Cash – includes money and any other negotiable instrument that is to settle a liability for at least twelve months
months after the end of the
payable in money and acceptable by the bank for deposit and
immediate credit.
Included in cash:
 Coins and bills in legal tender by BSP
 Checks (subject to certain conditions)
 Bank drafts
 Money orders
Types of checks:
 Post-dated checks (checks dated on future date) – not part
of cash and cash equivalents because they are not yet
accepted by the bank for deposit and immediate
encashment.
 Not sufficient fund (NSF) checks – not part of cash and
cash equivalents because the check has insufficient
balance not enough for the amount written in the check.
 Certified checks – part of cash and cash equivalents
because it is certified and insured by the bank to have
sufficiency of fund backed in the check. Examples of
certified checks include:
o Manager’s check – certified by the manager of
the bank
o Cashier’s check – certified by the teller or
cashier of the bank
o Traveler’s check – certified for travel purposes of
the depositor
 Antedated checks (checks dated on past date) – part of
cash and cash equivalents provided that they are to be
encashed or deposited to the bank six months following
the date of the check.
 Stale checks (checks long outstanding) – not part of cash
and cash equivalents because it is deemed to be expired.
Checks must be deposited or encashed six months
following the date of the check.
Example Analysis of a Check
The date of the check is on October 15, 2023 and has an amount of
P15,000. The check is not certified by the bank. Therefore:
 Before October 15, 2023, the check is post-dated and the
maker should have at least P15,000 in his account.
 On October 15, 2023, if the maker has failed to have at
least P15,000 in his account, the check would bounce or
marked as NSF check. Once the check is deposited to the
bank, the drawer will receive a notice of DAIF (drawn
against insufficient funds)
 After October 15, 2023, assuming the check has sufficient
funds, it will be an antedated check.
 On April 15, 2012 (six months after the check date),
assuming the check has not been deposited nor encashed,
it is deemed as expired and it will become a stale check.
Unrestricted cash
PAS 1 (Presentation of Financial Statements) provides that “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
reporting period.”
The following cash items are included in “cash.”
 Cash on hand – cash collections and cash items (checks,
bank drafts and money orders) awaiting bank deposit
 Cash in bank – demand or savings deposit, or checking
account which are unrestricted as to withdrawal
 Cash fund – cash set aside for current purposes (petty
cash fund, payroll fund, dividend fund)
Cash equivalents – short and highly liquid instruments (three
months before maturity) that are readily convertible to cash and so
near their maturity that they present insignificant risk of change in
value because of changes in interest rates [PAS 7 (Statement of
Cash Flows) definition]
Included in cash equivalents:
 Three-month BSP treasury bill
 Three-year BSP treasury bill purchased three months
before maturity date
 Three-month bank deposit
 Three-month money market instrument
 Preference shares with specified redemption date and
acquired three months before redemption date
Measurement
 Cash is measured at face value.
 Cash in foreign currency is measured at current exchange
date (balance sheet date)
 Cash is measured at estimated realizable value if bank is in
financial difficulty or bankruptcy and if recoverable
amount is lower than face value (currently, cash account is
insured up to P500,000)
Classification for investments
 If term is three months or less, classified as cash
equivalents
 If term is more than three months but within one year,
classified as marketable securities, or short-term
investments, and are separate current assets in the financial
statements
 If term is more than one year, classified as long-term
investments which are non-current assets.
Cash in a foreign bank
 If not subject to foreign exchange restriction, they are
included as cash.
 If subject to foreign exchange restriction and material,
they are reclassified as cash restricted in foreign bank
which are non-current assets.
Cash fund set for a purpose
 For use in current operations – classified as current asset.
Examples include: petty cash fund, payroll fund, travel
fund, interest fund, dividend fund, and tax fund.
 For use in non-current operations – classified as long-term
investment. Examples include sinking fund, contingent
fund, fund for acquisition of PPE, etc. If the fund is set
1
 aside for use within one year after the reporting period, it Loss from cash shortage xxx
will be reclassified as current asset. Cash short or over xxx
Assuming investigation is unsuccessful
Bank overdraft – happens when there is a credit balance in the
cash in bank account. Pro-forma entries for overage
 Bank overdrafts should not be offset against other bank Cash xxx
accounts with debit balances, except: Cash short or over xxx
o The entity maintains two or more accounts in one Discovery of shortage
bank (account title: cash, net of bank overdraft) #
o The entity maintains accounts in other banks if Cash short or over xxx
the amount is immaterial Payable to cashier xxx
Assuming the money is from
Compensating balance – minimum account balance that must be cashier #
maintained in connection with borrowing arrangement with bank Cash short or over xxx
 If not legally restricted, compensating balance is part of Miscellaneous income xxx
cash Assuming there is no claim on overage
 If legally restricted, compensating balance is reclassified
as cash held as compensating balance. It can be current or Accounting for petty cash
non-current depending on the term of the loan
1. Establishment of fund
Undelivered checks – checks that is drawn and recorded but is not Imprest & Fluctating:
given to payees; it is still cash of the company. Petty cash fund xxx
Cash in bank xxx
Pro-forma Entry
Cash xxx 2. Payment of expenses in PCF
Accounts payable xxx Imprest:

