Module 16 - Cash and Cash Equivalents
Module 16 - Cash and Cash Equivalents
Module 16 - Cash and Cash Equivalents
RELATED STANDARD: IAS 1 – Presentation of Financial Statements, IAS 7 – Statement of Cash Flows
Definition of Terms
Cash – It comprises cash on hand and demand deposits.
Cash equivalents – These 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.
Cash items
a. Cash on hand – Undeposited collections of currency and checks such as bills and coins, customer’s checks, manager’s
checks, traveler’s checks, bank drafts and money order.
b. Cash in bank – Demand deposits such as savings account and checking account.
c. Cash fund – Fund set aside for current operation such as petty cash fund, payroll fund, dividend fund, interest fund,
tax fund, revolving fund and change fund.
Cash equivalents
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.
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.
Examples of cash equivalents:
a. Treasury bill
b. Short-term time deposit
c. Money market
d. Commercial paper
Note: On acquisition date, maturity of the preceding instruments must be 3 months or less.
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Cash and Cash Equivalents LVC
Reconciling items
Book reconciling items
- Bank credit memos, bank debit memos, book errors
Bank reconciling items
- Deposit in transit, outstanding checks and bank errors
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Illustrative Problems
1. These 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.
A. Cash and cash equivalents C. Current investment
B. Treasury bills D. Cash equivalents
2. Which of the following is least likely a component of cash and cash equivalents in the statement of financial position?
A. Cash in bank C. Cash fund
B. Cash equivalents D. Cash surrender value
3. Which cash fund is included from the cash and cash equivalent balance?
A. Fund set aside for acquisition of equipment and machinery.
B. Fund set up in a bank exclusively for payment of employees’ compensation.
C. Fund for the redemption of preference shares.
D. Fund established for settlement of long-term obligations.
4. Which of the following would not form part of the cash and cash equivalent balance?
A. Customer’s postdated check C. Drawer Issued stale check
B. Undelivered check D. All of the foregoing
5. Internal control feature that is specific to petty cash is
A. Segregation of duties C. Authorization
B. Independent verification D. Imprest system
6. All of the following can be classified as cash and cash equivalents, except
A. Bank drafts
B. Commercial paper due for repayment in 90 days
C. Investment in equity securities
D. Redeemable preference shares acquired and due in 60 days
7. A cash in bank with credit balance that should not be offset against other bank account in another bank.
A. Bank draft C. Stale check
B. Compensating balance D. Bank overdraft
8. The journal entry to record payment of expenses from the petty cash fund would include a
A. Debit to expense C. Credit to cash on hand
B. Credit to petty cash D. None of the foregoing
9. In reconciling the cash balance with the book balance, which of the following would not cause the bank balance
shown in the bank statement to be lower than the unadjusted book balance?
A. Interest credit to the account of the bank. C. Cash on hand
B. Deposit in transit. D. NSF checks from customer returned by the bank
10. Which of the following is a bank reconciling item?
A. Bank service charge C. NSF check of customer
B. Outstanding checks D. Notes collected by bank
11. It consists of four columns: beginning of the period bank reconciliation, receipts, disbursements, and end-of-the-
period bank reconciliation.
A. Bank reconciliation statement C. Bank statement
B. Proof of cash D. Proof of bank balance
12. The following statements relate to cash. Which statement is true?
A. The term “cash equivalent” refer to demand credit instruments such as money order and bank drafts.
B. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all normal operating
expenses for a period of time.
C. Classification of a restricted cash balance as current or noncurrent should parallel the classification of the related
obligation for which the cash was restricted.
D. Compensating balance required by a bank should always be excluded from “cash and cash equivalent”.
13. Which is not considered as a cash equivalent?
A. A three-year treasury note maturing on May 30 of the current year purchased by the entity on April 15 of the
current year.
B. A three-year treasury note maturing on May 30 of the current year purchased by the entity on January 15 of the
current year.
C. A 90-day T-bill.
D. A 60-day money market placement.
14. As of December 31 of the current year, an entity had various checks and papers in its safe. Which item should not be
included in its cash account in the year-ended balance sheet?
