AED 08: INTERMEDIATE ACCOUNTING 1

CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

1- CASH AND CASH EQUIVALENT

Introduction:

In the field of accounting, having a solid understanding on the concept and logic of cash and cash equivalent is paramount. This chapter provides a
comprehensive summary of the discussions tackled by the previous class reporters including an in-depth exploration of the concepts, composition, and
accounting methods concerning cash and cash equivalents. This chapter shall make use of diagrams and tables to simplify the topic and deliver an
understandable brief discussion.

-Undeposited collections
CASH ON HAND -checks
Money that is immediately -bank draft
available for transactions
-money order

CASH CASH IN BANK

-demand deposit
Includes money and negotiable Money that is deposited or -savings deposit
instrument that is payable in saved in a bank
money and acceptable by the bank.

CASH FUND -petty cash fund

-payroll fund
Money that is set aside for
current purposes -dividend fund
AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

Short term, highly liquid investment, readily convertible Note: the date of purchase
CASH EQUIVALENT should be 3 months or less
Acquired 3 months before maturity before maturity

IF INVESTED CASH IS:

TIME DEPOSITS  3 MONTHS OR LESS – considered as cash
equivalent and is under the category of “Cash
EXCESS CASH MAY BE INVESTED IN: MONEY MARKET PLACEMENTS
and Cash Equivalent”
 MORE THAN 3 MONTHS BUT WITHIN 1 YEAR –
TREASURY BILLS
classified as a short or temporary financial
asset and is under “Current Asset”
 MORE THAN 1 YEAR – long term, “noncurrent
asset”

MEASUREMENT

Face value

CASH Current Exchange Rate (Foreign)

Measured at:
Estimated realizable value (in state of bankruptcy If amount recoverable is lower than face value
AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

Classification of cash fund should be the same with  Current assets serve for current purposes. This
the classification of related liability includes petty cash fund, payroll fund, travel
CASH fund, interest fund
EXCEPTION: cash fund set aside for acquisition of  Long term investment is for long term
Measured at:
noncurrent asset should be classified as noncurrent purposes. This includes sinking fund,
regardless of the year of disbursement. contingent fund, etc

If same bank

BANK OVERDRAFT Issuance in excess of cash deposited No offsetting except:

Amount is small or
immaterial
Not permitted in PH!

Considered as “cash”
Not legally restricted as to
withdrawal Considered as “cash
COMPENSATING (informal) held as compensating
Minimum balance required to maintain
balance”
BALANCE
Legally restricted as to
withdrawal
“noncurrent
(formal) investment” if long
terms
AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

 Recorded but not given

UNDELIVERED  No payment if pending
CHECKS delivery because it may be
cancelled anytime
ADJUSTING ENTRY
 Already given but bears a
date for encashment Cash xx
POSTDATED  No payment unless check
CHECKS CHECKS will be presented at the Accounts payable xx
bank No payment is recognized

 Expired check
 Must be encashed within a
STALE CHECKS reasonable time
 Becomes stale after 6
months

Amount is immaterial Amount is material

ADJUSTING ENTRY ADJUSTING ENTRY

Cash xx Cash xx

Miscellaneous income xx Accounts payable xx

AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

Debit: Cash short or over

CASH SHORTAGE Cash is less than balance per book Credit: Cash

Debit: Cash
CASH OVERAGE Cash is more than balance per book
Credit: Cash short or over

IMPREST FUND
SYSTEM
Money is set aside to pay small
PETTY CASH FUND expenses
FLUCTUATING
FUND SYSTEM

IMPREST VS. FLUCTUATING

 Fixed amount  No fixed initial amount

 Fund is immediately replenished  No strict amount to maintain
 Fund balance always remains the same  No mandatory replenishment
 consistent  Flexible
 Less accountability; less stringent
AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

ADDITIONAL NOTES:
o Money market placements and time deposit qualify as cash and cash equivalent when there is no specification attached.
o Cash in bank set aside for payroll is included in cash because it is for the payment of current liability.
o Share investments are not part of cash and cash equivalent because it doesn’t have maturity.
o Check drawn payable to the order of the petty cash custodian representing her salary is considered as an accommodation check and is therefore
classified as cash.
o Bank overdrafts are only included if it is on the same bank
o Pension fund is a non-current investment
o Value added tax account is included I cash because it is a payment of current liability.
o Refundable deposit for returnable containers is classified as current assets.

