Intermediate Accounting Part 1

Cash and Cash Equivalents

Cash is a financial asset and a financial instrument. It consists of coin, currency, bank
deposits, and negotiable instruments such as money orders, checks, and bank drafts. Cash
that has been designated for some specific use, other than for payment of currently
maturing obligations, is segregated from the general cash account. There is no specific
standard dealing with “cash”. Accordingly, to be reported as cash, an item must be
unrestricted in use. This means that the cash must be readily available in the payment of
current obligations and not be subject to any restrictions, contractual or otherwise.

1. Cash on hand
a. Undeposited cash collections – currencies such as bills and coins, customers’
check, traveler’s check, manager’s check, cashier’s check, bank drafts and money
orders.

b. Working funds – cash funds segregated for current use in the ordinary course of
business such as petty cash fund, payroll fund, dividend fund, tax fund and interest
fund.

2. Cash in bank – includes demand deposits, checking account and savings account which
are unrestricted as to withdrawal.

Cash equivalents – are short-term and highly liquid investment that are readily convertible
into cash and so near as their maturity that they present significant risk of changes in value
because of changes in interest rates.

These includes:
 three month BSP treasury bill,
 three-year BSP treasury bill purchased three-months before date of maturity,
 three-month time deposit and
 three-month money market placement instrument or commercial paper.

3. The following summarizes several noteworthy considerations in reporting cash balance in

the statement of financial position:

1. Cash in foreign currency and deposits.

 If the currency deposits are unrestricted as to withdrawal, the latter should be
translated to Philippine denominations and presented as part of cash and cash
equivalents.
 Otherwise, it should be separately reported, preferably non-cash assets.

2. Cash in closed banks or in banks having financial difficulty or in bankruptcy should be

reclassified as receivable and should be written down to its recoverable amount.

3. Customers’ postdated checks, NSF check (no sufficient fund checks are those that
cannot be covered by funds in the debtor’s bank account), and IOUs (I owe you notes)
should be reported as receivables rather than cash.

4. Postage stamps are not cash but should be reported as prepaid expenses

5. Bank overdraft should be reported as current liability

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6. Undelivered and unreleased check should be part of cash balance and as a result,
liabilities that the checks are intended to liquidate still exist and should be part of
current liabilities.

7. Company’s postdated check should be part of cash balance and as a result, liabilities
that the checks are intended to liquidate still exist and should be part of current
liabilities.

8. Compensating balances are minimum amounts that a company agrees to maintain in

a bank checking account as support or collateral for a loan by the depositor.

 When the compensating balance is not legally restricted as to withdrawal by the

depositor and the loan for which it is used as collateral is a short-term loan, the
amount should be reported as part of cash.

 When the compensating balance is legally restricted as to withdrawal by the

depositor and the loan for which it is used as collateral is a short-term loan, the
amount should be reported separately as part of cash but part of current assets.

 When the compensating balance is legally restricted as to withdrawal by the

depositor and the loan for which it is used as collateral is a long-term loan, the
amount should be reported separately as part of cash but part of non-current
assets.

9. Cash set aside for long-term specific purpose or for acquisition of a non-current asset
such as bond sinking fund and plant expansion fund, is reported as non-current financial
assets.

Let’s do it!

1. Pygmalion Company had the following account balances on December 31, 2014:
Cash in bank – current account 5,000,000
Cash in bank – payroll account 1,000,000
Cash on hand 500,000
Cash in bank – restricted account for building construction in 2015 3,000,000
Time deposit, purchased December 15, 2014 and due March 15, 2015 2,000,000

The cash on hand included a P200,000 check payable to Pygmalion dated January 15, 2015.
What total amount should be reported as “cash and cash equivalents” on December 31,
2014?
a. 6,300,000
b. 8,300,000
c. 6,500,000
d. 8,700,000

2. On December 31, 2014, Roel Company reported cash accounts with the following details:

Undeposited collections 60,000

Cash in bank – PCIB checking account 500,000
Cash in bank – PNB (50,000)
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Undeposited NSF check received from customer,

dated December 1, 2014 – 15,000
Undeposited check from a customer,
dated January 15, 2015 – 25,000
Cash in bank (payroll fund) – 150,000
Cash in bank (saving deposit) – 100,000
Cash in bank (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
Financial assets held trading – 120,000.

What total amount should be reported as cash and cash equivalents on December 31, 2014?
a. 2,660,000
b. 2,810,000
c. 2,770,000
d. 810,000

3. Burr Company had the following account balances on December 31, 2014:

Cash in bank 2,250,000

Cash on hand 125,000
Cash restricted for addition to plant in 2015 1,600,000

Cash in bank included a P600,000 of compensating balance against short term borrowing
arrangement. The compensating balance is not restricted as to withdrawal. On December
31, 2014, what total cash should be reported under current assets?
a. 1,775,000
b. 2,250,000
c. 2,375,000
d. 3,975,000

4. On December 31, 2014, West Company had the following cash balances:

Cash in bank – 1,800,000

Petty cash fund (all funds were reimbursed on December 31,2014) 50,000
Time deposit (due February 1, 2015) 250,000
Time deposit in bank closed by BSP 1,000,000

Cash in bank included P600,000 of compensating balance against short term borrowing
arrangement on December 31, 2014. The compensating balance is legally restricted as to
withdrawal. On December 31, 2014, what total amount should be reported as cash and cash
equivalents?
a. 1,850,000
b. 1,250,000
c. 2,100,000
d. 1,500,000

5. Tranvia Company had the foillowing balances on December 31, 2018:

Cash in checking account 350,000

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Cash in money market account 750,000

Treasury bill, purchased November 1, 2018
maturing January 31, 2019 3,500,000
Time deposit purchased December 1, 2018
maturing March 31, 2019 4,000,000

What amount should be reported as cash and cash equivalents on December 31, 2018?
a. 1,100,000
b. 3,850,000
c. 4,600,000
d. 8,600,000

6. At year-end Myra Company reported cash and cash equivalent 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’s check 200,000
Manager’s check 100,000
Money order 150,000

What 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

7. On December 31, 2014, Erika Company reported “cash account” balance per ledger of
P3,600,000 which included the following:

Demand deposit 1,500,000

Time deposit – 30 days 500,000
NSF Check of customer 20,000
Money market placement due on June 30,2015 1,000,000
Saving deposit 50,000
IOU from an employee 30,000
Pension fund 400,000
Petty cash fund 10,000
Customer check dated January 31, 2015 60,000
Customer check outstanding for 18 months 930,000

 Check of P100,000 in payment of accounts payable was dated and recorded on

December 31, 2014 but mailed to creditors on January 15, 2015.
 Check of P50,000 dated January 31, 2015 in payment of accounts payable was
recorded and mailed December 31, 2014.
 The entity used the calendar year. The cash receipts journal was held open until
January 15, 2015, during which time P200,000 was collected and recorded on
December 31, 2014.

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What total amount should be reported as cash and cash equivalents on December 31, 2014?
a. 2,010,000
b. 1, 960,000
c. 1,860,000
d. 1,510,000
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