A. US $20,000 cash.
B. Past due promissory note issued in favor of the entity by its President.
C. Another entity’s P150,000 check payable to the entity dated December 15 of the current year.
D. The entity’s undelivered check payable to a supplier dated December 31 of the current year.
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15. Which item should be excluded from cash and cash equivalent on the current year-end balance sheet of an entity?
A. The minimum cash balance in the entity’s current account which is maintained to avoid service charges.
B. A check issued by the entity on December 27 of the current year but dated January 15 next year.
C. Time deposit which matures in one year.
D. A customer’s check denominated in a foreign currency.
16. At December 31 of the current year, an entity had cash accounts at three different banks. One account balance is
segregated solely for payment into a bond sinking fund. A second account, used for branch operations, is overdrawn.
The third account, used for regular corporate operations, has a positive balance. How should three accounts be
reported in the December 31 classified balance sheet?
A. The segregated account should be reported as a noncurrent asset, the regular account should be reported as a
current asset, and the overdraft should be reported as a current liability.
B. The segregated and regular accounts should be reported as current assets, and the overdraft should be reported
as a current liability.
C. The segregated account should be reported as a noncurrent asset, and the regular account should be reported
as a current asset net of the overdraft.
D. The segregated and regular accounts should be reported as current assets net of the overdraft.
17. In order to be classified as cash equivalents, an investment must have a maturity period of
A. Less than 6 months C. 6 to 12 months
B. 3 to 6 months D. 3 months or less
18. Burr Company had the following account balances at December 31, year 2: Cash in banks P2,250,000 Cash on hand
P125,000 Cash legally restricted for additions to plant (expected to be disbursed in year 3) P1,600,000 Cash in banks
includes P600,000 of compensating balances against short-term borrowing arrangements. The compensating
balances are not legally restricted as to withdrawal by Burr. In the current assets section of Burr’s December 31, year
2 balance sheet, total cash should be reported at
A. 1,775,000 C. 2,375,000
B. 2,250,000 D. 3,975,000
19. Trans Co. had the following balances at December 31, year 2:
Cash in checking account P35,000
Cash in money market account P75,000
Treasury bill, purchased 11/1/Year 2, maturing 1/31/Year 3, P350,000
Treasury bill, purchased 12/1/Year 2, maturing 3/31/Year 3, P400,000
Trans’s policy is to treat as cash equivalents all highly liquid investments with a maturity of three months or less
when purchased. What amount should Trans report as cash and cash equivalents in its December 31, Year 2
balance sheet?
A. 110,000 C. 460,000
B. 385,000 D. 860,000
20. Perth COMPANY reported the checkbook balance on December 31, Year 1 at P8,000,000. In addition, the entity
held the following items in the safe on that date:
Check payable to Perth COMPANY, dated January 2, Year 2 in payment of a sale, not included in December 31
checkbook balance, P1,000,000
Check payable to Perth COMPANY, 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, Year 2 and
cleared on January 5, Year 2, P3,000,000
Check drawn on Perth COMPANY account, dated and recorded on December 31, Year 1 but not mailed until
January 15, Year 2, P2,500,000
Coins and currencies on hand P800,000
Three-month money market instruments P1,500,000
What is the correct amount of cash on December 31, Year 1?
A. 7,500,000 C. 9,800,000
B. 9,300,000 D. 8,300,000
21. Queen COMPANY had the following account balances on December 31, Year 1:
Petty cash fund 50,000
Cash on hand 500,000
Cash in bank – current account 4,000,000
Cash in bank – payroll account 1,000,000
Time deposit 2,000,000
Cash in bank – restricted account for plant addition, expected to be disbursed
in Year 2 500,000
Cash in sinking fund set aside for bond payable due June 30, Year 2 1,500,000
The petty cash fund included unreplenished December 31, Year 1 petty cash expense vouchers of P5,000 and
employee IOU of P5,000. The cash on hand included a P100,000 check payable to the entity dated January 31, Year
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2. In exchange for a guaranteed line of credit, the entity has agreed to maintain a minimum balance of P200,000 in
the unrestricted current bank account.
What amount should be reported as cash and cash equivalents on December 31, Year 1?
