Cash and Cash Equivalents Chapter 2

1. What constitutes cash?

a. Money only

b. Money and negotiable instruments

c. Any negotiable instrument including promissory notes

d. Money and any instrument that is immediately payable in money and acceptable by the bank for deposit and immediate credit

Answer:

d. Money and any instrument that is immediately payable in money and acceptable by the bank for deposit and immediate credit

To be reported as cash and cash equivalents, the item must be:

a. Deposited in a financial institution, particularly a bank

b. Available for the redemption of preference shares or bonds

c. Can be freely used in current operations

d. Set aside for the acquisition or construction of a property, plant, equipment

Answer:

c. Can be freely used in current operations

Which of the following should be presented as cash in the statement of financial position?

a. Postdated checks received

b. IOUs from officers to be deducted from their salaries for the following month

c. Undelivered checks

d. NSF checks

Answer:

c. Undelivered checks

Which of the following cannot be shown as part of cash in the current assets section of the statement of financial position?

a. Cash in special checking account for payroll

b. Compensating balances

c. Cash deposited with utility company

d. Customer's checks

Answer:

c. Cash deposited with utility company

Which of the following describes unreleased checks?

a. They are outstanding checks.

b. They are treated as certified checks.

c. They are part of the payor's cash balance.

d. They should be a book-reconciling item, as the bank has deducted this amount from the cash balance in the bank statement.

Answer:

c. They are part of the payor's cash balance.

Which of the following should not be considered cash?

a. Petty cash fund

b. Money orders

c. Coin, currency, and funds awaiting deposits

d. Postdated checks

Answer:

d. Postdated checks

Which of the following is incorrect with regard to the valuation of cash and cash equivalents?

a. Cash is valued at face value.

b. Cash denominated in foreign currency is translated using the closing rate.

c. Cash equivalents include interest that is to be received.

d. Cash deposited in a bank that has filed for bankruptcy should be written down to its net realizable value

Answer:

c. Cash equivalents include interest that is to be received.

Deposits in foreign countries that are also subject to certain foreign exchange restrictions should be:

a. Valued at current exchange rates and shown as current assets

b. Valued at historical exchange rates and presented as noncurrent assets

c. Valued at current exchange rates and presented as noncurrent assets

d. Valued at historical exchange rates and presented as current assets

Answer:

c. Valued at current exchange rates and presented as noncurrent assets

Which of the following should be considered cash equivalents?

a. Certificates of deposit

b. Money market with checking account privileges

c. Legally restricted compensating balances

d. Postdated checks

Answer:

a. Certificates of deposit

Travel advances should be reported as:

a. Supplies

b. Cash because they represent the equivalent of money

c. Investments

d. None of these

Answer:

d. None of these

What is Cash?

Cash in financial accounting is broader in scope than the basic notion of cash in layman's terms. Cash is described in various ways, and its definition largely depends on the point of view of an individual or business entity. For individuals, cash could mean the money in one's wallet or purse, an account kept with a bank, or bills stored for safekeeping inside cash boxes or vaults. Business owners, on the other hand, have a deeper understanding of the most liquid asset, as cash is the medium of exchange that facilitates the smooth flow of their daily operations. To properly account and recognize cash in the books of accounts, accountants need to be guided by standards to correctly report this asset on the financial statements. It is a financial asset.

3 General Categories of Cash

1.) Cash on hand, as the term suggests, is cash inside one's wallet and/or coins inside one's pocket or purse. Other examples would be checks on hand, manager's checks, traveler's checks, cashier's checks, and bank drafts.

2.) Cash in bank consists of savings and checking accounts.

3.) Cash funds include, but are not limited to, petty cash fund, payroll fund, travel fund, interest fund, dividend fund, and tax fund. To be classified as cash, funds must be set aside for current purposes.

For financial reporting purposes, cash is shown as the first item in the current assets section of the statement of financial position. Cash in local currency is reported at face value. Foreign currencies and deposits are covered by RA No. 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines

What is Cash Equivalents?

as described in Philippine Accounting Standard No. 7 (PAS 7): Statement of Cash Flows, are short-term, highly liquid investments that are readily convertible to known amounts of cash, which are subject to an insignificant risk of changes in value. These include certain investments that have very short terms or those that have been purchased so close to their maturity dates that they present insignificant risk to the holder.