2- BANK RECONCILIATION

BANK RECONCILIATION BANK STATEMENT

- only necessary for demand deposit accounts - Monthly report of the bank to the depositor showing:
- statement which brings into agreement the cash balance o Cash balance per bank (beginning)
per book and cash balance per bank o Deposits made by the depositor
- prepared monthly o Checks drawn by the depositor
o Daily cash balance per bank during month
AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

BOOK RECONCILING ITEMS

o Notes receivable collected by

the bank and credited to the
 Credited by the bank in the account of the depositor
account of the depositor but o Proceeds of bank loans
not yet recorded at the credited to the account of the
CREDIT MEMOS depositor’s book depositor
 Increases bank balance o Matured time deposits
transferred by the bank to
the account of the depositor

 Money has been taken out of o NSF (No Sufficient Fund)

the depositor’s account but o Technically defective checks
DEBIT MEMOS not yet recorded in the books o Bank service charge
 Decreases the bank balance o Reduction of loan

BANK RECONCILING ITEMS

o Collections already
 Already recorded by the book forwarded to the bank but
DEPOSIT IN too late to appear in the bank
but not yet by the bank
TRANSIT statement
o Undeposited collections
AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

 Already recorded as cash

o Checks given to payee but
OUTSTANDING disbursement in the book but
not yet [resented at the bank
not in bank
CHECKS  Checks that are not yet
o Certified checks
encashed

FORMS OF BANK RECONCILIATION

1. Adjusted balance method- the book and the bank balance are both adjusted to match each other

2. Book to bank method- the book balance is adjusted to equal the bank balance.

3. Bank to book method- the bank balance is adjusted to equal the book balance.

PROFORMA RECONCILIATION (ADJUSTED)

BOOK BANK
Book Balance xx Bank Balance xx
Add: Credit memos xx Add: Deposits in Transit xx
Less: Debit memos (xx) Less: Outstanding Checks (xx)
ADJUSTED BOOK BALANCE XX ADJUSTED BANK BALANCE XX
AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

3- PROOF OF CASH
PROOF OF CASH is an auditing and accounting procedure that makes used of an expanded reconciliation that includes a series of receipts and
disbursements. It ensures that the actual physical cash as well as the actual cash transactions recorded in the company’s accounting records, match up.

There are three forms of proof of cash:

o Adjusted balance method

o Book to bank method
o Bank to book method

END
“To God Be the Highest Glory*
AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

EXAMPLE PROBLEMS

A. CASH AND CASH EQUIVALENTS

PROBLEM 1: Okinawa Company has supplied you with the following list of its bank accounts and cash at December 31, 2022:

Checking account (compensating balance with no restriction) P48,000

Savings Account, 2% 30,000

Certificate of deposit, 6 months, 10% due April 20, 2023 60,000

Money market (30-day certificate) current rate 9.75% 40,000

Payroll account 20,000

Certificate of deposit, 3 months, 10%, due Feb. 15, 2023 75,000

Petty Cash 1,500

TOTAL P274,500

What should be the balance to be reported as “Cash and Cash Equivalents” in the December 31, 2022 statement of financial position of Okinawa Company?

Answer: P214,500

Checking account (compensating balance with no restriction) P48,000

Savings Account, 2% 30,000

Money market (30-day certificate) current rate 9.75% 40,000

Payroll account 20,000

AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

Certificate of deposit, 3 months, 10%, due Feb. 15, 2023 75,000

Petty Cash 1,500

TOTAL CASH AND CASH EQUIVALENT P214,500

PROBLEM 2: Wintermelon Corporation reported a total cash and cash equivalent of P6,325,000 on Dec. 31, 2020, which includes the following information:

a) Two certificate of deposits, each totaling P500,000. These certificates of deposit have a maturity of 120 days.

b) A check that is dated January 12, 2021 in the amount of P125,000

c) A commercial paper of P2,100,000 which is due in 120 days

d) Currency and coins on hand amounted to P7,700

Wintermelon Corporation has agreed to maintain a cash balance of P500,000 in one of its banks at all times and it is not available for withdrawawl and to
ensure future credit availability (this amount was included in the above balance). How much is the correct amount of cash and cash equivalents that
Wintermelon Corp. should report in its December 31, 2020 statement of financial position?

