Intermediate Accounting 1 (INTACC1) De La Salle Lipa

Module 1
CASH AND CASH EQUIVALENTS

Nature and Composition of Cash

A financial asset refers to cash or a contractual right to receive cash or another financial instrument in
the future; cash belong to this category of assets. From a limited viewpoint, cash refers to currency and
coins that are in circulation. However, for accounting purposes, an item is considered as cash if it is
acceptable by bank or other financial institution for deposit at face value.

Cash Items

Unrestricted and immediately available for For use other than for
use in current operations current operations

For payment of operating expenses

For payment of current liability

For acquisition of current asset

“Cash” in the current Other non-current

assets section financial assets

Note: Cash items are unrestricted if they are on hand, or in the case of deposits with banks, they could
be withdrawn immediately. Cash items are immediately available for use in current operations, if they are
available for payment of current obligations or current operating expenses or for acquisition of current
assets.

“Cash” on the statement of financial position includes the following:

1. Cash on hand
a. Undeposited cash collections: currencies such as bills and coins, customers’ checks, traveler’s
checks, manager’s checks, bank drafts, and money orders
b. Working funds: cash funds segregated for current use in the ordinary conduct of business such
as petty cash fund, change fund, payroll fund, dividend fund, tax fund, and interest fund
2. Cash in bank includes demand deposits. These are unrestricted funds deposited in a bank that can
be withdrawn upon demand such as amounts in checking and savings account.

Nature and Composition of Cash Equivalents

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Intermediate Accounting 1 (INTACC1) De La Salle Lipa

Cash equivalents are highly liquid financial instruments that are so near their maturity and that there is
insignificant risk of change in value due to fluctuation of interest rates. A financial instrument qualifies as
cash equivalent if it matures within a short period of time, normally three months or less, from the date of
acquisition. Although cash equivalents are not cash, they are generally presented on the statement of
financial position together with cash using the account title “Cash and Cash Equivalents”

Note: The determination of the maturity date starts from the date of the acquisition of the instrument and
not from the date indicated on the face of the instrument.

Presentation and Measurement of Cash in the Statement of Financial Position

Cash is generally measured at face value, which is its fair value. Some considerations in reporting cash
balance:

1. Cash in foreign currency and deposits in foreign banks should translated to Philippine currency
using the exchange rate at the reporting date.

2. Cash in closed banks or cash in banks having financial difficulty or cash in bank in
bankruptcy should be reclassified as receivable and written down to its recoverable amount.

3. Customers’ post-dated checks, NSF checks (not sufficient funds checks) and IOUs (“I owe you.”)
should be reclassified as receivables.

4. Postage stamps and expense advances are prepaid expenses.

5. Bank overdraft. A bank overdraft occurs when a depositor has written checks for a sum greater
than that in the depositor’s bank account. It should be reported as a current liability, except when the
depositor has sufficient funds in another account with the same bank to cover the account which is
overdrawn and if a right of offset exists in the agreement between the bank and the depositor.

6. Undelivered checks or unreleased checks are company’s checks drawn and recorded but are not
actually issued or delivered to the payees as of the reporting date; they are reverted to the cash
balance.

7. Company’s post-dated checks which have been recorded as issued and delivered to payees
before or at the reporting date should be reverted to cash, because there is no actual payment yet as
of the reporting date.

8. Compensating balance are minimum amount that a company agrees to maintain in a bank checking
account as support or collateral for a loan by the depositor. If not legally restricted as to withdrawal,
the amount is reported as part of cash. Otherwise, it should be classified separately either as current
or non-current asset depending on the nature of the loan for which the compensating balance is set
up.

9. Cash set aside for long-term specific purpose should be reported as non-current financial asset
(e.g. bond sinking fund and plant expansion fund).

* Stale checks are checks that are presented to be cashed or deposited at a bank six months or more
after the date it was written. If they are written by the company, they should be reported as a liability;
if they are written by the customer, they should be reported as a receivable.

