (XX)
Cash shortage XX

(2) Cash receipt paid out in cash. Q: How to compute cash shortage from in a “bank reconciliation problem”?
 Alternative 1 Per book Per bank
Per book Unadjusted balance per ledger + + Unadjusted balance per bank statement
Beginning Receipt Disbursement Ending Credit memos + + Deposit in transit
Cash receipt paid out in cash – – 1. loan proceeds
2. note collection in behalf of Co.
 Alternative 2 3. interest earned from bank
Per bank Debit memo – – Outstanding checks
Beginning Receipt Disbursement Ending 1. NSF check
Cash receipt paid out in cash + + 2. Bank service charge
3. Automatic debit
Book errors Bank errors
(3) NSF check recorded as deduction of receipt 1. Understatement of receipt + + 1. Erroneous bank disbursement
Adjustment 2. Overstatement of disbursement + + 2. Unrecorded bank receipt
3. Overstatement of receipt – – 3. Erroneous bank receipt
Per book
4. Understatement of disbursement – – 4. Unrecorded disbursement
Beginning Receipt Disbursement Ending
NSF check recorded as + + Unrecorded disbursement (shortage)
deduction of receipt Adjusted cash in bank balance XX XX Adjusted cash in bank balance

Squeeze

END
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