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ReSA - THE REVIEW SCHOOL OF

ACCOUNTANCY
CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 2

FINANCIAL ACCOUNTING & REPORTING C. Uberita  G. Macariola  J. Binaluyo

FAR-4203: CASH AND CASH EQUIVALENTS

Cash
a. an item is considered as cash if it is acceptable by bank or other financial institutions for deposit at face
value.
b. it must be immediately available for use in current operations (e.g. for payment of operating expenses, for
payment of current liability or for acquisition of current asset)
c. comprises cash on hand and demand deposits. (IAS 7, Par. 6)
d. is measured at face value and classified as current asset.

Composition of Cash:
Includes cash on hand as well as current and other accounts maintained with banks such as the following: a.
Undeposited currency and coins
b. Petty cash – cash items kept on hand to pay for minor expenditures
c. Demand deposits – amounts on deposit in checking and savings account, respectively
d. Undeposited negotiable checks – are checks payable to the company or bearer but not yet presented to the
bank for payment
e. Foreign currencies – converted to their peso values are also included in the cash
f. Bank drafts – are commitments by banking institutions to advance funds on demand by the party to whom
the draft was directed
g. Money orders – are similar financial instruments to bank drafts but are drawn generally from authorized post
offices or other financial institutions.
h. Other short-term funds for current operations

Cash Equivalents
Cash equivalents are short-term highly liquid investments that are readily convertible into cash and so near their
maturity that they present insignificant risk of changes in value because of changes in interest rates. Only highly
liquid investments that are acquired three months before maturity can qualify as cash equivalents such as the
following:
a. Three-month commercial paper or money market instrument
b. Three-month time deposit
c. Three-month treasury bills

Valuation Of Cash in the Statement of Financial Position:

a. Is generally valued at face amount
b. Cash in foreign currency is valued in Philippine peso using the current exchange rate as of the balance
sheet date
c. Cash in bank or financial institutions having financial difficulty or in bankruptcy should be shown at it
estimated realizable or recoverable value.

Financial Statement Presentation

Shown as the first item among the current assets, as one line item but the detail of which should be disclosed in
the notes to financial statements.

Compensating balance
A set of amount of cash that a firm must keep to its checking account or savings account at all times as part of
a loan agreement. As part of the loan agreement or contract, a financial institution lending money to an
enterprise sometimes requires that a specified amount of cash be maintained in the borrowing entity’s
account(s), and the minimum or average cash to be maintained in the bank during the period of loan is a
compensating balance.

Compensating balance, in effect provides a higher effective interest rate that is higher than the stated interest
rate on a loan agreement because the bank uses the restricted amount that must remain in deposit over the
loan period.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4203

Week 2: CASH AND CASH EQUIVALENTS

The following generally accepted procedures to disclose compensating balance would be applicable depending
on whether such amount is legally restricted or unrestricted:
1. Legally restricted compensating balance -
a. If held as compensating balance against short-term borrowing arrangements, it should be stated
separately under current assets but under no circumstances should it be included in the caption “Cash
and Cash Equivalents”.
b. If held against long-term borrowings, it should be separately classified as non-current asset either in the
Investments or Other Assets sections of the balance sheet.

2. Unrestricted – should be included as part of the cash items on deposit

In the absence of any information, compensating balance is always considered not available for an unrestricted
use.
0915-2303213/0908-6567516  www.resacpareview.com
Bank Reconciliation Statement a statement which brings into agreement the cash balance
per ledger and cash balance per bank.

Proof of cash an expanded reconciliation in that it includes proof of receipts and disbursements. This approach
may be useful in discovering possible discrepancies in handling cash particularly when cash receipts have been
recorded but have not been deposited.

Multiple Choices – Theories:

1. Which of the following shall not be considered “cash” for financial reporting purposes?
a. Coin, currency and available funds
b. Postdated checks and IOUs
c. Petty cash funds and change funds
d. Money orders, certified and bank drafts

2. Bank overdraft
a. Is offset against demand deposit account in another bank
b. Is a debit balance in a cash in bank account
c. Which cannot be offset is classified as current liability
d. Which cannot be offset is classified as noncurrent liability

3. Which of the following items must be added to the cash balance per ledger in preparing a bank
reconciliation which ends with adjusted balance?
a. Note receivable collected by the bank in favor of the depositor and credited to the account of the
depositor.
b. NSF customer check
c. Service charge
d. Erroneous bank credit

4. Unreleased checks, which are checks drawn before the end of reporting period but held for later delivery to
creditors
a. Shall be treated as outstanding checks
b. Shall be restored to the cash balance
c. Shall be treated as outstanding checks if the date is shortly after the end of reporting period.
d. Shall be treated as outstanding checks if they are ultimately encashed

5. Deposits held as compensating balances

a. usually do not earn interest.
b. if legally restricted and held against short-term credit may be included as cash.
c. if legally restricted and held against long-term credit may be included among current assets.
d. None of these answer choices are correct.

6. When a petty cash fund is used, which of the following is true?

a. The balance of the petty cash fund should be reporting in the statement of financial position as a
longterm investment.
b. The petty cashier’s summary of petty cash payments serves as a journal entry that is posted to the
appropriate general ledger account.
c. The reimbursement of the petty cash fund should be credited to the cash account.

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