CHAPTER 1 CASH AND CASH EQUIVALENTS TECHNICAL KNOWLEDGE To understand the concept of cash. To understand the concept of cash equivalents. To identify items considered cash. To identify items considered cash equivalents. To know the accounting for petty cash fund.DEFINITION OF CASH From the point of view of a layman, cash simply means money. Money is the standard medium of exchange in busines= transactions. Money refers to the currency and coins which are in circulation and legal tender. Howéver, in the accounting parlance, the term cash has 2 special and broader meaning and connotes more than money. As contemplated in accounting, cash includes money and any other negotiable instrument that is payable in money and acceptable by the barik for deposit and immediate credit. Accordingly, cash includes checks, bank drafts and money orders because these are acceptable by the bank for deposit or immediate encashment. For example, when checks are received in full settlement of an account receivable, cash is immediately debited. But postdated checks received cannot be considered as cash yet because the postdated checks are unacceptable by the bank for deposit and immediate credit or outright encashment. Unrestricted cash There is no specific standard dealing with cash. The only guidance is found in 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 to settle a liability for more than twelve months after the end of the reporting period. Accordingly, to be reported as cash, an item must be unrestricted in use. . The cash must be readily available in the payment of current obligations and not be subject to any restrictions, contractual or otherwise.Cash items included in cash a. Cash on hand includes bindlébositel cash collections and other cash items awaiting deposit: such as customers’ checks, cashier's or manager's checks, traveler's checks, bank drafts and money orders. b. Cash in bank includes demand deposit or checking account and saving deposit which are unrestricted as to withdrawal. c. Cash fund set aside for current purposes such as petty cash fund, payroll fund and dividend fund. Cash equivalents PAS 7, paragraph 6, defines cash equivalents as short-term and 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 rate. The standard further states that only highly liquid investments acquired three months before maturity can qualify as cash equivalents. Examples of cash equivalents are: a. Three-month BSP treasury bill b. Three-year BSP treasury. bill purchased three months before date of maturity c. Three-month time deposit d. Three-month money market instrument or commercial paper Equity securities or equity investments cannot qualify as cash equivalents because shares do not have a maturity date. However, preference shares with specified redemption date and ‘acquired three months before redemption date can qualify as cash equivalents. Note that what is important is the date of purchase which should be three months or less before maturity. Thus, a BSP treasury bill that was purchased one year ago cannot qualify as cash equivalent even if the remaining maturity is three months or less from the end of reporting period.Investment of excess cash The control and proper use of cash is an important aspect of canh management. Basically, the entity must maintain sufficient cash for use in current operations. Any cash accumulated in excess of that needed for current operations should be invested even temporarily in some type of revenue earning investment. Accordingly, excess cash may be invested in time deposita, money market instruments and treasury bills for the purpose of earning interest income. Investments in time deposit, money market instruments and treasury bills should be properly classified. a. Ifthe term is three months or less, such instruments are classified as cash equivalents. b. Ifthe term is more than three months but within one year, such investments are classified as short-term or temporary investments and presented separately as current assets. c. If the term is more than one year, such investments are classified as noncurrent or long-term investments. However, such investments that become due within one year from the end of the reporting period are reclassified as current. Measurement and presentation of cash Cash is measured at face value. Ifa bank or financial institution holding the funds of an entity is in bankruptcy or financial difficulty, cash should be written down to estimated realizable value if the amount recoverable is estimated to be lower than the face value. Cash in foreign cutrency should be translated to Philippine pesos using the current exchange rate. Deposits in foreign countries which ‘are not subject to any foreign exchange restriction are included in cash. , Deposits in foreign bank which are subject to foreign exchange restriction should be classified separately among noncurrent assets and the restriction clearly indicated. The caption cash and cash equivalents should be shown as the first line item under current assets. However, the details comprising the cash and cash equivalentsClassification of cash fund for certain purpose Mf tho cash fund is vet aside for use in current operations or for the payment