Post-dated checks delivered – checks that is sent to payees but has No entry
Fluctating:
a date subsequent in the reporting period; it is still cash of the Expenses xxx
company. Petty cash fund xxx

Stale checks – checks released by the company that has been 3. Replenishment of PCF
expired Imprest:
Expenses xxx
Pro-forma Entry Cash in bank xxx
Cash xxx Fluctating:
Miscellaneous income xxx (if Petty cash fund xxx
immaterial) # Cash in bank xxx
Cash xxx
Accounts payable xxx (if material) 4. Adjustment of expenses at the end of accounting period
Imprest:
Issues in cash: Expenses xxx
Window dressing – opening the accounts even after the reporting Petty cash fund xxx
period Fluctating:
Lapping – practice used for concealing cash shortage, where it No entry
consists of misappropriating collections in customers.
Kitting – practice used for concealing cash shortage through bank 5. Increase (decrease) of PCF
reconciliation. Imprest & Fluctating
Petty cash fund xxx
Accounting for cash shortage/overage Cash in bank xxx (increase)
#
Pro-forma entries for shortage: Cash in bank xxx
Cash short or over xxx Petty cash fund xxx (decrease)
Cash xxx
Discovery of shortage
# AUDIT PROGRAM FOR CASH
Due from cashier xxx
Cash short or over xxx Audit Objectives:
Assuming cashier is responsible for
shortage # To determine that:

1. Cash balances at the end of the reporting period represent

cash and cash items on hand, in transit to, or in depository
 banks.
2. Cash transactions have been properly recorded
3. Cash balances are properly described and classified, and
adequate disclosure with respect to amounts restricted as to
withdrawal are made in the financial statements.
Audit Procedures:
 Conduct a cash count of undeposited collections, petty
cash and other funds.
 Obtain custodian’s signature to acknowledge return of
items counted.
 Reconcile items counted with general ledger balances.
 Trace undeposited collections counted to bank
reconciliation.
 Follow up dispositions of items in cash counted:
 Undeposited collections should be traced to
bank deposits
 Checks accommodated in petty cash should be
 deposited after the count to establish their
validity.
 IOUs in the petty cash should be confirmed and
 traced to collections in the next payroll period.
 Expense vouchers should be traced to the
succeeding replenishment voucher.
 Coordinate cash count with count of marketable
securities and other negotiable assets of the client.
 Obtain confirmation of year-end fund balances of cash
not counted in branches or other offices.
 Confirm bank balance by direct correspondence with all
banks in which the client has had deposits and loans
during the year.
 Obtain or prepare bank reconciliation.
 Check arithmetical accuracy of reconciliation.
 Trace balance per book to the general ledger balance of
cash account.
 Trace balance per bank to bank statement and compare
with amount confirmed by bank.
 Establish authenticity of reconciling items by reference
to their respective sources, like:
 Bank debit or credit advices.
 Duly approved journal vouchers.
 Investigate checks outstanding for a long period of time.
 Consider adjustment, especially if the check is already
stale.
 Consider the possibility of an erroneous preparation of
the check.
 Investigate any unusual reconciling items.
 Where internal control over cash is weak, consider 2. Your audit of the company’s account with Tsunami Bank disclosed the
preparing a proof of cash reconciliation.
 Obtain cutoff bank statement showing the client’s
transactions within the bank at least one week after the
reporting date, and:
 Trace year-end reconciling items, like:
 Deposit of the year-end undeposited
collections.
 Completeness of year-end outstanding checks.
 Correction of bank errors.
 Examine supporting documents of year-end outstanding
checks that did not clear in the cutoff statement.
 Test reasonableness of cutoff by:
 Comparing dates of checks returned with the
cutoff bank statement to dates of recording in the
cash disbursements register.
 Tracing receipts recorded to a few days before
reporting date to bank deposits.
 Inspect savings account passbook and certificates of
deposit
 Reconcile with book balances.
 Update interest earned posting on passbooks, if
necessary.
 Compare balances with bank confirmation reply.
 Determine any restrictions on availability of cash.
 Determine propriety of financial statement presentation
and adequacy of disclosures.
PROBLEMS:
PROBLEM #1
Computation of Correct Cash Balance
The following are the cash balances of LEONOR, INC. at December
31, 2022:
Undeposited collections (in currency and coins) P40,200
Current account – unrestricted 620,000
Disbursement checks written and recorded in
December 2022 but are to be released to the
payees in January 2023 130,000
Restricted time deposits (expected use in June 2023) 2,000,000
Leonor, Inc. has agreed to maintain a P200,000 compensating
balance in its unrestricted current account in accordance with the
loan covenant.
How much should Leonor, Inc. report as ash on its December 31,
2022, statement of financial position?
A. P590,200 C. P790,200
B. P2,790,200 D. P750,000
PROBLEM #2
Cash and Cash Equivalents
In connection with your audit of the financial statements of ONOR
COMPANY for the year ended December 31, 2022, you gathered the
following information.
1. The company maintains its current account with the Tsunami Bank.
The bank statement on December 31, 2022 showed a balance of
P638,340.
following:
 A check for P22,500 received from a customer whose
account is current had been deposited and then returned by
the bank on December 28, 2022. No entry was made for the
return of this check. The customer replaced the check on
January 15, 2023.
 A check for P5,720 was cleared by the bank as P7,520. The
bank made the correction on January 2, 2023.
 A check for P3,500 representing payment of an employee
advance was received and deposited on December 27, 2022,
but was not recorded until January 3, 2023.
 Post dated checks totaling P67,300 were included in the
deposits in transit. These represent collections of current
 accounts receivable from customers. The checks were
actually deposited on January 5, 2023.
 Various debit memos for drafts purchased for payment
of importation of equipment totaling P230,000 were not
yet recorded. These purchases were previously set up as
accounts payable. Said equipment arrived in December
2022.
 Interest earned on the bank balances for the 4 th quarter
of 2022, amounting to P1,950 was not recorded.
 Bank service charges totaling P1,260 were not recorded.
 Deposit in transit and outstanding checks at December
31, 2022 totaled P136,250 and P276,380, respectively.
2. Various expenses from the company’s imprest petty cash
fund dated December 2022 totaled P16,250, while those
dated January 2023 amounted to P5,903. Another
disbursement from the fund dated December 2022 was a
cash advance to an employee amounting to P3,500. A
replenishment of the petty cash fund was made on January 8,
2023.
3. The company’s trial balance on December 31, 2022 includes
the following accounts:
Cash in bank – Tsunami Bank P 748,320
Cash in bank – Earthquake Bank
(restricted account for plant expansion,
expected to be disbursed in 2023) 700,000
Petty cash fund 30,000
Time deposit, placed December 20, 2022
and due March 20, 2023 1,000,000
Money market placement – Prudential Bank 4,000,000
QUESTIONS:
The accountant of SANTIAGO COMPANY is in the process of
preparing the company’s financial statements for the year ended
December 31, 2022. He is trying to determine the correct balance of
cash and cash equivalents to be reported as a current asset on the
statement of financial position. The following items are being
considered:
 Balances in the company’s accounts at the Metropolitan
Bank:
 Current account P81,000
 Savings account P132,600
 Undeposited customer checks of P22,200 (including a
customer check dated January 2, 2023 or P3,000).
 Currency and coins on hand of P3,480
 Savings account at the Northern Philippines Bank with a
balance of P2,400,000. This account is being used to
accumulate cash for future plant expansion (in 2023).
 Petty cash of P4,000 (currency of P1,200 and unreplenished
vouches for P2,800).
 P120,000 in a current account at the Northern Philippines
Bank. This represents a 20% compensating balance for
P600,000 loan with the bank. Santiago company is legally
restricted to withdraw the funds until the loan is due in 2025.
 Treasury bills:
 Two-month maturity bills P90,000
 Seven-month bills P120,000
 Time Deposit P100,000
What is the correct balance of cash and cash equivalents to be
reported in the current assets section of the statement of financial
position?
A. P547,480 C. P430,280
B. P427,480 D. P327,480

