Intermediate Accounting 1

Recap of Previous Discussion

• Enumerate the steps in the accounting cycle and explain each briefly.

• State the different types of accounting records used in the recording process.

• Enumerate the components of a complete set of financial statements.

Chapter 2 Cash and Cash Equivalents

• Define cash and identify the items that are included in the “Cash and Cash
Equivalents” line item.

• Account for petty cash funds and cash shortages/overages.

Cash
 Cash
Nature of Cash
• Money or its equivalent that is readily available for unrestricted use.

• World’s most widely used medium of exchange and the foundation for
accounting measurements.

• Includes money and other negotiable instruments that is payable in money

acceptable by bank for deposit and immediate credit.
What are Cash Items included as part of cash?
CASH ON HAND CASH IN BANK
• Currencies • Unrestricted funds deposited in a
• Checks or Cheques bank that can be withdrawn upon
• Bank drafts demand of an entity
• Money Orders • Savings Account
• Working funds • Demand Deposit (Checking
Account or Current Account)
Currencies
• Represents all paper
bills and coins that is not
yet deposited by the
entity.
 Checks or Cheques
• Refers to a form of
negotiable instrument
that is written, signed
and dated which
enables the bearer to
receive a sum of money Parties involve in the use of check
from a bank. a. Payor or Drawer – entity issuing
a check
Form of Checks b. Payee – the entity who will
a. Personal Check d. Traveler’s Check received the check (entity
b. Cashier’s Check e. Certified Check written in the check)
c. Manager’s Check c. Drawee – bank on which the
check is drawn.
Checks or Cheques
Three important dates
on transactions
involving checks

a. Issue Date (Payor) c. Check Date

Represents the date when the check is This represents the date when the
drawn or issued. check is available for encashment or
for deposit to the bank.
b. Received Date (Payee)
The date when the payee received the
check from the payor.
Checks or Cheques
What happen when the date the check received by the payee and
check date is not the same?
Illustration
On December 31, 2020 Mel Company received a check amounting to P17,000 from
Monreal Company in payment for the goods delivered. However, upon examining
the check, the cashier notice that the date on the check is on January 5, 2021.

Will the check from part of Mikel Company’s total cash balance on December 31,
2020?
Checks or Cheques
What happen when the date the check issued or drawn by the
payor and check date is not the same?
Illustration
On December 31, 2020, Fuel Inc. drawn and recorded a check amounting to P16,000
payable to Shell Company. The said check is received by Shell Company on same day
but the check is dated on January 5, 2021.

Will the check issued by Fuel Inc. should be included total cash balance on
December 31, 2020?
Checks or Cheques
Post-dated Checks
Any checks received or issued that is written and dated for future date is called post-
dated checks.
Continuation of Illustration
On December 31, 2020 Mel Company received a check amounting to P17,000 from
Monreal Company in payment for the goods delivered. However, upon examining
the check, the cashier notice that the date on the check is on January 5, 2021.

What if the accountant from Mikel Company already recorded the transaction when
they received the check, what will be the adjusting entry?
Dr. Accounts Receivable 17,000
Cr. Cash 17,000
Checks or Cheques
Post-dated Checks
Any checks received or drawn that is written and dated for future date is called post-
dated checks.
Continuation of Illustration
On December 31, 2020, Fuel Inc. drawn and recorded a check amounting to P16,000
payable to Shell Company. The said check is received by Shell Company on same day
but the check is dated on January 5, 2021.

What if the accountant from Fuel Inc. already recorded the transaction when they
issue the check, what will be the adjusting entry?
Dr. Cash 16,000
Cr. Accounts Payable 16,000
Checks or Cheques
What happen when check is drawn or issued by the payor but failed
to deliver to the payee?
Illustration
On December 28, 2020, Apple Inc. drawn a check dated December 31, 2020
amounting to P20,000 payable to Samsung Company. The said check is was delivered
through its liaison officer who in turn was not able to deliver the check to Samsung.
As of January 1, 2021, the check is still in the hands of the liaison officer.

Will the check issued by Apple Inc. should be included total cash balance on
December 31, 2020?
Checks or Cheques
Undelivered or Unreleased Checks

A check drawn and recorded but is not delivered or given to the payee as of the
reporting date.

Since undelivered or unreleased, the control over the check remains to the issuing
entity and may decide to cancel it.

Any recorded undelivered or unreleased checks must be reverted back to cash.

