FARAP: cash and cash equivalents

composition of cash

1. short terms funds used for operations

2. undeposited currencies and coins

3. demand deposits in checking and savings account

4. foreign currencies converted to the Philippine peso based on the closing rate

5. bank drafts

6. money orders

7. compensating balance

compensating balance that is unrestricted should be presented as…

cash

compensating balance that is legally restricted as collateral for short-term borrowing should…

be shown separately under short-term investment

compensating balance that is legally restricted as collateral for long-term borrowing should…

be shown separately under long-term investment

examples of cash equivalents are…

1. three month commercial paper

2. three month money market instrument

3. three month time deposit

4. three month treasury bills

5. one year commercial paper purchased 3 months or less before maturity

Petty cash fund is

a. Separately classified as current asset.

b. Money kept on hand for making minor disbursements of coin and currency rather than by writing checks.

c. Set aside for the payment of payroll.

d. Restricted cash.

B

The petty cash fund account under the Imprest fund system is debited

a. Only when the fund is created.

b. When the fund is created and every time it is replenished.

c. When the fund is created and when the size of the fund is increased.

d. When the fund is created and when the fund is decreased.

B

Which of the following statements is false?

a. Adjustment of the petty cash account is made at the end of the period to avoid understatement of expenses and overstatement of cash.

b. Entries are made to the petty cash account to increase or decrease the size of the fund or to adjust the balance if not replenished at year-end.

c. The Imprest petty cash system in effect adheres to the rule of disbursements by check.

d. The petty cash account is debited when the fund is replenished.

C

A cash short and over account is

a. A contra account to cash.

b. Not generally accepted.

c. Debited when the petty cash fund proves out over.

d. Debited when the petty cash fund proves out short.

A

What is the major purpose of an Imprest petty cash fund?

a. To effectively plan cash inflows and outflows.

b. To ease the payment of cash to vendors.

c. To determine the honesty of petty cashier.

d. To effectively control cash disbursements.

B

A compensating balance

a. Must be included in “cash and cash equivalents”.

b. Which is legally restricted and related to a long-term loan is classified as current asset.

c. Which is legally restricted and related to a short-term loan is classified separately as current asset.

d. Which is not legally restricted as to withdrawal is classified separately as current asset

C

Cash equivalents are

a. Short-term and highly liquid investments that are readily convertible into cash.

b. Short-term and highly liquid investments that are readily convertible into cash with remaining maturity of three-months.

c. Short-term and highly liquid investments that are readily convertible into cash and acquired three months before maturity.

d. Short-term and highly liquid marketable equity securities.

C

A bank reconciliation is

a. A formal financial statement that lists all the bank account balances of an entity.

b. A merger of two banks that previously were competitors.

c. A statement sent by the bank to depositor on a monthly basis.

d. A schedule that accounts for the difference between an entity’s cash balance as shown in the bank statement and the cash balance as shown in the general ledger.

D

Bank reconciliation is normally prepared on a monthly basis to identify adjustments needed in the depositor’s records and to identify bank errors. Adjustments on the part of the depositor should be recorded for

a. All items except bank errors, outstanding checks and deposits in transit.

b. Bank errors, outstanding checks and deposits in transit.

c. Book errors, bank errors, deposits in transit and outstanding checks.

d. Outstanding checks and deposits in transit.

C

Which information is not provided by the Bank Statements

a. Bank changes for the period.

b. Errors made by the company.

c. Checks cleared during the period.

d. No sufficient fund checks.

C

If the cash balance shown in the company’s cash records is less than the correct cash balance and neither the company nor the bank has made any error, there must be

a. Outstanding checks.

b. NSF check returned by the bank.

c. Bank charges not yet recorded by the depositor.

d. An interest credited by bank to depositor’s account

A

Which of the following items must be added to the cash balance per bank statement in preparing a bank reconciliation which ends with adjusted cash balance?

a. Note receivable collected by bank in favor of the depositor and credited to the account of the depositor.

b. NSF customer check.

c. Service charge.

d. Erroneous bank debit.

D

In preparing a bank reconciliation which ends in adjusted balances, an erroneous book credit is

a. Added to the bank balance.

b. Added to the book balance.

c. Subtracted from bank balance.

d. Subtracted from book balance.

B

If an erroneous book receipts in November 2024 was corrected by the company in January 2025, how will this reconciling item be presented in the proof of cash for the month of December 2024 using the adjusted balance method?

a. Addition to November 30, 2024 Book Balance and a Deduction from the December 31, 2024 Book Receipts

b. Subtraction from the November 30, 2024 Book Balance and an Addition to the December 31, 2024 Book Receipts

c. Subtraction from the November 30, 2024 Book Balance and a Subtraction from the December 31, 2024 Book Disbursements

d. Subtraction from both the November 30, 2024 and December 31, 2024 Balances

A

what is the assessed inherent risk of the cash account?

high

why is the inherent risk of cash high?

because it is…

• susceptible to theft

• high volume of transactions

• overstatement of risk (in the POV of management)

• timing and adjusting differences (bank reconciliation)

control risk is ____ if there is no separation of duties

high

what is intact collection in relation to the control procedure connected to intact collection