of current obligation, it, is a current asset, The cash fund is included as part of cash and cash equivalents. Ixamples of this fund are petty cash fund, payroll fund, travel fund, interest fund, dividend fund and tax fund. On the other hand, if the cash fund is set aside for noncurrent purpose or payment of noncurrent obligation, it is shown as long-term or noncurrent investment, ‘The classification of a cash fund as current or noncurrent should parallel the classification of the related liability. For example, a sinking fund set aside for the payment of a bond payable shall be classified as current asset when the bond payable is already due within one year after the end of reporting period, However, a cash fund set aside for the acquisition of a noncurrent asset should be classified as noncurrent regardless of the year of disbursement. Bank overdraft When the cash in bank account has a credit balance, it is said to be an overdraft. The credit balance in the cash in bank account results from the issuance of checks in excess of the deposits. A bank overdraft is classified as a current liability and should not be offset against other bank accounts with debit balances. For example, an entity maintains two bank accounts: a. Cash in bank — First Bank, overdrawn by P100,000. b. Cash in bank - Second Bank, with a debit balance of P500,000. Proper statement classification of the two accounts: Current asset: Cash in bank - Second Bank 500,000 Current liability: Bank overdraft — First Bank 100,000 Generally, overdrafts are not permitted in the Philippines. 5Exception to the rule on overdraft When an entity maintains two or more accounts in one bank and one account results in an overdraft, such overdraft can be offset against the other bank account with a debit balance in order to show cash, net of bank overdraft or bank overdraft, net of other bank account. An overdraft can also be offset against the other bank account if the amount is not material. Under IFRS, bank overdraft can be offset against other bank account when payable on demand and often fluctuates frorn positive to negative as an integral part of cash management. Compensating balance A compensating balance generally takes the form of minimurn checking or demand deposit account balance that must be maintained in connection with a borrowing arrangement with a bank. For example, an entity borrows P5,000,000 from a bank and agrees to maintain a 10% or P500,000 minimum compensating balance in a demand deposit account. In effect, this arrangement results in the reduction of the amount borrowed because the compensating balance provides a source of fund to the bank as partial compensation for the loan extended. Classification of compensating balance If the deposit is not legally restricted as to withdrawal by the borrower because of an informal compensating balance agreement, the compensating balance is part of cash. If the deposit is legally restricted because of a formal compensating balance agreement, the compensating balance is classified separately as cash held as compensating balance under current assets if the related loan is short-term. If the related loan is long-term, the compensating balance is classified as noncurrent investment. RgUndelivered or unreleased check ‘An undelivered or unreleased check is one that is merely drawn and recorded but not given to the payee before the end of reporting period. ‘There is no payment when the check is pending delivery to the payee at the end of reporting period. The reason is that undelivered check is still subject to the entity's control and may thus be canceled anytime before delivery at the discretion of the entity. Accordingly, an adjusting entry is required to restore the cash balance and set up the liability. Postdated check delivered A postdated check delivered is a check drawn, recorded and already given to the payee but it bears a date subsequent to the end of reporting period. The original entry recording a delivered postdated check shall also be reversed and therefore restored to the cash balance. The reason is that there is no payment until the check can be presented to the bank for encashment or deposit. Stale check or check long outstanding A stale check is a check not encashed by the payee within a relatively long period of time. The question is how long a time must the check remain. outstanding. The Negotiable Instruments Law provides that where the instrument is payable on demand, presentment must be made within a reasonable time after issue. Clearly, the law does not specify a definite period within which checks must be presented for encashment. Reference is made to usage of trade or business practice. In banking practice, a check becomes stale if not encashed within six months from the time-of issuance. Of course, this is a matter of entity policy. . Thus, even after three months only, the entity may issue a stop payment order to the bank for the cancelation of a previously issued check. If the amount of stale check is. immaterial, it is simply accounted for as miscellaneous income. However, if the amount is material and liability is expected to continue, the cash is restored and the liability is set up. 7Accounting for cash