Checks or Cheques
What happen when check is drawn or issued by the payor but failed
to deposit or encash it for 6 months or more?

This is called “STALE CHECKS”.

Stale checks are reverted back to cash.

Bank draft or Demand
draft
• An instrument issued by
bank to guarantee a
fund to the payee which
will be charged against
the account of the
payor.

Is it possible that the bank issue demand draft more than the available cash
in the account of the payor?
Bank draft or Demand draft
Is it possible that the bank issue demand draft more than the available cash
in the account of the payor?

YES
The bank account will show a negative
balance,
Bank Overdraft
A negative balance in the bank account caused by overpayment of checks in
excess of the deposit amount.

Bank overdrafts occur only in checking accounts.

Bank overdrafts are payable on demand and reported as current liabilities in

the financial statements.

Exception:
If the company maintained two or more accounts in the same bank, where one
of the account results to overdraft, the overdraft may be offsetted or deducted
to the other account with a positive balance.
Bank Overdraft
Example:
Change Oil Company maintains two bank accounts in two different banks:
Cash in bank – BPI (P20,000)
Cash in bank – BDO P200,000

How much cash should be reported by Change Oil Company?

Bank Overdraft
Example:
Change Oil Company maintains two bank accounts as follows:
Cash in bank – BPI Savings Account (P20,000)
Cash in bank – BPI Current Account P200,000

How much cash should be reported by Change Oil Company?

Money Order

• A certificate issued by
government or financial
institutions that allows
the payee to received
immediate cash.

Included in the cash balance once received.

Working Fund
• Cash set aside for use in current operations.
• It is expected to be use payment of operating expenses, current
liabilities or for acquisition of current assets.

Examples
a. Petty Cash Fund h. Interest Fund
b. Revolving Fund i. Other funds use for current operations
c. Payroll Fund
d. Change Fund
e. Dividend Fund
f. Tax Fund
g. Travel Fund
Working Fund
For payment of
operating expenses

For payment of
Cash Unrestricted
current liabilities

For acquisition of
current assets
Compensating Balances
• An amount that a borrower must maintain in a bank as part of the loan
agreement. It is serves as cash collateral which may be used by the bank
anytime.
• Required to be disclosed in the notes to financial statements regardless if
unrestricted or restricted.

Unrestricted Cash

Compensating
Balances Relates to Current
short-term loan Asset
Restricted Not part of cash
Relates to Non-Current
long-term loan Asset
Other Considerations in items included and excluded from cash
1. NSF (No Sufficient Fund) / DAIF (Drawn Against Insufficient Fund) / DAUD
(Drawn Against Uncleared Deposits) checks received
➢ If initially recorded as cash receipts, these items must be removed from
cash and reverted back to receivable.

2. NSF/DAIF/DAUD checks issued

➢ If initially recorded as cash disbursement, these items must be reverted
back to cash.

3. IOUs or advances from employees

➢ Exclude from Cash. These are treated as receivables.

4. Unused credit line

➢ Exclude from Cash. Disclosed only in the notes to financial statements.
Other Considerations in items included and excluded from cash
5. Cash set aside for long-term use or acquisition of non-current assets
➢ Not included in cash.
➢ Classified as non-current asset.

6. Cash set aside to pay long term liabilities

➢ Excluded from Cash.
➢ Exception: When the long-term liability is due within 12 months from the
balance sheet date, must be included in cash.
Other Considerations in items included and excluded from cash
7. Cash denominated on foreign currency

Unrestricted Cash

Cash in foreign
current Short-Term Current
Restriction Asset
Restricted Not part of cash
Long-term Non-Current
Restriction Asset
Other Considerations in items included and excluded from cash
8. Cash in closed banks
➢ Reclassified to receivables and should be written down to its recoverable
amount.