1. What is the adjusted Petty cash fund balance on December

31, 2022?
A. P4,347 C.P30,000 PROBLEM #4
B. P10,250 D.P24,097 Identifying Cash Items
2. The petty cash shortage on December 31, 2022 is Which of the following items should be included in the cash balance
A. P 0 C. P3,500 at December 31, 2022?
B. P5903 D. P4,347
– A check payable to the company, dated January 3, 2023 in
3. What is the adjusted Cash in bank – Tsunami Bank balance payment of a sale made in December 2022.
on December 31, 2022? – A check payable to a vendor, dated and recorded in the
A. P 500,010 C. P432,710 company’s books on December 31, 2022, but not released until
B. P748,320 D. P429,110 January 4, 2023.
4. The entry to adjust the Cash in bank – Tsunami Bank A. I only C. Both I and II
account should include a debit to B. II only D. Neither I nor II
A. Accounts receivable for P89,800.
B. Accounts receivable for P86,300.
C. Accounts payable for P228,200. PROBLEM #5
D. Interest expense for P1,950. Cash and Cash equivalents on the Statement of Financial
Position
5. The December 31, 2022 statement of financial position
should show “Cash and cash equivalents “ at Your audit of the December 31, 2022, financial statements of
A. P6,142,970 C. P4,442,960 DIONISIO CORP. reveals the following:
B. P5,439,360 D. P5,442,960
Current account at Prime Bank P(30,000)
Current account at Prudent Bank 135,000
PROBLEM #3 Treasury bills (acquired 3 months
Cash and Cash Equivalents before maturity) 300,000
Treasury bills (maturity date is Dec. 31, 2023) 1,500,000
 Payroll account 390,000 the check was returned by the customs broker.
Foreign bank account – restricted This check was an outstanding check in the
(translated using the December 31, 2022, reconciliation of the Bank of Manila. 410,000
exchange rate) 2,000,000
Postage stamps 1,250 Petty cash fund of which P10,000 is in
Employee’s postdated check 4,500 currency, P7,200 in form of employee’s
IOU from the vice-president 8,000 IOUS; and P2,800 is supported by approved
Credit memo from a supplier for a purchase return 8,100 petty cash vouchers for expenses all dated prior
Traveler’s check 21,000 to closing of the books on December 31, 2022
Money order 12,900 20,000
Petty cash fund (3,000 in currency and Total P1,960,000
expense receipts for P12,000) 15,000 Less: Overdraft with the Bank of Manila secured by
a chattel mortgage on the inventories 300,000
What amount would be reported as “cash and cash equivalents” on Cash balance per ledger P1,660,000
the statement of financial position on December 31, 2022?
A. P840,050 C.P849,400 What is the amount of cash to b e reported on the December 31, 2022
B. P873,900 D.P861,900 statement of financial position of Bea Company?

PROBLEM #5
Compensating Balance

VICTORIA, INC. needs P2,000,000 to finance its expansion

program. Victoria, Inc. is negotiating a loan with Metropolis Bank
which requires company to maintain a compensating balance of
10% of the loan principal on deposit in a current account at the
bank.

Victoria, Inc. currently maintains a balance of P20,000 in its current

account. The current account earns interest of 2% per annum; the
interest rate on the loan is 12% per annum.

1. What is the principal amount of the loan?

A. P2,200,000 C. P1,980,000
B. P2,000,000 D. P2,220,000

2. What is the effective interest rate on the loan?

A. 13.2% C. 13%
B. 11.8% D. 12%

PROBLEM #5
Compilation of Correct Cash Balance

The Cash account of the BEA CORPORATION as of December 31,

2022 was composed of the following:
A customer’s check returned by the bank for
Insufficient fund P150,000

On deposit in current account with the Bank of PI 900,000

Cash collection not yet deposited to the bank 350,000

A check drawn by the Vice-President of the
Company dated January 15, 2023 70,000

A check drawn by a supplier dated

December 28, 2022 for goods returned
by the company 60,000

A check dated May 31, 2022 drawn by the

company the Bank of Manila in payment of custom
duties. Since the importation did not materialize,