A. 6,940,000 C. 7,940,000
B. 8,940,000 D. 7,440,000
22. Royal COMPANY reported the following information in relation to imprest petty cash fund at year-end:
Coins and currency 22,000
Petty cash vouchers:
Gasoline 3,000
Medical supplies 1,000
Repairs 1,500
IOU from an employee 3,500
Check drawn payable to the order of Rose Anne, petty cash custodian, representing
her salary. 15,000
Check of an employee returned by bank marked “NSF” 3,000
A sheet of paper with names of several employees together with contribution for a
birthday party and attached to the sheet of paper is a currency of 5,000
The petty cash ledger account had a balance of P50,000. What amount of petty cash fund should be reported at
year-end?
A. 42,000 C. 37,000
B. 27,000 D. 22,000
23. Sun COMPANY provided following information on December 31, Year 1:
Cash in bank per book 7,400,000
Cash in bank per bank statement 8,180,000
Deposit in transit 1,200,000
Outstanding checks, including certified check of P200,000 1,500,000
Note collected by bank for the entity, including interest of P100,000 1,100,000
Service charge for December 20,000
DAIF checks of customers returned by bank 500,000
Error in recording a check in the book. The correct amount as paid by the bank is
P100,000 instead of P200,000 as recorded in the book. 100,000
Deposit in other bank closed by BSP 1,500,000
Currency and coins on hand 600,000
Petty cash fund 50,000
What is the total cash to be reported as current asset on December 31, Year 1?
A. 8,730,000 C. 8,180,000
B. 8,080,000 D. 8,530,000
24. U COMPANY provided the following information on December 31, Year 1:
Cash on hand 200,000
Petty cash fund 20,000
Philippine Bank current account 5,000,000
Manila Bank current account 4,000,000
City Bank current account (bank overdraft) ( 100,000 )
Asia Bank savings account for equipment acquisition 250,000
Asia Bank time deposit, 90 days 2,000,000
Cash on hand included the following items: customer’s check for P35,000 returned by the bank December 26,
Year 1 due to insufficient fund but subsequently redeposited and cleared by the bank on January 10, Year 2;
and customer’s check for P15,000 dated January 10, Year 2, received December 23, Year 1.
The petty cash fund compromised the following items on December 31, Year 1:
Currency and coins 5,000
IOU from an officer 2,000
Unreplenished petty cash vouchers 12,000
Included among the checks drawn by U COMPANY against the Philippine Bank current account and recorded in
December Year 1 are: check written and dated December 31, Year 1 and delivered to payee on January 3, Year
2, P25,000; and check written December 26, Year 1, dated January 30, Year 2 delivered to the payee on
December 28, Year 1, P45,000
What total amount should be reported as cash and cash equivalents on December 31, Year 1?
A. 11,125,000 C. 11,155,000
B. 11,225,000 D. 11,205,000
25. True COMPANY had the following bank reconciliation on June 30, Year 1:
Balance per bank statement, June 30 3,000,000
Deposit in transit 400,000
Total 3,400,000
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Outstanding checks ( 900,000 )
Balance per book, June 30 2,500,000
The bank statement for the month of July showed the following:
Deposits (including P200,000 note collected) 9,000,000
Disbursements (including P140,000 NSF check and P10,000 service charge) 7,000,000
All reconciling items on June 30, Year 1 cleared through the bank in July. The deposit in transit amounted to
P1,000,000 and the outstanding checks totaled P600,000 on July 31.
What is the cash in bank balance per ledger on July 31, Year 1?
A. 5,400,000 A. 5,550,000
B. 5,350,000 D. 4,500,000
26. In preparing its August 31, year 2 bank reconciliation, Apex Corp. has available the following information:
Balance per bank statement, 8/31/Y2 P18,050
Deposit in transit, 8/31/Y2 P3,250
Return of customer’s check for insufficient funds, 8/31/Y2 P600
Outstanding checks, 8/31/Y2 P2,750
Bank service charges for August P100
At August 31, year 2, Apex’s correct cash balance is
A. 18,550 C. 17,850
B. 17,950 D. 17,550
27. Reconciliation of Joy Company’s bank account at May 31 of the current year is
Balance per bank statement, 2,600,000
Deposit in transit 300,000
Total 2,900,000
Outstanding checks ( 100,000)
Adjusted bank balance 2,800,000
- End of discussion
“Education's purpose is to replace an empty mind with an open one.” Malcolm Forbes
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