As a general rule, PAS 7 allows investments purchased 90 days or less before the maturity date to be classified as cash equivalents. Examples of cash equivalents are 90-day time deposits, time deposits purchased three months prior to maturity, treasury bills, commercial papers, certificate of deposits, and money market placements. For an instrument to be classified as a cash equivalent, it should be purchased by the entity 3 months or 90 days prior to maturity, regardless of its original term.

Investments whose maturity dates are over 90 days but do not exceed one year are classified as short-term investment, and those with maturities beyond one year are long-term investments.

Compensating Balance (other notes)

is the minimum balance that an account holder should maintain in his/her bank account. Compensating balances are included in an entity's cash balance if they could be withdrawn by the depositor without due penalties. In other words, compensating balance is still considered cash if there is no legal restriction as to its withdrawal. Otherwise, it should be treated as a long-term investment.

Postdated Checks (other notes)

are checks that bear a future date on its face. It has become the practice of some business entities to issue postdated checks as payment of liabilities and to receive postdated checks as collections from customers. A postdated check should be recorded as payment or collection only on the specified date on its face, not at the time it was received. The date on the postdated check signifies the time when it can finally be negotiated with the bank.

If there is a postdated check still on hand at the end of the year, the previous entry recording the payment of a payable or the collection of a receivable would result in an incorrect cash balance at the end of the year. For financial statement purposes, the cash balance should be corrected by reversing the previous payment or collection entry.

Stale Check (other notes)

Checks received by an entity but are not yet negotiated with the bank within a significant period of time after the date of issue. In practice, if the check is not negotiated with the bank after six months from the date written on its face, it is considered a stale check and the bank would no longer accept it. Stale checks should not form part of the cash balance of the holder. Unless the issuer replaces the stale check with a currently dated one, the entity should deduct the amount from its cash account for financial statement purposes.

NSF Check (other notes)

This is a check previously received by an entity from its customer as collection of the latter's account. If the customer's bank account does not have sufficient balance at the time when the entity presents the check for negotiation, the check will not be honored by the bank and will subsequently be returned to the entity-depositor with a notation of "NSF" or "no sufficient fund." In this case, the check should not be considered part of the cash balance of the entity. The previous entry recording the collection from the customer should be reversed to reduce the cash balance.

Cash set aside for acquisition of noncurrent assets (other notes)

When an entity sets aside cash for the acquisition of noncurrent assets, such fund should not be part of the entity's cash and cash equivalents. The reason is that the fund does not meet the requirement of cash being readily available either for use in the ordinary course of business or for settlement of a short-term obligation It should instead be reclassified as a noncurrent asset, particularly as a long-term investment.

Bank Overdraft (other notes)

When an entity makes withdrawals or writes checks that would exceed the balance of the amount it currently has with the bank, the resulting negative balance is called an overdraft. Generally speaking, such an occurrence is not accepted by banks in the Philippines. However, should this occur, an overdraft should recognized as a current liability, not as a negative balance in an entity's cash accor However, there are exceptions to this rule. If the amount of overdraft is immate or if the amount is material but there is another account in the same bank, the overdraft can be offset with other bank accounts.

What is Internal Control

Cash is one of the most significant resources of a company. However, it is also the asset that is most vulnerable to theft or misappropriation. This high vulnerable cash to irregularities should compel an entity to closely monitor its cash transactions. A company must implement effective internal control measures to minimize, if not totally eliminate, employee fraud and accounting errors involving cash.

What is Voucher System?

A voucher system is a method for authorizing and controlling cash disbursements. A cash voucher is a document that supports a cash transaction. It is filled out to identify what is to be paid, the amount to be paid, and the accounts to be recorded. Once the voucher is approved, the authorized disbursing employee prepares the payment check. Basically, the voucher system prevents indiscriminate and unauthorized purchases and incurrence of expense because the whole cycle of purchasing, verifying/checking, paying, and recording requires the involvement of various employees and departments.

What is Imprest System?

Is a control measure for both cash receipts and cash disbursements. Under this internal control measure, cash receipts are deposited intact daily to the bank, and all payments of assets, liabilities, and expenses should be made by check except for small or petty expenditures.

What is Petty Cash Fund?