• must be deposited @ the same day

• centralized collection system; one bank account

• restrictive endorsement

control risk is high if the _____ and ______ balances are _______

book, bank, not balanced

what are the three common fraud in relation to cash

1. lapping

2. kiting

3. salami

what is lapping?

collection is used by someone else and is not yet recorded

what is kiting

transfer of cash between banks, not yet recorded

what is salami

stealing immaterial amounts

do we sample bank balances?

no

management assertion of completeness in relation to cash is usually controlled through

cut-off procedures, using bank statements

• for receipts and disbursements

• for YE and subsequent periods

management assertion of valuation in relation to cash usually encounters the problem of

ForEx, solved by using the closing rate at the end of the period

management assertion of rights and obligations in relation to cash is usually controlled through

confirming if the company has loans, N/P, other liabilities

management assertion of presentation and disclosure in relation to cash is usually controlled through

PAS 1: a single line item as C&CE

composition of PCF

bills, currencies, coins

replenishment check

accommodation check (only if qualified as cash)

Vouchers dated subsequent to YE (not added in BCC, so needs to be added back)

Petty cash fund is

a. Separately classified as current asset.

b. Money kept on hand for making minor disbursements of coin and currency rather than by writing checks.

c. Set aside for the payment of payroll.

d. Restricted cash.

b

The petty cash fund account under the Imprest fund system is debited

a. Only when the fund is created.

b. When the fund is created and every time it is replenished.

c. When the fund is created and when the size of the fund is increased.

d. When the fund is created and when the fund is decreased.

c

Which of the following statements is false?

a. Adjustment of the petty cash account is made at the end of the period to avoid understatement of expenses and overstatement of cash.

b. Entries are made to the petty cash account to increase or decrease the size of the fund or to adjust the balance if not replenished at year-end.

c. The Imprest petty cash system in effect adheres to the rule of disbursements by check.

d. The petty cash account is debited when the fund is replenished.

d

A cash short and over account is

a. A contra account to cash.

b. Not generally accepted.

c. Debited when the petty cash fund proves out over

d. Debited when the petty cash fund proves out short

d

What is the major purpose of an Imprest petty cash fund?

a. To effectively plan cash inflows and outflows.

b. To ease the payment of cash to vendors.

c. To determine the honesty of petty cashier.

d. To effectively control cash disbursements.

d

A compensating balance

a. Must be included in “cash and cash equivalents”.

b. Which is legally restricted and related to a long-term loan is classified as current asset.

c. Which is legally restricted and related to a short-term loan is classified separately as current asset.

d. Which is not legally restricted as to withdrawal is classified separately as current asset

c

Cash equivalents are

a. Short-term and highly liquid investments that are readily convertible into cash.

b. Short-term and highly liquid investments that are readily convertible into cash with remaining maturity of three-months.

c. Short-term and highly liquid investments that are readily convertible into cash and acquired three months before maturity.

d. Short-term and highly liquid marketable equity securities.

c

A bank reconciliation is

a. A formal financial statement that lists all the bank account balances of an entity.

b. A merger of two banks that previously were competitors.

c. A statement sent by the bank to depositor on a monthly basis.

d. A schedule that accounts for the difference between an entity’s cash balance as shown in the bank statement and the cash balance as shown in the general ledger.

d

Bank reconciliation is normally prepared on a monthly basis to identify adjustments needed in the depositor’s records and to identify bank errors. Adjustments on the part of the depositor should be recorded for

a. All items except bank errors, outstanding checks and deposits in transit.

b. Bank errors, outstanding checks and deposits in transit.

c. Book errors, bank errors, deposits in transit and outstanding checks.

d. Outstanding checks and deposits in transit.

a

Which information is not provided by the Bank Statements

a. Bank changes for the period.

b. Errors made by the company.

c. Checks cleared during the period.

d. No sufficient fund checks.

b

If the cash balance shown in the company’s cash records is less than the correct cash balance and neither the company nor the bank has made any error, there must be

a. Outstanding checks.

b. NSF check returned by the bank.

c. Bank charges not yet recorded by the depositor.

d. An interest credited by bank to depositor’s account

d

Which of the following items must be added to the cash balance per bank statement in preparing a bank reconciliation which ends with adjusted cash balance?

a. Note receivable collected by bank in favor of the depositor and credited to the account of the depositor.

b. NSF customer check.

c. Service charge.

d. Erroneous bank debit.

d

In preparing a bank reconciliation which ends in adjusted balances, an erroneous book credit is

a. Added to the bank balance.

b. Added to the book balance.

c. Subtracted from bank balance.

d. Subtracted from book balance.

b

If an erroneous book receipts in November 2024 was corrected by the company in January 2025, how will this reconciling item be presented in the proof of cash for the month of December 2024 using the adjusted balance method?

a. Addition to November 30, 2024 Book Balance and a Deduction from the December 31, 2024 Book Receipts

b. Subtraction from the November 30, 2024 Book Balance and an Addition to the December 31, 2024 Book Receipts

c. Subtraction from the November 30, 2024 Book Balance and a Subtraction from the December 31, 2024 Book Disbursements

d. Subtraction from both the November 30, 2024 and December 31, 2024 Balances

c