shortage Where the cash count shows cash which is less than the balance per book, a cash shortage is to be recorded Cash short or over XX Cash xx The cash short or over account is only a temporary or suspense account, When financial statements are prepared the same should be adjusted. Hence, if the cashier or cash custodian is held responsible for the cash shortage, the adjustment should be: Due from cashier XX Cash short or over xx However, if reasonable efforts fail to disclose the cause of the shortage, the adjustment is Loss from cash shortage xX Cash short or over xx Accounting for cash overage Where the cash count shows cash which is more than the balance per book, a cash overage is to be recorded. Cash xx Cash short or over xx Note that whether it is a cash shortage or cash overage, the offsetting account is cash short or over account. The cash short or over account should be adjusted when financial statements are made. The cash overage is treated as miscellaneous income if there is no claim on.the same. Cash short or over XX Miscellaneous income XX But where the cash overage is properly found to be the money of the cashier, a liability should be established. Cash short or over xX Payable to cashierImprest system The imprest system is a system of control of cash which requires that all cash receipts should be deposited intact and all cash disbursements should be made by means of check. While internal control ideally requires that all payments should be made by means of check, this is sometimes impossible. There are occasions when the issuance of checks becomes impractical or inconvenient such as when small amounts are paid or things are hurriedly bought or customers are entertained. Consequently, in such instances, it may be more economical and convenient to pay in cash rather than issue checks, Petty cash fund The petty cash fund is money set aside to pay small expenses which cannot be paid conveniently by means of check. There are two methods of handling the petty cash, namely: a. Imprest fund system b. Fluctuating fund system Imprest fund system The imprest fund system is the one usually followed in handling petty cash transactions. : Accounting procedures a. A check is drawn to establish the fund. Petty cash fund xx Cash in bank xx b. Payment of expenses out of the fund. No formal journal entries are made. The petty cashier generally requires a signed petty cash voucher for such payments and simply prepares memorandum entries in the petty cash journal. “9. Replenishment of petty cash payments. Whenever the petty cash fund runs low, a check is drawn to replenish the fund. © The replenishment check is usually equal to the petty cash disbursements. It is at this time that the petty cash disbursements are recorded. * Expenses xx Cash in bank xx The petty cash disbursements should be replenished only by means of check and not from undeposited collections. d. At the end of the accounting period, it is necessary to adjust the unreplenished expenses in order to state the correct petty cash balance. Expenses XxX Petty cash fund xx The adjustment isto be reversed at the beginning of the next accounting period. The reversal is made in order that the normal replenishment procedurés may be followed by simply debiting expenses and crediting cash in bank without distinguishing whether the expenses pertain to the current period or prior period. . An increase in the fund is recorded normally. Petty cash fund XxX Cash in bank xx . A decrease in the fund is recorded normally. Cash in bank xx Petty cash fund xx 10Illustration 2022 Nov. Dec. 2023 Jan. 10 The entity established an imprest fund of P10,000. Petty cash fund 10,000 Cash in bank 10,000 29 Replenished the fund. The petty cash items include the following: Currency and coin 2,000 Supplies 5,000 Telephone 1,800 Postage 1,200 29 The journal entry to record the replenishment is: Supplies 5,000 Telephone 1,800 Postage 1,200 Cash in bank 8,000 31 The fund was not. replenished. An adjustment is necessary to record the unreplenished expenses. The fund is composed of the-following: currency and coin P7,000, supplies P1,500, postage P500, miscellaneous expense P1,000. Supplies . 1,500 Postage 500 Miscellaneous expense 1,000 Petty cash fund 3,000 1 The adjustment made on December 31, 2022 is reversed. Petty cash fund 3,000 Supplies 1,500 Postage 500 Miscellaneous expense 1,000 ilFluctuating fund system The accounting for petty cash is called fluctuating fund ayetem because the checks drawn to replenish the fund do not mecessarily equal the petty cash disbursements, The replenishment checks are simply drawn upon the request of the petty cashier. Moreover, petty cash disbursements are immediately recorded thus resulting in a fluctuating petty cash balance per book frorn time to time: a. Establishment of the fund: Petty cash fund xx Cash in bank xx b. Payment of expenses out of the petty cash fund: Expenses xx Petty cash fund x Under this system, the disbursements from the petty cash fund are immediately recorded in contradistinction with the imprest fund system where the disbursements are recorded upon the replenishment of the fund. c. Replenishment or increase of the fund: Petty cash fund xX Cash in