The imprest system also provides an alternative method for recording small expenditures. Since it is impractical and inconvenient for small expenditures to be paid by check, a petty cash fund is set up by an entity, out of which petty expenses are to be paid. Small items purchased such as office supplies, fare of the company's messenger, and snack items for officers and employees during staff meetings are impally paid out of part of the imprest system.

the petty cash fund is under the responsibility of a petty cashier or needs the odian. Whenever a payment is to besponsibility of a petty, the party who needs the fund fills out a petty cash vou be made from the funde upon receipte petty requested amount. A receipt or any proand signs the salater given to the petty cash custodian as a supporting document of purchase custodian files petty capt together with the petty cash voucher at. The petty cae expense in the petty cash book. If the firm is using special journals, de perds th book serves as a schedule for small expenses. The specine cournals, the petty cash dividually recorded in the entity's cash payments journal (CPI) upon replenishment of the petty cash fund.

What is Bank recollection?

Banks offer three major types of deposit accounts to the public. A savings account earns interest and may either be a passbook savings account or an ATM Savings account. Deposits and withdrawals are transacted by the depositor either at the bank's counter or through an automated teller mached

A time deposit or certificate of time deposit account earns a higher interest than a savings account. This type has a maturity date, and withdrawal is interest only upon its maturity. Depending, however, on the policies of the bank, depositors may be allowed to withdraw before the maturity date or preterminate depositors deposit. Since the pretermination would constitute non-compliance of the condition for a held-to-maturity type of deposit, banks impose a penalty charge called a pretermination fee. The interest to be paid on preterminated time deposits is computed at a reduced interest rate.

The third type of deposit is the checking account. It is also known as a current account or demand deposit account. Traditional checking accounts do not earn interest; however, the current practice of banks is to allow a minimal rate of interest to encourage depositors to put in more funds to their checking accounts. Deposits to this account are made by filling out the usual bank deposit slips, while withdrawals are effected either by the issuance of checks or through an ATM. Checking account is the focus of the topic on bank reconciliation.

Reconciling Items due to timing difference (Bank recollection)?

This arisend of the month Exaty has recorded a particular disaction as of the end of the month Examples of this type are as follows:

a. Deposit in transit. This deposit is already recorded by an entity but is not yet recognized this deposit is a transaction increased the balance per books but has no effect yet in the balance per bank; thus, the balance per books is greater than the balance per bank. In preparing the bank reconciliation, this reconciling item is added to the balance per bank.

b. Outstanding check. This involves a check issued and recorded by the depositor, but the payee has not yet negotiated it with the bank. This transaction decreased the balance per books but has no effect yet in the balance per bank; thus, the balance per books is less than the balance per bank. This reconciling item is deducted from the balance per bank in preparing the bank reconciliation.

c. Bank debit memos. These are items deducted by the bank from an entity's account but not yet recorded by the entity. These transactions decrease the balance per bank but have no effect yet in the balance per books; thus, the balance per books is greater than the balance per bank. Examples of debit memos are NSF checks, cost of check books, service and penalty charges, and reduction of loans. In preparing the bank reconciliation, these reconciling items are deducted from the balance per books.

d. Bank credit memos. These are items added by the bank to an entity's account but not yet recorded by the entity. These transactions increased the cash balance per bank but have no effect yet in the cash balance per books; thus, the cash balance per books is less than the cash balance per bank. Examples of credit memos are collections of an entity that are directly made to the bank, interest earned on an entity's account, and proceeds of loans granted by the bank to an entity. In preparing the bank reconciliation, these reconciling items are added to the cash balance per books.

Reconciling items due to errors (Bank recollection)?

Errors may be committed by either the depositor or the bank. The general guidelines in the treatment of errors are as follows:

a. Determine who committed the error:

1. If the depositor committed the error, the balance per books should be corrected.

2. If the bank committed the error, the balance per bank should be corrected.

b. Determine the type of error committed and its effect on the cash balance. The error is corrected as follows:

1. If the error is an overstatement of deposit, the error is deducted

from the cash balance.

2. If the error is an understatement of deposit, the error is added to

the cash balance.

3. If the error is an overstatement of check issued, the error is added

to the cash balance.

4. If the error is an understatement of check issued, the error is

deducted from the cash balance.

5. Posting to the wrong depositor's account is an error that can only be committed by the bank. Apply a2, then analyze the type of error and its effect on the cash balance per bank and correct accordingly.