Answer: P2,600,000

Balance reported P6,325,000

Certificate of deposit (P500,000 x 2) (1,000,000)

Check dated Jan. 12, 2021- postdated ( 125,000)

Maintaining balance ( 500,000)

AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

Commercial Paper (2,100,000)

Correct cash and cash equiv. P2,600,000

o Post-dated check should be classified as receivable

o Since the term of the commercial paper is more than the required term of 90 days, it should be reclassified as temporary investment
o Cash equivalent are short term, highly liquid investments that are both readily convertible and so near their maturity date that they present
insignificant risk of changes, in interest rate.

PROBLEM 3: Sesame Company had the following transactions in the year 2022 which is also the first year of their operation:

Sales (90% collected in the first year) P1,500,000

Bad debt written-off 60,000

Disbursements for cost and expenses 1,200,000

Disbursements for income taxes 90,000

Purchases of fixed assets 400,000

Depreciation on fixed assets 80,000

Proceeds from issuance of ordinary share 500,000

Proceeds from short term borrowing 100,000

Payments on short term borrowings 50,000

AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

Answer: P210,000

Total Cash Receipts:

Collections from credit sales (90% x P1.5M) P1,350,000

Proceeds from ordinary shares 600,000

Proceeds from short-term borrowings 100,000 P1,950,000

Less: Total Dsibursements:

For cost and expenses P1,200,000

For income taxes 90,000

For purchase of fixed assets 400,000

Payments of short-term borrowing 50,000 1,740,000

Cash balance, December 31 P 210,000

AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

B. BANK RECONCILIATION

PROBLEM 1: The bank statement of Kingga Trading and Co., as of June 30, 2021 had an ending balance of P373,612. The following data were assembled in
the course of reconciling the bank balance:

 The bank erroneously credited Kingga Trading for P2,150 on June 19.
 During the month, the bank charged NSF checks amounting to P2,340 of which P800 had been redeposited on the 24th of June.
 Collection for June 30 totaling P10,330 was deposited the following month.
 Checks outstanding as of June 30 were P30,205.
 Notes collected by the bank for Kingga Trading were P8,150 and the corresponding bank charges were P50.

What is the adjusted bank balance on June 30,2021 of Kingga Trading and Co.?

a. P351, 587 c. P305,875

b. P352, 345 d. P315, 587

SOLUTION:

Balance per bank P373,612

Bank error (2,150)

Collection for June 10,330

Outstanding checks (30,205)

CORRECT CASH BALANCE P351,587

o The notes collected and NSF checks are books reconciling items that require adjustment in the company’s book.
AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

PROBLEM 2: Kurimao Company is preparing its March 31 bank reconciliation. The following data are available:

From the February 28 bank reconciliation:

Deposits in Transit, P1,700

Outstanding checks, P3,900

March data: Per Bank Per Book

Balance, Feb. 28 P74,140 P71,940

March deposits reflected 47,600 49,000

March checks reflected (61,700)* (61,000)

Note collected (inc. P200 interest) 20,000

Service charge (120)

BALANCE, MARCH 31 P79,920 P59,940

*Erroneously includes a check drawn by Kurimao Company for P1,500

How much is the deposits in transit at March 31?

a. P300 c. P5,100

b. P1,300 d. P3,100
AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

SOLUTION:

Book Deposits P49,000

Less: Bank deposit- March

Total deposits during March P47,600

Less: deposits in transit- begin (1,700) 45,900

Deposits in transit, end P 3,100

PROBLEM 3: Shown below is the bank reconciliation for Kiwi Company for May 2023:

Balance per bank, May 31, 2023 P300,000

Deposit in Transit 48,000

Outstanding Checks (56,000)

Bank credit recorded in error (20,000)

Cash balance per book, May 31, 2023 P272,000

The bank statement for June 2023 contains the following data:

Total deposits P220,000

Total charges, including NSF of 16K

and service charge of P800 192,000

AED 08: INTERMEDIATE ACCOUNTING 1
CHAPTER SUMMARY: Cash and Cash Equivalent – Chapter 1, 2 and 3 BS Accountancy 2

Macailao, Angela T. Mr. Justin Philip Batao, CPA

All outstanding checks on April 30, including the bank credit, were cleared in the bank on May 31. There were outstanding checks of P60,000 and deposits
in transit of P76,000 on May 31, 2023.

What is the cash balance per bank on June 30,2023?

a) P450,000 c) P328,000

b) P680,456 d) P328,900

SOLUTION:

Balance, May 31, 2023 P300,000

Add: Receipts (deposits) 220,000

Total 520,000

Less: Disbursement (192,000)

BALANCE, JUNE 30, 2023 P328,000