Quiz No.

1 CASH AND CASH EQUIVALENTS August 20, 2024

CATEGORIES OF CASH:
Cash on  Coins, currency, paper bills, checks received, money orders, etc.
hand  A money order is a prepaid, secure financial instrument used to send a specified
amount of money to a recipient, often as an alternative to cash or checks.
 Checks include manager’s check, traveler’s check, customer’s check, employee’s
check.
 A manager's check is a secure, bank-issued check drawn from the bank's own funds
and signed by a bank official, often used for large transactions where guaranteed
funds are required.
 A traveler's check is a pre-printed, fixed-amount check used as a secure alternative to
cash, typically for international travel, that can be replaced if lost or stolen.
 A customer's check is a written order from a bank account holder directing their
bank to pay a specified amount of money to the person or entity named on the check.
 An employee's check, commonly known as a paycheck, is a check issued by an
employer to an employee as payment for wages earned during a specific pay period.
Cash in  Demand and savings deposit
bank  A demand deposit is a bank account from which funds can be withdrawn at any time
without advance notice, typically used for everyday transactions, such as checking
accounts.
 A savings deposit is a bank account where funds are deposited to earn interest over
time, typically with limited withdrawal options, designed for saving rather than daily
transactions.
 Time deposits are classified as cash equivalents, not cash in bank.
Cash  Shall be used in operations such as payroll fund, tax funds, and dividend funds.
funds

CASH ITEMS are measured at their face amount. If a cash item is denominated in foreign currency,
it shall be translated using the exchange rate as of the reporting date.

PARTIES IN A CHECK DOCUMENT:

1) Maker (drawer) – person (usually the debtor) who made the check in favor of the payee.
2) Drawee – person (usually a bank) which the maker directed to pay the payee; drawer has custody
over the maker’s cash (cash in bank).
3) Payee – person (usually a creditor or supplier) for whom the check is made and given to.

Entity is the payee Entity is the maker

Check was received from customers; Check written; or Prepared check; or
Transaction or
or Check received as payment of Check as payment of accounts payable;
Situation
accounts receivable or Supplier check
Added to the cash on hand balance Deducted to arrive at cash in bank
Initial accounting
and deducted from accounts balance and deducted from accounts
procedures
receivable balance payable balance.

Q: Why is the amount of check already considered in the computation of the balance of cash items?
A: Because there is already an economic transfer whenever a maker gives a check to the payee. Payee
has already obtained control over the amount represented by the check as it can be deposited in the
drawee bank anytime to obtain the actual amount of cash.

SPECIAL CASES ON CHECKS (no transfer of control over cash as represented by the check):
 Check dated after reporting date
Post-dated
 Control will be transferred from the maker to the payee only upon the date
check
indicated on the check
Unreleased  Check not yet given to the payee as of reporting date
  For unreleased check, control will be transferred only when the maker has
check
given the physical possession of the check to the payee
 Check that is not encashed within reasonable time (based on banking practices,
that is within 180 days or 6 months from the date of check)
Stale check
 Control is lost since right of the payee over the check has already expired
(transferred back to maker)

If the entity is the payee, these special checks shall be all excluded from the cash balance. In case these
were already included, the following adjusting entry shall be made:
Accounts receivable xxxx
Cash xxxx

If the entity is the maker, the amount of check shall be added back to both cash in bank and accounts
payable:
Cash xxxx
Accounts payable xxxx

1) On December 31, 2023, ABC Company reported cash in bank balance amounting to ₱3,200,000. Upon
inspection of journal entries, the following supplier checks were already deducted to arrive at the ending
cash in bank balance:
 Check A amounting to ₱250,000 and dated January 10, 2024 was already given to the payee last
December 23, 2023.
 Check B amounting to ₱360,000 and dated December 20, 2023 was given to the payee only on January
12, 2024.
 Check C amounting to ₱150,000 and dated December 28, 2023 was given to the payee last December
15, 2023. This is yet to be encashed by the payee.
 Check D amounting to ₱450,000 and dated May 1, 2023 was given to the payee last May 15, 2023. This
is yet to be encashed by the payee.
Answer the following: (5 points each)
a. Determine the adjusted cash balance as of December 31, 2023.

