1.

0 Cash

1.1 Cash comprises cash on hand and demand deposits.

1.2 To be reported as cash, an item must be readily available and not restricted for use in the payment of current
obligations.

1.3 Cash on hand includes undeposited coin and currency, petty cash funds, change funds, and negotiable instruments
such as personal checks.

1.4 Demand deposits are unrestricted funds that can be withdrawn upon demand from a bank where they have been
deposited.

1.5 Time deposits are deposits that are not immediately available for withdrawal or that have other restrictions.
Examples of time deposits include certificates of deposit and money market savings certificates.

1.6 Foreign deposits that are subject to immediate and unrestricted withdrawal are reported in their Philippine peso
equivalents as of the date of the balance sheet.

1.7 Restricted foreign deposits are designated as receivables of a current or noncurrent nature and reported subject to any
appropriate allowances.

1.8 Some items do not meet the “acceptance at face value on deposit” test and should not be reported as cash [i.e.,
postage stamps (an office supply), postdated checks, IOUs, and NSF checks (the latter three essentially being
receivables)].

1.9 Cash specifically designated for special purposes should be reported separately in the current or noncurrent asset
section (classification should parallel the classification applied to the liability).

1.10 Cash overdraft—a credit balance in the cash account resulting from the issuance of checks in excess of the
amount on deposit—is reported as a current liability.

2.0 Cash equivalents

2.1 Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash
and which are subject to an insignificant risk of changes in value.

2.2 Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or
other purposes.

2.3 For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be
subject to an insignificant risk of changes in value.

2.4 An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or
less from the date of acquisition.

2.5 Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents, for example
in the case of preferred shares acquired within a short period of their maturity and with a specified redemption date.

3.0 Compensating balances

• A minimum or average balance on deposit with a bank.

• Constitutes support for existing borrowing arrangements.

• Provide a source of funds to the lender as partial compensation for the credit extended.

• Without adequate disclosure, financial statement users may mistakenly assume the entire cash balance is available to
meet current obligations when, in fact, part of the balance is restricted.

• Therefore, any “legally restricted” deposits held as compensating balances should be segregated and reported
separately.

• If the balances are the result of short-term arrangements, they should be shown separately among the “cash items”
in the current assets section; if the result of long-term agreements, they should be classified as noncurrent (either as
investments or “other noncurrent assets”).

• Deposits held as compensating balances that are not “legally restricted” are not shown separately. However,
footnote disclosure is necessary.

4.0 Petty cash

• In an imprest petty cash system, a petty cash custodian is given a small amount of currency from which to make
small payments (minor office supplies, taxi, postage, etc.).
• Each time a disbursement is made, the petty cashier obtains a signed receipt for the payment.

• When cash in the fund runs low, the petty cashier submits the signed receipts to the general cashier and a check is
prepared to replenish the petty cash fund.

• This process is designed to promote control over small cash disbursements which would be awkward to pay by check.

1. Bank reconciliation

1.1 The bank reconciliation, when properly prepared, proves that the cash balance per bank and the cash balance per
book are in agreement.

1.2 Periodic bank reconciliations can help identify any cash errors or irregularities that have occurred in accounting for
cash, either by the business unit or the bank.

1.3 Prepared by an individual who neither handles nor records cash.

1.4 Most differences in bank and book balances for cash are “normal” and are the result of temporary timing lags.

1.4.1 Deposits in Transit - Deposits recorded in the cash account in one period but not received by the bank until the
next period.

1.4.2 Outstanding Checks - Checks written by the company that have yet to be presented at the bank for collection.

1.4.3 Bank Charges - Charges by the bank for services that are deducted from the account by the bank and which the
company learns of when it receives the bank statement.

1.4.4 Bank Credits - Collections or deposits in the company's account that the company is not aware of until receipt of
the bank statement.

1.4.5 Bank or Depositor Errors - Errors made by the company or the bank that must be corrected for the reconciliation
to balance.

