HANDOUT – FAR 0 (CASH AND CASH EQUIVALENTS)

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 from being exchanged or used to settle a liability for at least twelve (12) months after the end of the reporting period”

CASH
1. Cash on hand
2. Cash in bank
3. Cash fund set aside for current purposes

CASH EQUIVALENTS
PAS 7, paragraph 6 – “cash equivalents are short-term highly liquid investments that are readily convertible into cash and so
near their maturity that they represent insignificant risk of changes in value because of changes in interest rates”

Measurement rules for cash and cash equivalents:

1. Cash is measured at face value.
2. Cash in foreign currency is measured at the current exchange rate.
3. Cash of an entity held by a bank or financial institution in the brink of bankruptcy or financial difficulty is written down to
estimated realizable value if the same is lower than the face value.

Financial statement presentation:

1. “Cash and cash equivalents” line item is presented as the first item among the current assets, details comprising the same
should be disclosed in the notes to financial statements.
2. Deposits in foreign countries that are not subject to foreign exchange restriction are included as part of cash.
3. Deposits in foreign (bank) countries that are subject to foreign exchange restriction, if material, are classified separately
among noncurrent assets with the restriction clearly indicated.

Classification of excess cash invested in time deposits, money market instruments and treasury bills:
1. Term is three (3) months or less – cash and cash equivalents
2. Term is more than three (3) months but not over one (1) year – short term financial assets or temporary investments and
presented among current assets
3. Term is more than one (1) year – noncurrent or long term investment

Classification of cash fund set aside for a certain purpose:

1. Held for current operations or for the payment of a current obligation – cash and cash equivalents among current assets
2. Held for noncurrent purpose or for the payment of a noncurrent obligation – long term investment among noncurrent assets
3. Cash held for the payment of a liability should parallel the classification of the liability for which the related fund is
established.

Special cases and issues related to cash and cash equivalents:

1. Bank overdraft – a credit balance in the cash in bank account of the depositor
a. An overdraft should not be offset against other cash in bank accounts of the entity and shall be presented
separately among current liabilities
b. However, offsetting is allowed if (1) several cash in banks are maintained in the same bank; or (2) the amount of
overdraft is immaterial, even if the accounts are held in different banks

2. Compensating balance – minimum checking or demand deposit account balance that must be maintained in connection
with a borrowing arrangement with a bank.
a. Compensating balance is not legally restricted as to withdrawal – presented as part of cash
b. Compensating balance is legally restricted as to withdrawal:
i. Related loan or borrowing is short term – presented separately among current assets as “cash held as
compensating balance
ii. Related loan or borrowing is long term – presented as noncurrent investment

3. Checks written/drawn and recorded by the entity but are undelivered or unreleased as at end of the reporting period should
be added back to cash.
4. Checks written/drawn and recorded by the entity but are post-dated as at end of the reporting period should be added back
to cash.
5. Checks written/drawn and recorded by the entity but are long outstanding or stale should be treated as follows:
a. Amount involved is immaterial – Amount is reverted back to cash with a credit to miscellaneous income
b. Amount involved is material – Amount is reverted back to cash with a credit to accounts payable
6. Window dressing is a practice of opening the books of accounts beyond the close of the reporting period for the purpose of
showing a better financial position and performance.
7. Lapping involves a series of postponements on the recording of the entries for collections from customers.
8. Kiting occurs when a check is drawn against a first bank and depositing the same check in a second bank to cover the
shortage in the latter bank. No entry is made for both drawing and deposit of the check.
9. Cash shortage occurs when the cash balance per book is higher than the cash actually counted. An overage occurs if it’s
otherwise. A suspense account, “cash short or over” is used upon discovery of the discrepancy pending investigation.
10. A petty cash fund is money set aside to pay small expenses which cannot be paid conveniently and practically by means of
check. The fund may be accounted for under any of the following methods:
a. Imprest fund system
b. Fluctuating fund system
PROBLEM NO. 1
The following balances and information were provided by La Cash Company as at December 31, 2017:

Petty cash fund 15,000 Sinking fund cash 1,500,000

Cash on hand 105,000 Investment in preference shares 500,000
BDO current account No. 14344 (100,000) BPI savings deposit 2,000,000
BDO current account No. 52534 420,000 MBTC savings account 200,000

Additional information:
1. The petty cash fund was replenished on December 31, 2017. Prior to the replenishment, the petty cash fund was composed
of the following items: coins and currencies – Php 2,000; employee check amounting to Php 3,000 dated December 31,
2017; and unreplenished vouchers – Php 10,000.
2. Cash on hand includes the following: postal money order – Php 10,000 and a customer check for Php 15,000 dated
January 06, 2018.
3. Included in the BDO current account No. 14344 are the following items: (a) a Php 40,000 check drawn for a supplier,
unrecorded as at year end, dated December 30, 2017, delivered to the payee on January 06, 2018; (b) a 30,000 check
drawn for a supplier, dated January 05, 2018, recorded and delivered on December 30, 2017; and (c) outstanding checks
amounting to Php 50,000, of which Php 15,000 has already been considered stale.
4. The BDO current account No. 52534 balance presented above was taken from the Company’s checkbook. The following
were presented in relation to the aforesaid account: (a) NSF check from a customer which was returned by the bank
December 26, 2017 redeposited by the customer on December 30, 2017 and cleared three days after date of redeposit; (b) a
check issued to a supplier, dated and delivered December 01, 2017, outstanding as at year end; and (c) a check correctly
drawn in the amount of Php 25,000, which already cleared the bank during the year, was incorrectly recorded by the
depositor in the amount of Php 52,000.
5. The BPI savings deposit pertains to the cash set aside by the management for the New Year’s bonus payment to its
employees which will be paid on January 03, 2018.
6. The sinking fund cash is earmarked for the payment of a 3-year liability which was availed by the company on March 31,
2015.
7. The investment in preference shares were acquired on December 1, 2017. The shares are redeemable at the option of the
issuing corporation within 3 months after date of acquisition.
8. The MBTC current account represents a 10% compensating balance of the face amount of a long – term loan availed by La
Cash from MBTC during 2016. The balance is not legally restricted as to withdrawal by La Cash.

Determine (prepare) the following items as at December 31, 2017:

1. Petty cash fund
2. Cash on hand
3. Cash in bank - BDO Accounts
4. Total cash
5. Total cash equivalents
6. Total Cash and cash equivalents
7. Adjusting journal entries

PROBLEM NO. 2
The cash account of Mappie Rah Company on December 31, 2017 includes the following:
Cash on hand 180,000

Petty cash fund (imprest balance) 20,000

Bank of the Philippine Archipelago – Current Account 800,000
Near Western Bank – Current Account (50,000)
Tsina Bank savings account 300,000
Axis Bank time deposit, 90 days 500,000
Total 1,750,000

***Cash on hand includes:

 Traveler’s check 10,000
 Customer check for 30,000 dated January 10, 2018 received on December 22, 2017.
 Postal money order amounting to 5,000.

***The petty cash fund consists of the following items:

 Currency and coins 5,000
 Employees’ IOUs 1,500
 Currency in envelope marked “collections for Christmas party” 3,000
 Unreplenished vouchers for miscellaneous expenses 10,000
Total 19,500
 Efforts were made to disclose the reason for the cash shortage but the same was not established.

***Included among the checks drawn by Mappie Rah against its Bank of Philippine Archipelago current account and recorded
in December 2017 are:
 Check written and dated December 22, 2017 and delivered to payee on January 03, 2018, 30,000.
 Check written on December 26, 2017 and dated January 31, 2018 delivered to payee on December 26, 2017,
70,000.
  Checks written for 90,000 and dated December 24, 2017, delivered to payees on December 28, 2017. The checks
were not yet presented for encashment or payment in the bank as at December 31, 2017. However, 50,000 of the
total 90,000 checks were already certified by the bank.
 Check written on December 20, 2017 and dated on the same date for the correct amount of P6,000 was
erroneously recorded by the bank for P60,000. The check was issued to the supplier on December 22, 2017 and
cleared the bank on the same date.