bank x The replenishment check may or may not be the same as the petty cash disbursements. d. At the end of the reporting period, no adjustment is necessary because the petty cash expenses are recorded outright, e. Decrease of the fund is reverted to the general cash. Cash in bank xX Petty cash fund xIllustration Nov. 10 The entity established a petty cash fund of P 10,000. Petty cash furrd 10,000 Cash in bank 10,000 Nov. 11-28 Petty cash disbursements amounted to P8,000. Expenses 8,000 Petty cash fund 6,000 Nov. 29 Issued a check for P10,000 to replenish the fund. Petty cash fund 10,000 Cash in bank 10,000 At this point, the petty cash balance per book is P12,000. Dec. 1-30 Petty cash expenses amounted to P9,000. Expenses 9,000 Petty cash fund 9,000 31 Issued a check for P15,000 to replenish the fund. Petty cash fund 15,000 Cash in bank 15,000 At this point, the petty cash balance is P18,000.Problem 1-10 (AICPA Adapted) Tranvia Company revealed the following information on December 31, 2022: Cash in checking account 360,000 Cash in money market account 150,000 ‘Treasury bill, purchased November 1, 2022 maturing January 31, 2023 3,500,000 Time deposit purchased December 1, 2022 maturing March 31, 2023 4,000,000 What amount should be reported as cash and cash equivalents on December 31, 2022? 1,100,000 3,850,000 4,600,000 . 8,600,000 Beop Problem 1-11 (IAA) At year-end, Myra Company reported cash and cash equivalents which comprised the following: Cash on hand 500,000 Demand deposit 4,000,000 Certificate of deposit 2,000,000 Postdated customer check 300,000 Petty cash fund 50,000 Traveler check 200,000 Manager check 100,000 Moneyorder 150,000 What total amount should be reported as cash at year-end? a. 7,000,000 b. 4,800,000 c. 6,800,000 d. 5,000,000problem 1-12 PHILCPA Adapted) Starex Company provided the following information at year-end: Checking account at Metrobank 3,000,000 Employee postdated check 120,000 Foreign bank account unrestricted and in equivalent pesos 2,500,000 IOU from company president 500,000 NSF customer check 100,000 Petty cash fund, expense receipts P40,000 50,000 Postage stamps 10,000 Treasury bills 1,200,000 Treasury bonds 500,000 Value added tax account 1,500,000 What amount should be reported as cash and cash equivalents? a. 8,710,000 b. 7,000,000 c. 8,210,000 d. 8,250,000 Problem 1-13 (AICPA Adapted) Thor Company provided the following data on December 31, - 2022: Checkbook balance 4,000,000 Bank statement balance 5,000,000 Check drawn on Thor's account, payable to supplier, dated and recorded on December 31, 2022 but not mailed until January 31, 2023 500,000 Cash in sinking fund 2,000,000 On December 31, 2022, what amount should be reported as cash under current assets? a. 4,500,000 b. 5,500,000 c. 3,500,000 d. 6,500,000 .Problem 1-14 (AICPA Adapted) On December 31, 2022, West Company had the following cash baltinces: Cash it bank — eurtent account 1,000,001) Potty cae fund - all funds were reimbursed nt yearend 000 ‘Time deposit — due February 1, 2023 2th), Saving deposit in bank closed by BSP 1,000,000, Cash in bank included P600,000 of compensating balance againet short term borrowing arrangement, The compensating balance is legally restricted 4 to withdrawal. What total amount should be reported as cash and cash equivalents? a. 1,500,000 b. 2,500,000 c. 1,250,000 d. 2,100,000 Problem 1-15 (AICPA Adapted) Baloney Company had the following account balances on December 31, 2022: Cash in bank 2,250,000 Cash on hand 125,000 Cash restricted for addition to plant in January 2023 1,600,000 Cash in bank included P600,000 of compensating balance against short-term borrowing arrangement. The compensating balance is not legally restricted as to withdrawal. What total amount should be reported as cash under current assets on December 31, 2022? a. 1,775,000 b. 2,375,000 c. 3,375,000 d. 3,975,000Problem 1-16 (IAA) Yasmin Company provided the following on December 31, 2022: Petty cash fund 60,000 Current account - First Bank 4,000,000 Current account - Second Bank (overdraft) (260,000) Money market placement - Third Bank 1,000,000 Time deposit — Fourth Bank 2,000,000 * Accheck for P100,000 was drawn against First Bank current account dated and recorded December 29, 2022 but delivered to payee on January 16, 2023. * The Fourth Bank time deposit is set aside for land acquisition in early January 2023. What total amount should be reported as cash and cash equivalents on December 31, 2022? 5,050,000 5,150,000 4,900,000 4,150,000 Be ep Problem 1-17 (IAA) On December 31, 2022, Roma Company reported cash balance of P9,950,000. Undeposited collections 600,000 Cash in bank —- BDO checking account 4,000,000 Undeposited NSF check received from customer, . ' dated December 1, 2022 150,000 Undeposited check from a customer, dated January 15,2023 250,000 Cash in bank - BDO fund for payroll 1,000,000 Cash in bank - BDO time deposit, 90 days 2,000,000 Cash in foreign bank restricted 1,500,000 Cash in bank — BDO value added tax account _ 450,000 Total 9,950,000 On December 31, 2022, what total amount should be reported as cash and cash equivalents? 