FAR 1: CASH & CASH EQUIVALENTS

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PAS 7 Statement of Cash Flows

PAS 1 Presentation of Financial Statements

CASH
1. Cash must be unrestricted for use in the current operations.
2. Cash is always a current asset.
3. For various purposes, cash may be categorized as:
a. Financial asset (PFRS 9)
b. Monetary asset (PAS 21/29)

CHECKS
1. Traveler’s, cashier’s and manager’s checks are classified as cash.
2. NSF checks received are classified as:
a. Receivable – if no redeposit was made on or before the reporting date
b. Cash – if redeposit was made on or before the reporting date
4. Undelivered and post-dated checks issued and recorded as disbursement shall be restored back to cash and payable (dr. Cash, cr.
Liability)
5. Post-dated checks received and recorded as collection shall not be presented as cash, but reverted back to receivable (dr.
Receivable, cr. Cash)
6. Certified and personal checks received are classified as cash.
7. Although checks are accounted for as cash in the books, under the law, they do NOT represent legal tender in the Philippines.

DEPOSITS
1. To be classified as cash, deposit must be made with a bank (i.e. demand deposits).
2. Refundable deposits made with non-banking institutions are presented as receivables.
3. Security deposit paid by lessee is classified as short/long-term receivable, depending on the refund period.
4. Deposit in a closed bank cannot be withdrawn anytime and must be reclassified to receivable at their estimated realizable value.
5. Deposit in a foreign bank/account shall be translated to closing rate (exchange rate at the end of the period)
a. If with restriction – normally presented as other noncurrent asset
b. If without restriction – cash

BANK OVERDRAFT
1. If silent, the negative balance from bank overdraft shall be reverted back to cash and payable (dr. Cash, cr. Liability).
- In effect, the cash balance shall be zero, and the liability shall increase.
2. If 2 or more accounts are maintained in 1 bank, the negative balance may be deducted from the account/s with positive balance in
computing for cash.
- The overdraft may not be deducted from the positive balance/s maintained in OTHER banks.
3. If repayable on demand, per PAS 7:
- it forms an integral part of an entity’s cash management
- it is included as component of cash and cash equivalents
- it is characterized by a balance that often fluctuates from being positive to overdrawn

COMPENSATING BALANCE
1. If not legally restricted, part of cash.
2. If legally restricted:
a. Other current asset – if the related loan is short-term.
b. Other non-current asset – if the related loan is long-term.
3. Restricted or not, compensating balance reduces the net proceeds from the loan, thus increasing the loan’s effective interest rate.
4. Effective interest rate on a loan is computed as follows:
- (interest expense - interest income) / (loan principal - compensating balance - interest deducted in advance)

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FINANCIAL ACCOUNTING & REPORTING SMARTS CPA REVIEW

FUNDS
1. If set aside for current operations, part of cash. Examples include the following:
a. Petty cash fund d. Payroll fund g. Dividend fund
b. Working fund e. VAT fund h. Travel fund
c. Change fund f. Tax fund
2. If set aside for noncurrent purposes, other noncurrent asset.
a. Plant fund (for PPE purposes) – noncurrent asset even if the actual disbursement was made 1 year or less from the end of the
period.
b. Sinking fund (for redemption of bonds) – cash if the bonds were to be paid currently, and noncurrent asset if the bonds were
to be paid beyond 1 year from the end of the period.
3. Pension fund, contingency fund and insurance fund are other noncurrent assets (Long-term investments).

CASH EQUIVALENTS
1. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value.
2. Per PAS 7 Statement of Cash Flows, cash equivalents are held for the purpose of meeting short-term cash commitments rather
than for investment or other purposes.
3. Guidance notes indicate that an investment normally meets the definition of cash equivalent when it has a maturity of 3 months or
less from the date of acquisition.
4. If the problem is silent as to maturities, the following are cash equivalents:
a. Time deposit c. Certificate of deposit e. Commercial papers
b. Treasury bills d. Money market placement
5. Cash equivalents are debt instruments (i.e. interest-bearing) that are short-term in nature:
a. If the original maturity is 3 months or less – cash equivalents
b. If the original maturity is more than three months (e.g. 1 year time deposit):
- cash equivalents if purchased 3 months before maturity
- short-term or long-term investments if purchased more than three months before maturity, depending on the remaining
period to maturity after year-end.
6. Preference shares that are mandatorily redeemable, in substance, are debt instruments. Therefore, they may qualify as cash
equivalents if they are acquired 3 months before their specified redemption date.

OTHER ITEMS
1. Bank drafts are commitments by banking institutions to advance funds on demand by the party to whom the commitment was
directed.
2. Postal money order is similar to bank draft but is generally drawn from authorized post offices.
3. Bank drafts and postal money order are classified as cash.

LINE ITEM PRESENTATION

1. Normally, the line item “Cash and Cash Equivalents” is presented first in the statement of financial position.
2. Some companies present Fixed Assets or Non-current assets as the first line item. This is allowed by reason of industry practice.
3. For banking institutions, the equivalent line item is usually called “Cash and Other Cash Items”.

PETTY CASH SYSTEM

1. Under the Imprest PCF system, expenses are recognized upon replenishment.
2. Under the Fluctuating PCF system, expenses are immediately recognized.
3. The imprest system requires that all cash receipts shall be deposited intact and all cash payments shall be made by means of check.
Small payments shall be paid out of the petty cash fund.