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Cash Management

The following are some characteristics of a system of cash control:

1. Segregation of duties for handling cash and recording cash transactions.
2. Imprest System, which is characterized by daily deposit of all cash receipts intact in the bank and
making disbursement through issuance of checks.
3. Voucher system, which is a system to control the cash disbursements. Under the voucher system,
properly approved vouchers, ensuring that all disbursements are authorized, support all cash
payments. All potential payments are recorded first in the voucher register, and actual payments are
recorded in the check register.
4. Internal audits at irregular intervals.
5. Periodic reconciliation of bank statement balance and cash balance in the company’s accounting
records.

Petty Cash Fund

A petty cash fund allows a company to effectively control small amounts of cash fairly simply.

1. Establishment of the fund

Petty cash fund xx

Cash in bank xx

2. Disbursement of money from the fund

No entry.

3. Replenishment of the fund

Expenses xx
Cash in bank xx

4. Adjusting entry, to recognize the payments from the fund that are not replenished

Expenses xx
Petty cash fund xx

5. To increase the balance of the fund

Petty cash fund xx

Cash in bank xx

6. To decrease the balance of the fund

Cash in bank xx
Petty cash fund xx
Cash short and over is a nominal account that is debited for shortages and credited for overages in the
petty cash fund.

Reconciliation of Bank Balances

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Intermediate Accounting 1 (INTACC1) De La Salle Lipa

A bank reconciliation is a report that explains the difference between the book (company) balance of
cash and the cash balance reported on the bank statement.

1. Deposit in transit or undeposited collections are cash receipt that has been added to the
company’s cash balance but has not been added to the balance reported on the bank statement,
either because it is not yet received by the bank as of cutoff time (deposit in transit) or it has not yet
been deposited as of the end of the month (undeposited collections).

2. Outstanding checks are checks that were written by the company, issued to the payees, and
deducted from the company’s cash balance but they have not yet been reflected in the bank
statement since they have not been presented yet to the bank for payment.

3. Debit memos are charges to the depositor’s account made directly by the bank.

4. Credit memo are deposits made directly by the bank to the company’s account.

5. Bank or depositor errors are errors on either the part of the bank or the part of the depositor cause
the bank balance to disagree with the depositor’s book balance.

Name of the Company

Bank Reconciliation
Date

Balance per bank statement xx Balance per books (or per ledger) xx
Add: Deposit in transit xx Add: Note collected and interest xx
Less: Outstanding check (xx) Less: NSF checks (xx)
Add/Less: Bank errors xx Bank service charge (xx)
Adjusted balance xx Add/Less: Bank errors xx
Adjusted balance xx

To illustrate, Nugget Mining Company’s books show a cash balance at the Melbourne Bank on
November 30, 2015, of P20,502. The bank statement covering the month of November shows an ending
balance of P22,190. An examination of Nugget’s accounting records and November bank statement
identified the following reconciling items.

1. A deposit of P3,680 that Nugget mailed November 30 does not appear on the bank statement.
2. Checks written in November but not charged to the November bank statement are:
Check #7327 P 150
#7348 4,820
#7349 31
3. Nugget has not yet recorded the P600 of interest collected by the bank November 20 on Sequoia Co.
bonds held by the bank for Nugget.
4. Bank service charges of P18 are not yet recorded on Nugget’s books.
5. The bank returned one of Nugget’s customer’s checks for P220 with the bank statement, marked
“NSF.” The bank deducted P220 from Nugget’s account.
6. Nugget discovered that it incorrectly recorded check #7322, written in November for P131 in payment
of an account payable, as P311.
7. A check for Nugent Oil Co. in the amount of P175 that the bank incorrectly charged to Nugget
accompanied the statement.

Nugget reconciled the bank and book balances to the correct cash balance of P21,044 as shown below.
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Intermediate Accounting 1 (INTACC1) De La Salle Lipa

Nugget Mining Company

Bank Reconciliation
November 30, 2018

Balance per bank P22,190

Add: Deposit in transit 3,680
Bank error—incorrect check charged to account by bank 175
Less: Outstanding checks (5,001)
Adjusted balance per bank P21,044

Balance per books P20,502

Add: Interest collected by the bank 600
Book error—Error in recording check #7322 180
Less: Bank service charges (18)
NSF check returned (220)
Correct cash balance P21,044

The journal entries required to adjust and correct Nugget’s books are taken from the items in the
“Balance per books” section and are as follows.