7,600,000 8,200,000 6,050,000 8,050,000 Be oP 25Problem 1-18 (AICPA Adapted) Ral Company reported the checkbook balance on December 31, 2022 at P5,000,000 and held the following items on same date: Check payable to Ral, dated January 2, 2023 in payment of a sale madé in December 2022, not included in December 31 checkbook balance 2,000,000 Check payable to Ral, deposited December 15 and included in December 31 checkbook balance, but returned by bank on December 30 stamped “NSF.” The check was redeposited on January 2, 2028 and cleared on January 9, 2023 500,000 Check drawn on Ral’s account, payable to a vendor, dated and recorded in Ral’s books on December 31, 2022 but not mailed until January 10, 2023 300,000 Certificate of time deposit 1,000,000 What amount should be reported as cash on December 31, 2022? 4,800,000 b. 5,300,000 c. 6,500,000 d. 5,800,000 2 Problem 1-19 (IAA) Everlast Company reported the following information at year-end: * Share investments of P1,000,000 that are very actively traded. * Government treasury bills of P2,000,000 with a 10-year term but purchased on December 31 with two months to go until maturity. Cash of P3,400,000 in the form of cojn, currency, saving -account and checking account. Commercial papers of P1,500,000 with term of nine months but purchased on December 31 with three months to go until maturity. What total amount should be reported as cash and cash equivalents? ; a. 6,900,000 b. 7, 000 0 4. 0,400,000Problem 1-20 (AICPA Adapted) Campbell Company had the following account balances on December 31, 2022: Petty cash fund 50,000 Cash on hand 500,000 Cash in bank - current account 4,000,000 Cash in bank ~ payroll account 1,200,000 ‘Time deposit . 1,000,000 Cash in bank — restricted for plant addition 500,000 Sinking fund set aside for bond payable due June 30,2023 2,000,000 The petty cash fund included unreplenished December 2022 peta en expense vouchers of P5,000 and employee IOU of The cash on hand included a P100,000 check payable to Campbell Company dated January 31, 2023 In exchange for a guaranteed line of credit, the entity had agreed to maintain a minimum balance of P200,000 in the unrestricted current bank account. What total amount should be reported as cash and cash equivalents on December 31, 2022? a. 8,640,000 b. 7,640,000 c, 5,640,000 d. 7,440,000 Problem 1-21 (AICPA Adapted) Isabel Company provided the following information on December 31, 2022: Cash on hand 200,000 Security Bank current account 5,000,000 Manila Bank current account No. 1 4,000,000 Manila Bank current account No. 2 (bank overdraft) ( ),000) BDO account for bond payable due December 31, 2024 3,000,000 United Bank saving account for equipment acquisition 10,000 United Bank time deposit, 90 days 2,000,000 Treasury bills 1,000,000 Check drawn against Security Bank current account for P100,000 dated and recorded December 23, 2022 was delivered to the payee January 15, 2023. What total amount should be reported as cash and cash equivalents on December 31, 2022? a, 11,800,000 b. 11,700,000 c. 14,800,000 d. 12,050,000Problem 1-22 (ACP) Love Company reported the following information in relation to cash on December 31, 2022: * * * Checkbook balance, P4,000,000. Undeposited collections, P400,000. A customer check amounting to P200,000 dated January 2, 2023 was included in the December 31, 2022 checkbook balance. Another customer check for P500,000 deposited on December 22, 2022 was included in the checkbook balance but returned by the bank for insufficiency of fund. This check was redeposited on December 26, 2022 and cleared two days later. A P400,000 check payable to supplier dated and recorded on Dezember 30, 2022 was mailed on January 16, 2023. A petty cash fund of P50,000 comprised the following on December 31, 2022: Coins and currencies 5,000 Petty cash vouchers 40,000 Refundable deposit for returnable containers 5,000 50,000 A check of P40,000 was drawn on December 31, 2022 payable to Petty Cash. . What amount should be reported as adjusted cash in bank on December 31, 2022? 4,600,000 4,200,000 4,400,000 3,700,000 Be rp . What total amount should be reported as cash on December 31, 2022? a. 4,645,000 b. 4,845,000 c. 4,600,000 d. 4,650,000Problem 1-23 (PHILCPA Adapted) Marjorie Company established a petty cash fund of P50,000 with the following information: Coins and currency 22,000 Petty cash vouchers: Gasoline 9,000 Medical supplies 1,000 Repairs 1,500 IOU from an employee 3,500 Check drawn payable to the order of Ann Cruz, petty cash custodian, representing her salary 15,000 Check of an employee returned by bank marked "NSF" 8,000 Asheet of paper with the names of several employees together with a contribution for a birthday party and attached to the sheet of paper is a currency of 5,000 What amount of petty cash fund should be reported? a. 42,000 b. 27,000 c. 37,000 d. 22,000 Problem 1-24 (PHILCPA Adapted) Admirable Company had a petty cash fund which included the following details: Coins and currency 2,000 Paid vouchers Transportation 600 Gasoline 400 Office supplies 500 Postage stamps 300 Due from employees 1,200 3,000 Employee’s check returned by bank marked “NSF” 1,000 Check drawn to the order of of petty cash custodian 4,000 What amount of petty cash should be reported? a. 2,000 b. 7,000 c. 6,000 d. 9,000 29