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FINANCIAL ACCOUNTING & REPORTING SMARTS CPA REVIEW

REVIEW QUESTIONS
1. Celia Company presents the following for the year ended December 31, 2019:
A. P 50,000 90-day money market placement
B. 30,000 Money market savings account
C. 25,000 Mutual fund account, with checking privileges
D. 20,000 60-day time deposit
E. 45,000 120-day certificate of deposit
F. 40,000 Investment on 1 year treasury bills dated January 31, 2019 (acquired on January 31, 2019)
G. 60,000 Investment on 3-year treasury notes dated January 15, 2017 (acquired on October 1, 2019)
H. 30,000 Investment on 3-year treasury notes dated March 1, 2017 (acquired on December 29, 2019)
I. 45,000 Investment in 1-year treasury bonds, acquired 3 months before maturity, and held to speculate on
changes in market interest rates

What amount shall Celia Company disclose in its notes as cash equivalents?
A. P 100,000 B. P 145,000 C. P 200,000 D. P 155,000

2. What amount shall Celia Company present as short-term investments?

A. P 190,000 B. P 100,000 C. P 130,000 D. P 175,000

3. The treasurer of Samuel Corp. presented the following instruments as of December 31, 2019:

A. P 100,000 Cash in Bank (Bank of the Islands)

 On December 29, 2019, P 8,000 was recorded as drawings against this account.
The check was not yet delivered as of December 31, 2019.
 On December 30, 2019, P 12,000 was recorded as collections. The check was dated January 15,
2020.
B. 140,000 Cash in Bank (Rural Bank – account #1)
 This includes two P 15,000 checks returned by the bank marked “NSF”. One of the checks was
redeposited on December 30, 2019, the other on January 5, 2020.
 Also included is P 50,000 earmarked for the purchase of computers on January 2020.
C. ( 30,000) Cash in Bank (Rural Bank – account #2)
D. 50,000 60-day money market placement
E. 40,000 Cash in Rural Bank, not included in balance above (must be maintained to avoid closure of the
account and additional bank charges)
F. 25,000 Balance included in Bank of the Islands (must be maintained at all times to ensure future credit
availability)
G. 10,000 Postal money order
H. 20,000 30-day BSP treasury notes
Other relevant balances as of December 31, 2019, before adjustments, are:
 Accounts receivable P 300,000  Accounts payable P 210,000
What is the correct amount of cash?
A. P 191,000 B. P 166,000 C. P 151,000 D. P 126,000

4. What is the correct amount of accounts receivable?

A. P 300,000 B. P 327,000 C. P 342,000 D. P 312,000

5. What is the correct amount of accounts payable?

A. P 202,000 B. P 248,000 C. P 218,000 D. P 232,000

6. If an entity purchases a 3-month commercial instrument as it foresees significant changes to the value of the instrument
and wishes to profit from such changes, the company presents the instrument as
A. Cash C. Short-term investment
B. Cash equivalent D. Long-term investment

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FINANCIAL ACCOUNTING & REPORTING SMARTS CPA REVIEW

7. Which of the following information should be disclosed in the summary of significant accounting policies?
A. Refinancing of debt subsequent to the end of the reporting period
B. Guarantees of indebtedness of others
C. Criteria for determining which investments are treated as cash equivalents
D. Adequacy of pension plan assets relative to vested benefits

Alexa Company maintained one or two accounts in several banks as of the end of 2019. The following schedule was prepared
by the company treasurer.
Bank #: Amount Particulars
1 P 200,000 Account #1 (includes P 10,000 balance legally restricted as to withdrawal, related loan is due in a
year)
2 (3,000) Overdraft balance
3 (2,000) Overdraft balance
4 42,000 Account in bank that closed before year-end
5 $ 1,000 Account #1 – not restricted (exchange rates: average = 50, year-end = 48)
1,000 Account #2 – subject to foreign exchange restriction (exchange rates: average = 50, year-end =
48)
Additional information:
1. The overdraft in Bank 2 is due to issuance of a check in excess of the current balance. The check was for the payment
of trade accounts.
2. The overdraft in Bank 3 is due to issuance of a P 10,000 check on December 30, 201 9. The check was delivered on
January 5, 2020.
3. Accounts payable, before adjustments, has a balance of P 137,000 at December 31, 2019.
8. What amount shall be presented as Cash at December 31, 2019?
A. P 238,000 B. P ,000 C. P 246,000 D. P 248,000

9. The P 10,000 compensating balance in Bank 1, account # 1 shall be

A. Excluded from cash and presented separately as other non-current asset
B. Excluded from cash and presented separately as other current asset
C. Included in cash but disclosed in the notes
D. Included in cash equivalents

10. The overdraft in Bank 2 is

A. Presented as cash C. Not presented as current liability
B. Presented as current liability D. Part of cash and cash equivalents

11. If the bank balance in Bank 2 regularly fluctuates dues to a bounce protection clause with the bank, where the bank allows
Alexa Company to issue overdrawn checks, repayable to the bank, on demand, with service charges, the overdraft in Bank
2 is
A. Component of cash and cash equivalents but not an integral part of the company’s cash management
B. Component of cash and cash equivalents and integral part of the company’s cash management
C. Still restored to current liability
D. Not a component of cash and cash equivalents

12. Isabel Co. has maintained the following funds as of December 31, 2017:

I. Payroll fund P 300,000

II. Dividends fund 100,000
III. Sinking fund – bond redemption
(for the payment of bonds payable due Dec. 31, 2019) 150,000
IV. Plant replacement fund (to be disbursed in January 2018) 200,000

What amount shall be presented as cash on December 31, 2017?

A. P 550,000 B. P 400,000 C. P 600,000 D. P 750,000

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