1. To record interest on Sequoia Co. bonds, collected by bank

Cash 600
Interest Revenue 600

2. To correct error in recording amount of check #7322

Cash 180
Accounts Payable 180

3. To record bank service charges for November

Miscellaneous expense (or Bank charges) 18

Cash 18

4. To record customer’s check returned NSF

Accounts receivable 220

Cash 220

Exercises

1. On December, 31 2018, Alaska Company provided the following data:

Cash in bank P3,000,000

Time deposit 30 days 1,000,000
Money market placement due on June 30, 2019 2,000,000
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Intermediate Accounting 1 (INTACC1) De La Salle Lipa
Saving deposit in closed bank 100,000
Sinking fund for bond payable due on June 30, 2020 1,500,000
Petty cash fund 20,000

 The cash in bank included customer check of P200,000 outstanding for 18 months.

 Check of P250,000 in payment of accounts payable was dated and recorded on December 31,
2018 but mailed to creditors on January 15, 2019.

 Check of P100,000 dated January 31, 2019 in payment of accounts payable was recorded and
mailed December 31, 2018.

 The reporting period is the calendar year.

 The cash receipts journal was held open until January 15, 2019 during which time an amount of
P450,000 was collected and recorded on December 31, 2018. (Assume that the amount referred
to a receivable that had been collected and deposited.)

Required:
a. Prepare adjusting entries on December 31, 2018.
b. Compute the total amount of cash and cash equivalents that should be reported on December 31,
2018.
c. Explain the presentation of the items excluded form cash and cash equivalents.

2. Jason Company provided the following information with respect to its cash and cash equivalents on
December 31, 2018.

Checking account at First Bank P (200,000)

Checking account at Second Bank 3,500,000
Treasury bonds 1,000,000
Payroll account 500,000
Value added tax account 400,000
Foreign bank account - restricted (in equivalent pesos) 2,000,000
Postage stamps 50,000
Employee's postdated check 300,000
IOU from president's brother 750,000
Credit memo from a vendor for a purchase return 80,000
Traveler's check 300,000
NSF check 150,000
Petty cash fund 20,000
Money order 180,000

Required: Compute the amount that would be reported as unrestricted cash on December 31, 2018.

3. McMann decided to establish a petty cash fund to help ensure internal control over its small cash
expenditures. The following information is available for the month of April.

a. On April 1, it established a petty cash fund in the amount of P200.

b. A summary of the petty cash expenditures made by the petty cash custodian as of April 10 is
as follows.

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Delivery charges paid on merchandise purchased P60
Supplies purchased and used 25
Postage expense 40
IOU from employees 17
Miscellaneous expense 36

The petty cash fund was replenished on April 15. The balance in the fund was P12.

c. The petty cash fund balance was increased P100 to P300 on April 20.

Required: Prepare the journal entries to record transactions related to petty cash for the month of
April.

4. Aragon Company has just received the August 31, 2018, bank statement, which is summarized
below.

County National Bank Disbursements Receipts Balance

Balance, August 1 P 9,369
Deposits during August P32,200 41,569
Note collected for depositor, including P40 interest 1,040 42,609
Checks cleared during August P34,500 8,109
Bank service charges 20 8,089
Balance, August 31 8,089

The general ledger Cash account contained the following entries for the month of August.

Cash
Balance, August 1 P10,050 Disbursements in August P35,403
Receipts during August 35,000

Deposits in transit at August 31 are P3,800, and checks outstanding at August 31 total P1,550. Cash
on hand at August 31 is P310. The bookkeeper improperly entered one check in the books at
P146.50 which was written for P164.50 for supplies (expense); it cleared the bank during the month
of August.

Required:
a. Prepare a bank reconciliation dated August 31, 2018, proceeding to a correct balance.
b. Prepare any entries necessary to make the books correct and complete.
c. What amount of cash should be reported in the August 31 statement of financial position?