9. Postage Stamps and expense advances

➢ Excluded from Cash. These items are treated as office supplies/
Accounting for Cash Overage and Shortage
Cash Overage
✓ Actual Cash Count > Balance per book
✓ Initially recorded in a suspense account “Cash Overage” while waiting for the
result of the investigation.
Initial Entry:
Cash XXX
Cash Overage XXX
✓ Cash Overage account is not presented in the financial statements.
✓ Depending on the result of investigation
• If employees fault, closed to payable account.
• If employee is not at fault, closed to miscellaneous income (gain).
Entry:
Cash overage XXX Cash overage XXX
Payable to employee XXX Miscellaneous Income XXX
Accounting for Cash Overage and Shortage
Cash Shortage
✓ Actual Cash Count < Balance per book
✓ Initially recorded in a suspense account “Cash Shortage” while waiting for the
result of the investigation.
Initial Entry:
Cash Shortage XXX
Cash XXX
✓ Cash Overage account is not presented in the financial statements.
✓ Depending on the result of investigation
• If employees fault, closed to receivable account.
• If employee is not at fault, closed to loss from cash shortage.
Entry:
Receivable from cashier XXX Loss from cash shortage XXX
Cash shortage XXX Cash shortage XXX
Petty Cash Fund (PCF)
• A type of cash fund set aside to cover relatively small expenditures.
• It is a matter of company policy as to what amount constitute small amount of
expenditures.
• Accounting for petty cash fund uses the “Imprest Fund System”
Account Procedures: Journal entry:
1. PCF is established. A check is drawn and turn over to Dr. Petty cash fund XXX
the petty cash custodian. Cr. Cash in bank XXX

2. Payment of expenses using petty cash fund. No entry.

3. Replenishment of petty cash fund. Dr. Various Expense XXX

Cr. Cash in bank XXX

4. Adjustment for unreplenished fund at reporting date Dr. Various Expense XXX
Cr. Petty cash fund XXX
Petty Cash Fund (PCF)
Illustration:
Refer to book on page 69 to 73
FIDEL Company had the following account balances on December 31, 2020:
Petty cash fund P 25,000
Cash in bank – current account 2,000,000
Cash in bank – payroll account 600,000
Cash in bank – bond sinking fund 1,000,000
Cash on hand 250,000
Cash in bank – restricted account for plant
addition and expected to be disbursed in 2020 750,000

The petty cash fund included unreplenished December 2020 petty cash expense
voucher P2,500 and employee IOU, P2,500.
The cash on hand included a P50,000 customer check payable to FIDEL dated January
5, 2021.
The current account includes P100,000 unrestricted minimum balance.
The sinking fund is set aside to settle a bond due that is due on June 30, 2021.
What amount of total cash should be reported on December 31, 2020?
 Cash Equivalents
Nature of Cash Equivalents
• Short-term, highly liquid investments that are readily convertible into known
amount of cash and which are subject to insignificant risk of changes in value.

• Only those highly liquid investments acquired within three months or less
before its maturity date can be classified as cash equivalents.
 Cash Equivalents
Example of Cash Equivalents
• Treasury Bills, Notes or Bonds acquired 3 months before maturity
• Money market placement or commercial paper acquired 3 months before
maturity
• Three month time deposit
Investment not acquired within three months
• If it will mature within 12 months from the date of reporting period, reported
in the financial statement as “Short-Term Investment” and classified as
Current Assets.

• If it will mature more than 12 from the date of reporting period, reported in
the financial statement as “Long-Term Investment” and classified as Non-
Current Assets.
 Cash Equivalents
Illustration
Identify if the following if cash equivalents or not as of December 31, 2021:
a. 1-year Treasury Bill maturing on March 30, 2022 acquired on July 1, 2021.
b. Time deposit maturing on March 30, 2023 acquired on June 30, 2021.
c. 1-year Treasury Bill maturing on March 30, 2022 acquired on December 31,
2021
Cash and Cash Equivalents
Cash is the most liquid asset and can be used easily in exchange for goods or
services.

This makes cash highly susceptible for fraud.

Here are the common types of fraudulent activities relating to cash
1. Lapping
2. Kitting
3. Window Dressing
Lapping
It occurs when a collection of receivable from one customer is misappropriated
and then concealed by applying a subsequent collection from another customer.

Kitting
It occurs by overstating the balance of cash in bank account thru exploiting the
float period or clearing time of the check. This is illegal due to the possibility of
bouncing check.
Window Dressing
Intentional manipulation of the balances reported in the financial statements to
make it look appealing and favorable.

It is normally done by recording next year transactions as current year

transactions.
Controls relating to Cash
1. Segregation of Duties – Custodianship, Authorization, Recording, Execution
2. Imprest system
3. Bank Reconciliation
4. Cash counts
5. Minimum cash balance
6. Lockbox accounts
7. Non-encashment of personal checks from PCF
8. Voucher System
Problem 6: Classroom Discussion
page 93
Assignment: (75 to 82)
Problem 1 – 10 items T/F
Problem 2 – MC Theory
Problem 3 - Exercises
Problem 4 – MC Computational
Deadline: August 17, 2021 12:59 pm