The entity is the maker for all of these checks.

Unadjusted balance 3,200,00

0
Check A 250,000 Postdated after December 31, 2023
Check B 360,000 Unrealeased check as of December 31, 2023
Check C Properly included (not postdated, stale nor unreleased)
Check D 450,000 Stale (not encashed for more than 6 months)
Adjusted balance 4,260,00
0

b. Prepare one compound journal entry to record the adjustments to the cash in bank balance.

Cash in bank (250,000 + 360,000 + 1,060,000

450,000)
Accounts payable 1,060,000

2) ABC Company maintains bank accounts with three different banks. As of December 31, 2023, the
following information is relevant:
 Account 000123 has ₱900,000 balance while Account 000124 has ₱350,000 overdraft balance, both
maintained with XYZ Bank.
 Account 800456 has ₱700,000 balance while Account 800457 has ₱800,000 overdraft balance, both
maintained with QWERTY Bank.
 Account 987654, which is maintained with WASD Bank, has ₱50,000 overdraft balance. There were no
other bank accounts maintained with WASD Bank.
Determine the following total amounts: (5 points each)

BANK OVERDRAFTS happen when a particular bank account results in a negative balance. There is
an overdraft if the total amount of checks encashed by payees is higher than the amount of cash that
the entity maintains for that bank account.

OVERDRAFT ACCOUNTING:
Other bank account with positive balance in same bank?
YES NO
Present whole
Positive balance enough to cover overdraft? overdraft as
current liabs
YES NO
Present whole overdraft as Present overdraft as deduction from cash and
deduction from cash and cash equivalents to the extent of positive balance
cash equivalents and present excess as part of current liabs

a. Cash and cash equivalents

b. Current liabilities

Cash and cash Current

equivalents liabilities
XYZ Bank
Account 000123 900,000 Positive balance enough
Account 000124 (350,000)
QWERTY Bank
Account 800456 700,000 Positive balance not enough
Account 800457 (700,000) 100,000 Excess over positive balance
WASD Bank
Account 987654 _______ 50,000 No positive balance
Totals 550,000 150,000

3) At the end of 2023, ABC Company reported the following cash funds:
Tax fund ₱400,000
Payroll fund 3,200,000
Warehouse fund 5,500,000
Machinery fund 4,000,000
Bond sinking fund – voluntarily established; related bonds will mature on December 31, 2026 1,500,000
Bond sinking fund – voluntarily established; related bonds will mature on July 31, 2024 2,000,000
Bond sinking fund – mandatorily established; related bonds will mature on March 31, 2024 4,400,000
Bond sinking fund – mandatorily established; related bonds will mature on December 31, 5,000,000
2027

Cash Funds Presentation in balance sheet

Operating (payroll, petty cash, tax, Part of cash and cash equivalents; for petty cash funds,
dividends, payment to suppliers, amount to be included is equal to coins and currency on
change, and for any other current hand and accommodation check or check of petty cash
purpose) custodian
Capital expenditure (for acquisition of
land, building, equipment, long-term
Part of noncurrent assets as long-term investments
investments and for any other
noncurrent purpose)
 If related liab is noncurrent, presented as long-term
Voluntary bond sinking fund (for investment as part of noncurrent assets. If related liab is
payment of long-term debts) current, presented as part of cash and cash equivalents
within current assets.
If related liab is noncurrent, presented as long-term
Mandatory bond sinking fund (for
investment as part of noncurrent assets. If related liab is
payment of long-term debts, in custody
current, presented as part of short-term investments
of trustee and use is highly restricted)
within current assets.