2. Forms of bank reconciliation

2.1 Two forms of bank reconciliation may be prepared.

2.2 One form reconciles from the bank statement balance to the book balance or vice versa.

2.3 The other form is described as the reconciliation of bank and book balances to corrected cash balance. This form is
composed of two separate sections that begin with the bank balance and book balance, respectively. Reconciling items
that apply to the bank balance are added and subtracted to arrive at the corrected cash balance. Likewise, reconciling
items that apply to the book balance are added and subtracted to arrive at the same corrected cash balance. The
corrected cash balance is the amount that should be shown on the balance sheet at the reconciliation date.

Funds
Fund refers to cash and other assets set aside to accomplish specific objectives. The purpose for which fund was
established may be current or noncurrent.

Funds for current purposes

• Petty cash fund – payment of small expenditures

• Payroll fund – payment of salaries and wages
• Interest fund – payment of interest
• Dividend fund – payment of dividends
• Tax fund – payment of taxes

Funds for noncurrent purposes

• Sinking fund – payment of long term debt

• Preferred stock redemption fund – payment for retirement of preferred stock
• Plant expansion fund – purchase or construction of additional plant
• Contingency fund – payment for unforeseen obligations
• Insurance fund – payment for uninsured casualties (e.g. fire and typhoon)

Cash surrender value of life insurance

• Cash surrender value of a life insurance policy is the amount of a life insurance premium that exceeds basic insurance
charges and is returnable in the event that the policy is surrendered or canceled.

• Cash surrender value normally arises under the following circumstances:

a. The policy is a life policy.
b. Premiums for three full years must have been paid.
c. The policy is surrendered at the end of the third year or anytime thereafter.
• It is considered to be an investment if the beneficiary is the company itself. If the beneficiary is other than the
company, the premiums paid are simply treated as an expense.

• At the end of the first year of a policy, there is little or no cash surrender value since a portion of the first year’s
premium is applied by the insurance company to the recovery of its costs of selling and initiating the policy.
However, the increase in cash surrender value is ordinarily uniform after the first year of the policy’s existence.

PROBLEMS
1. The following data pertain to Lincoln Corporation on December 31, 2009:
Current account at Metrobank P1,800,000
Current account at Allied Bank (100,000)
Payroll account 500,000
Foreign bank account (in equivalent
pesos) 800,000
Savings deposit in a closed bank 150,000
Postage stamps 1,000
Employee’s post dated check 4,000
IOU from employees 10,000
Credit memo from a vendor for a
purchase return 20,000
Traveler’s check 50,000
Money order 30,000
Petty cash fund (P4,000 in currency and
expense receipts for P6,000) 10,000
Pension fund 2,000,000
DAIF check of customer 15,000
Customer’s check dated 1/1/10 80,000
Time deposit – 30 days 200,000
Money market placement (due 6/30/10) 500,000
Treasury bills, due 3/31/10 (purchased
12/31/09) 200,000
Treasury bills, due 1/31/10 (purchased
1/1/09) 300,000
Compute for the cash and cash equivalents that should be reported on the December 31, 2009 balance sheet.
a. P2,784,000 c. P3,784,000
b. P3,084,000 d. P3,584,000
rro
2. Ralf Corporation had the following account balances at December 31, 2009:
Cash on hand and in bank P2,500,000
Cash restricted for bonds payable due
on June 30, 2010 1,000,000
Time deposit 3,000,000
Savings deposit set aside for dividends
payable on June 30, 2010 500,000
In the current assets section of Ralf’s December 31, 2009 balance sheet, what total amount should be reported as
cash and cash equivalents?
a. P7,000,000 c. P6,500,000
b. P6,000,000 d. P5,500,000

3. On December 31, 2009, Alfonso Company had the following cash balances:
Cash in bank P15,000,000
Petty cash fund 50,000
Time deposit 5,000,000
Saving deposit 2,000,000
Cash in bank includes P500,000 of compensating balance against short term borrowing arrangement at December
31, 2009. The compensating balance is legally restricted as to withdrawal by Alfonso. A check of P300,000 dated
January 15, 2010 in payment of accounts payable was recorded and mailed on December 31, 2009. In the current
assets section of the December 31, 2009 balance sheet, what amount should be reported as “cash and cash
equivalents”?
a. P21,850,000 c. P21,800,000
 b. P16,850,000 d. P14,850,000

