Chapter 4

FINANCIAL ASSET – CASH

Composition of Cash:

Includes cash on hand as well as current and other accounts maintained with banks such as the following:

a. Undeposited currency and coins.

b. Petty cash – cash items kept on hand to pay for minor expenditures.
c. Demand deposits – amounts on deposit in checking and savings account, respectively.
d. Undeposited negotiable checks – are checks payable to the company or bearer but not yet
presented to the bank for payment.
e. Foreign currencies – converted to their peso values are also included in the cash.
f. Bank drafts – are commitments by banking institutions to advance funds on demand by the party
to whom the draft was directed.
g. Money orders – are similar financial instruments to bank drafts but are drawn generally from
authorized post offices or other financial institutions.
h. Other short-term funds for current operations.

Cash Equivalents

Cash equivalents are short-term 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.  Only highly liquid investments that are acquired three months before maturity can qualify as cash
equivalents such as the following:

a. Three-month commercial paper or money market instrument

b. Three-month time deposit
c. Three-month treasury bills

Valuation of Cash in the Balance Sheet:

a. Is generally valued at face amount.

b. Cash in foreign currency is valued in Philippine peso using the current exchange rate as of the
balance sheet date.
c. Cash in bank or financial institutions having financial difficulty or in bankruptcy should be
shown at its estimated realizable or recoverable value.

Financial Statement Presentation

Shown as the first item among the current assets, as one line item but the detail of which should be
disclosed in the notes to financial statements.
Compensating balance

A set of amount of cash that a firm must keep to its checking account or savings account at all times as
part of a loan agreement.  As part of the loan agreement or contract, a financial institution lending money
to an enterprise sometimes require that a specified amount of cash be maintained in the borrowing entity’s
account(s), and the minimum or average ash to be maintained in the bank during the period of loan is a
compensating balance.

Compensating balance, in effect provides a higher effective interest rate that is higher than the stated
interest rate on a loan agreement because the bank uses the restricted amount that must remain in deposit
over the loan period.

The following generally accepted procedures to disclose compensating balance would be applicable
depending on whether such amount is legally restricted or unrestricted:

1. Legally restricted compensating balance

a. If held as compensating balance against short-tern borrowing arrangements, it should be stated
separately under current assets but under no circumstances should it be included in the caption
“Cash and Cash Equivalents”.
b. If held against long-term borrowings, it should be separately classified as non-current asset either
in the Investments or Other Assets section of the balance sheet.

2. Unrestricted – should be included as part of the cash items on deposit.

In the absence of any information, compensating balance is always considered not available for an
unrestricted use.

Problem 4 – 1: (Cash Items)

Apollo Company shows the following account balances in their financial records as of December 31,
2014:

Checking account at Morgan Bank P(20,000)

Checking account at Land Bank 500,000
Payroll account – National Bank 100,000
Foreign bank account – restricted 750,000
Postage stamps 22,000
Employees’ postdated checks 30,000
I.O.U. from president’s brother 75,000
Traveler’s check 50,000
No-sufficient funds check 18,000
Petty cash fund (P16,000 in currency & expenses receipts for 100,000
P84,000)
Cashier’s checks 36,000
Question 1: What is the correct cash balance to be reported in the statement of financial position of
Apollo Company on December 31, 2014?

Question 2: What is the correct cash balance to be reported in the statement of financial position of
Apollo Company on December 31, 2014 assuming the bank overdraft is repayable on demand
and it’s integral to the entity’s cash management?
a. P682,000 c)    P702,000
b. P686,000 d)    P704,000

Problem 4 – 2: (Cash Items)

The cash account in the current asset section of the balance sheet for Zeus Company showed a balance of
P555,000.  It was found to include the following items:

Petty cash fund (P1,000 is in the form of paid vouchers) P   5,000

Checking account balance, per bank statement
    (A P25,000 check is still outstanding) 255,000
Undeposited receipts, including a post-dated check for 120,000
P5,000
Currencies and coins awaiting deposit 55,000
Bond sinking fund – cash 100,000
Check drawn by manager, returned by bank marked NSF 20,000

What is the correct cash balance for Zeus Company’s statement of financial position?

Problem 4 – 3: (Cash Items)

On December 31, 2014, Artemis Company has the following information concerning its cash and cash
equivalents and some other items:

Coins and currency ………………………………………… P    50,000

Checks received from customers ………………………….. 600,000
Certificate of deposit, term:  12 months …………………… 800,000
Petty cash fund …………………………………………….. 4,000
Postage stamps …………………………………………….. 600
Bank A, checking account balance ………………………… 2,100,000
 Post-dated check, customer ………………………………… 10,000
Money order from customer ………………………………… 15,000
Cash in savings account …………………………………….. 100,000
Bank draft from customer ………………………………….. 40,000
Utility deposit to gas company, refundable 5,000
………………….
Cash advance received from customer …………………….. 8,000
NSF check, C. Company ……………………………………. 20,000
Cash advance to company executive, collectible upon
        Demand ………………………………………………. 200,000
Bank B, checking account, overdraft ……………………… 20,000
IOUs from employees ……………………………………… 12,000

What amount of cash and cash equivalents should Artemis Company report in its December 31, 2014
statement of financial position?

Problem 4 – 4: (Cash Item)

Gamma Corporation has supplied you with the following list of its bank accounts and cash at December
31, 2014:

Checking account (compensating balance of P  15,000

       with no restriction) P  48,000
Savings account, 2% 30,000
Certificate of deposit, 6 months, 10%, due April 20, 60,000
2015
Money market (30-day certificate), current rate, 9.75% 40,000
Payroll account 20,000
Certificate of deposit, 3 months, 10%, due Feb. 15, 2015 75,000
Petty cash 1,500
Total P274,500

What should be the balance to be reported as “Cash and Cash Equivalents” in the December 31, 2014
statement of financial position of Gamma Corporation?
Problem 4 – 5: (Cash Items)
Diana Corporation had the following account balances at December 31, 2014:
Cash on hand and in banks P975,000
Cash restricted for additions to plant (expected 
    to be disbursed in 2016) 600,000
Bank certificates of deposit (due January 16, 250,000
2015)

In the current asset section of Diana’s December 31, 2014 statement of financial position, what is the total
amount that should be reported under the caption “cash and cash equivalents”?