***The credit balance in Near Western current account represents checks drawn and recorded on December 30, 2017
amounting to P60,000. The checks were delivered to the payees on January 15, 2018. The current account had a debit balance
of P10,000 immediately before the recording of the checks.

***The Tsina Bank savings account represents a sinking fund that has been set aside by the Board of Directors for the payment
of a liability which is due to be settled on May 1, 2019.

Determine the following as at December 31, 2017:

8. Cash on hand
9. Petty cash fund
10. The Bank of Philippine Archipelago current account
11. Near Western Bank – Current Account
12. Adjusted cash and cash equivalents

PROBLEM NO. 3
As at December 31, 2017, the company’s petty cash fund with an imprest balance of 10,000 showed the following breakdown
in the fund: Coins and currencies - 6,000; Charges for Supplies -2,000; Transportation - 1,250; and Miscellaneous- 750.

The fund was not replenished as at year end of 2017. On January 31, 2018, the fund was replenished. Immediately before the
replenishment, the fund is comprised of the following items: Coins and currencies - 1,000; Charges for Supplies - 6,000;
Transportation -1,800; and Miscellaneous - 1,000

The company’s policy is to treat any cash overage/shortage as miscellaneous income or loss on shortage if the amount is P500
and below.

13. How much total expense should the company recognize for the month of January 2018 in relation to the petty cash fund?
[a] 8,800 [b] 4,800 [c] 9,000 [d] 5,000

14. How much is the total debit to petty cash fund on the date of replenishment? [a] 9,000 [b] 8,800 [c] 5,000 [d] 0

15. Which of the following statements is true concerning the petty cash transactions in problem 30? [a] The company will
report the petty cash fund at its imprest balance of 10,000 in its statement of financial position as at December 31, 2017.
[b] The adjustment as at year-end on petty cash should include an entry crediting cash in bank for 4,000. [c] The reversing
entries as at the start of 2018 should include an entry debiting petty cash fund for 6,000. [d] none of the foregoing
statements

PROBLEM NO. 4
Angla-Cash Co.’s checkbook balance on December 31, 2017 was 5,000,000. In addition, Angla-Cash held the following in its
safe on December 31:
 Check payable to Angla-Cash, dated January 5, 2018, not included in the December 31
checkbook balance 500,000
 Check payable to Angla-Cash, deposited December, and included in the December
31 checkbook balance, but returned by bank on December 27, stamped
NSF. The check was redeposited December 28 and cleared on December 30 700,000
 Check payable to a vendor, dated December 31, unrecorded and unmailed
as at year end 300,000
16. The correct amount to be shown as cash in the statement of financial position on December 31, 2017 should be (a)
5,000,000 (b) 4,500,000 (c) 5,500,000 (d) 5,300,000

PROBLEM NO. 5
The following petty cash transactions transpired during the months of December 2017 and January 2018 for PITIK-ASH Corp.
DEC 2017
15 Established a petty cash fund in the amount of Php 20,000.
16-22 Charges for the week: Supplies – Php 1,500; Transportation – Php 2,000; Misc. – Php 1,000.
23-30 Charges to date: Supplies – Php 4,000; Transportation – Php 5,000; Employee IOUs – Php 5,000; Misc. – Php 2,000.
31 No further charge was made against the fund during the day. As at the end of the year, the fund was found to be
comprised of the following: Coins and currencies – Php 4,000; unpaid vouchers for charges amounting to Php 16,000.
The fund was not replenished as at year end.
JAN 2018
09 The fund was replenished, during which time, the fund was found to contain the following:
Coins and currencies – Php 1,350
Charges to date: Supplies – Php 7,000; Transportation – Php 8,000; Misc. – Php 3,500.
It is the Company’s policy to treat cash shortage amounting to Php 300 and below as loss on cash shortage.

The fund balance was also increased to Php 25,000.