CIA 1189 IV-14

4. The petty cash fund of Guiguinto Company on December 31, 2009 is composed of the following:
Coins and currencies P14,000
Petty cash vouchers:
Gasoline payments 3,000
Supplies 1,000
Cash advances to employees 2,000
Employee’s check returned by bank
marked NSF 5,000
Check drawn by the company payable to
the order of the petty cash custodian,
representing her salary 20,000
A sheet of paper with names of
employees together with contribution
for a birthday gift of a co-employee
in the amount of 8,000
P53,000
The petty cash ledger account has an imprest balance of P50,000. What is the correct amount of petty cash on
December 31, 2009?
a. P34,000 c. P39,000
b. P14,000 d. P42,000

1. On December 31, 2009, the cash account of Jen Company has a debit balance of P3,500,000. An analysis of the
cash account shows the following details:
Undeposited collections P 60,000
Cash in bank-PCIB checking account 500,000
Cash in bank-PNB (overdraft) (50,000)
Undeposited NSF check received from a
customer, dated December 1, 2009 15,000
Undeposited check from a customer,
dated January 15, 2010 25,000
Cash in bank-PCIB (fund for payroll) 150,000
Cash in bank-PCIB (savings deposit) 100,000
Cash in bank-PCIB (money market
instrument, 90 days) 2,000,000
Cash in foreign bank (restricted) 100,000
IOUs from officers 30,000
Sinking fund cash 450,000
Listed stock held as temporary
investment 120,000
P3,500,000
Cash and cash equivalents on Jen’s December 31, 2009 balance sheet should be
a. P2,760,000 c. P2,885,000
b. P2,810,000 d. P2,935,000
rpcpa/Valix 6-20

2. Diversity Corporation's checkbook balance on December 31, 2009, was P800,000. In addition, Diversity held the
following items in its safe on December 31:
Check payable to Diversity Corporation,
dated January 2, 2010, not included in
December 31 checkbook balance P200,000
Check payable to Diversity Corporation,
deposited December 20, and included in
December 31 checkbook balance, but
returned by bank on December 30,
stamped "DAIF." The check was
redeposited January 2, 2010, and
cleared January 7 40,000
Check drawn on Diversity Corporation's
account, payable to a vendor, dated
and recorded December 31, but not
mailed until January 15, 2010 100,000
The proper amount to be shown as cash on Diversity's balance sheet at December 31, 2009, is
a. P760,000 c. P860,000
b. P800,000 d. P975,000
P2 M10 pp. 377 Wiley 07-08

3. The Ingersoll Co.’s ledger showed a balance in its cash account at December 31, 2009 of P341,125 which was
determined to consist of the following:
 Petty cash fund P 1,800
Cash in Allied Bank per bank statement
with a check for P3,000 still 168,375
outstanding
Notes receivable in the possession of a
collecting agency 12,500
Undeposited receipts, including postdated
check for P5,250 and traveler’s check 89,000
for P5,000
Bond sinking fund – cash 63,750
IOUs signed by employees 2,475
Paid vouchers not yet recorded 3,225
Total P341,125
At what amount should “Cash on hand and in bank” be reported on Ingersoll’s balance sheet?
a. P267,375 c. P331,125
b. P250,925 d. P314,675
RPCPA 1084-AMP
4. The following items were included as cash in the books of Gotch Co.:
Checking account at Security Bank (P1,200)
Checking account at BPI 5,335
Checking account at Citytrust used for
payment of salaries 5,500
Postage stamps 107
Employee’s post-dated check 2,300
I.O.U. from an employee 200
A check marked “DAIF” 1,250
Postal money order 500
Petty cash fund (P324 in expense
receipts) 500
Certificate of time deposit with BPI 5,000
A gold ring surrendered as security by a
customer who lost his wallet (at
market value) 1,500
The correct amount that should be reported as cash is
a. P11,835 c. P16,511
b. P11,011 d. P11,511
RPCPA 0592