CHAPTER 7 CASH & CASH EQUIVALENTS 12.

If the problem is silent on the term of the time

deposit, it is assumed that the term is three
1. Under PAS 7, treasury bills, money market
months or less, being the normal banking
placement and time deposit normally
practice.
qualify as cash equivalents only when they
13. The outstanding check is deducted from the
have a short maturity of three months or
cash in bank because the cash in bank
less from the date of acquisition.
balance is per bank statement.
2. In the absence of a specific term, money
14. The deposit in bank closed by BSP is a
market account is short-term investment of
noncurrent asset.
three months or less.
15. The vouchers paid should be recorded as
3. The cash in bank set aside for payroll is
expenses.
included in cash because it is for the
16. The IOUs should be shown as advances to
payment of current liability.
employees.
4. The cash in bank restricted for building
17. The undelivered check is restored to cash
construction is classified as a noncurrent
by debiting cash and crediting accounts
investment because it is set aside for the
payable.
acquisition of a noncurrent asset and not
18. The check drawn payable by the entity to the
for the payment of a current liability.
order of the petty cash custodian is actually
5. The undelivered check is restored to the
a replenishment check and therefore part
cash balance by debiting cash and crediting
of cash.
accounts payable.
19. The check drawn payable to the order of the
6. The cash in sinking is a noncurrent
petty cash custodian representing her salary
investment because it is set aside for the
is actually an accommodation check and
payment of noncurrent liability.
therefore part of cash.
7. The certificate of deposit is a cash
20. If the bond payable is already due within one
equivalent.
year from the end of the reporting period, the
8. The postdated customer check is reverted to
sinking fund is included in cash and cash
accounts receivable.
equivalents.
9. The share investments cannot qualify as
21. The classification of a cash fund should
cash equivalents because although very
parallel the classification of the related
actively traded the investments do not have
liability.
a maturity.
22. The cash in bank restricted for plant addition
10. The commercial papers are actually money
is classified as noncurrent regardless of the
market placements.
expected year of disbursement.
11. 1. A compensating balance is a minimum
23. The bank overdraft is a current liability.
checking or demand deposit account
24. The bank overdraft is netted if it is in the
balance that must be maintained in
same bank.
connection with a borrowing arrangement
25. The bank overdraft is not netted against
with a bank.
other bank accounts but should be reported
2. The compensating balance is part of cash
as current liability.
if it is not legally restricted as to withdrawal.
26. The window dressing of collections should
3. Otherwise, if it is legally restricted, the
be reversed by debiting account receivable
compensating balance is excluded from the
and crediting cash in bank.
amount shown as “cash”, and shown
26.1. Window dressing is actions taken to
separately as current or noncurrent asset
improve the appearance of a
depending on the bank loan to which it is
company's financial statements.
related.
27. The pension fund is a noncurrent
4. If the related bank loan is short term, the
investment.
restricted compensating balance is a current
28. The restricted cash in foreign bank is
asset.
classified as noncurrent.
4.1. In this case the compensating balance
29. If the check is redeposited and cleared
is shown as “cash held as compensating
before the end of the reporting period, then
balance” as a current asset.
the same is not deducted anymore from the
5. If the related bank loan is long term, the
checkbook balance.
restricted compensating balance is a
noncurrent asset.