Determine the amount of cash and cash equivalents. (5 points)

Tax fund 400,000

Payroll fund 3,200,000
Warehouse fund Noncurrent asset
Machinery fund Noncurrent asset
Voluntary bond sinking fund, related bonds will Noncurrent asset
mature on 12/31/26
Voluntary bond sinking fund, related bonds will 2,000,000
mature on 7/31/24
Mandatory bond sinking fund, related bonds will Current asset but as short-term
mature on 3/31/24 investment
Mandatory bond sinking fund, related bonds will Noncurrent asset
mature on 12/31/27
Total cash and cash equivalents 5,600,000

4) During 2023, ABC Company invested its excess cash in the following investments:
Items of investment Term Date acquired Maturity date
a. Commercial paper 3 months November 23, February 3, 2024
2023
b. Treasury bill 9 months April 16, 2023 January 16, 2024
c. Time deposit 2 months December 5, 2023 February 5, 2024
d. Redeemable preference shares 5 years October 26, 2023 January 7, 2024
e. Treasury bond 10 years June 26, 2023 June 26, 2025
f. Treasury bill 11 months December 27, 2023 March 3, 2024
Most of these investments can be purchased from other investors so the duration between the date of
purchase and maturity date is not necessarily the length of term. For each item of investment, determine
whether it is classified as a cash equivalent or not. (2 points each)

COMPENSATING BALANCES – when an entity borrows funds, the lender may require the entity to
maintain a minimum amount in its bank account.
GENERAL RULE: Part of cash and cash equivalents
EXCEPTION: When minimum cash balance is legally restricted, it shall be excluded from cash and
cash equivalents.

PAS 7.6 defines CASH EQUIVALENTS as 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. These are not cash per se but due to their high liquidity, they are considered as equivalent to
cash.

A cash equivalent has a short maturity of not more than 3 months. Take note that the original issue
date nor the original term of an investment is not relevant in applying the 3-month rule. An
investment is also not automatically classified as cash equivalent even if there is less than 3 months
from the reporting date up to the maturity date. The date of purchase and maturity date are the only
relevant dates.
EXAMPLES OF CASH EQUIVALENTS:
Short-term, unsecured promissory notes issued by companies to finance their
Commercial papers immediate operational needs, typically with maturities ranging from a few
days to under a year.
Short-term, low-risk investments in the money market, such as certificates of
Money market
deposit, Treasury bills, or commercial paper, that provide liquidity and a
placements
modest return.
Bank account where funds are deposited for a fixed period at a set interest
Time deposit rate, with withdrawals restricted until the end of the term, such as in a
certificate of deposit (CD).
Short-term government securities with maturities ranging from a few days to
Treasury bills one year, sold at a discount and redeemed at face value, used to finance
government debt.
Long-term government debt security with a maturity of 10 to 30 years, paying
Treasury bond
interest semiannually and issued to fund government expenditures.
Corporate bonds are debt securities issued by companies to raise capital,
Corporate bonds paying periodic interest to bondholders and returning the principal amount
at maturity.
Redeemable preference shares are equity securities that give holders
Redeemable
preferential dividends and can be repurchased by the issuing company at a
preference shares*
predetermined price and date.
*Equity securities, in general, cannot be classified as cash equivalents since they do not have specific
maturity dates. The exception is the redeemable preference shares since the issuing corporation is
required to redeem these shares on a pre-determined date.

a. Commercial paper Cash equivalent 11/23/23 – 2/3/24 = not more than 3 months
b. Treasury bill Not a cash equivalent 4/16/23 – 1/16/24 = more than 3 months
c. Time deposit Cash equivalent 12/5/23 – 2/5/24 = not more than 3 months
d. Redeemable pref.
Cash equivalent 10/26/23 – 1/7/24 = not more than 3 months
shares
e. Treasury bond Not a cash equivalent 6/26/23 – 6/26/25 = more than 3 months
f. Treasury bill Cash equivalent 12/27/23 – 3/3/24 = not more than 3 months