FINANCIAL ACCOUNTING AND REPORTING

CASH & CASH EQUIVALENTS

Composition of Cash:
a. Undeposited currency and coins
b. Demand deposits deposited in checking and savings account that can be withdrawn anytime, without
advance notice
c. Undeposited negotiable checks payable to the company or bearer awaiting deposit
d. Foreign currencies converted to Philippine peso
e. Bank drafts are commitments by banking institutions to advance funds on demand by the party to whom
the draft was directed
f. Money orders are similar to bank drafts but are drawn generally from authorized post offices or other
financial institutions.
g. Other short-term funds for current operations like:
 Petty Cash Fund (Coins, bills, replenishment checks and employees’ checks)
 Dividend Fund
 Change Fund
 Tax Fund
 Interest Fund
 Payroll Fund
 Fund for the Acquisition of Current Assets

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 due to changes in interest rates. Only highly liquid
investments that are acquired three months, or less than 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
date from acquisition
c. Three-month treasury bills

Valuation of Cash in the Statement of Financial Position

a. Generally valued at face amount

b. Cash in foreign currency is valued in Philippine peso using the current exchange rate as of the reporting
date

Cash in Closed Banks or in Banks having Financial Difficulty

Cash in bank or in financial institutions having financial difficulty or in bankruptcy should be shown at its estimated
realizable or recoverable value and is presented as Receivables.

Financial Statement Presentation CA

Cash and Cash Equivalents are the first item shown among the current assets, the details of which are presented in
the notes to financial statements.

Compensating Balance

The minimum amount to be maintained in a bank account to act as collateral for the payment of a depositor’s loan.
Its presentation in the financial statements is dependent on whether the balance is legally restricted or unrestricted:

1. Legally restricted compensating balance if held as collateral for:

a. Short-term borrowing--Shown separately under current assets but not part of “Cash and Cash Equivalents”.
b. Long-term borrowings—Shown separately as non-current asset either as Long-term Investments or Other
Assets
2. Unrestricted – Should as part of Cash

Cash
Cash – coins and currency, petty cash , checking or demand deposit, customer checks , personal checks, manager
checks, certified checks, money order , traveler checks, undelivered company checks, postdated company checks
delivered.
 Cash funds for the payment of liability due within one year –current
 Cash funds for the acquisition of noncurrent asset even if within one year –noncurrent

Unrestricted and immediately available for use in the current operations Cash in the current asset section
Cash items
For use other than for current operations Other noncurrent financial assets

Unrestricted and immediately available for use in the current operations

1. For payment of operating expense
2. For payment of current liabilities
3. For Acquisition of current assets

Page 1 of 18
FINANCIAL ACCOUNTING AND REPORTING

Cash on hand Cash in bank Cash fund for current

operations
 Customer’s checks awaiting deposit  Demand deposit/commercial  Change fund
 Undeposited cash collections deposit/current  Payroll fund
(currencies such as bills and coins) account/checking account  Purchasing fund (for
 Traveler’s check -Withdrawable by checks purchasing of inventories)
 Cashier’s/Official/Treasurer’s/Manager’s against bank  Revolving fund (fund that is
checks  Savings deposit (Savings used for limited or specific
 Postal money orders (a demand credit Account) purpose set by
instrument issued and payable by a post -Depositor is issued an ATM management)
office) card or passbook  Interest fund
 Bank drafts (a written order addressed -Withdrawable in ATM station  Petty cash fund (for small
to the bank to pay an amount of money or within bank and miscellaneous
to the order of the maker) disbursements)
 Dividend fund
 Travel fund
 Tax fund

Fund for Noncurrent Operations

 Fund for noncurrent operations should not be included as part of Cash but as part of non-current assets.
Generally noncurrent investment but
Pension fund If related liability is current, then pension fund is current, thus part of
CASH.
Preferred redemption fund Noncurrent investment (unless the preferred share capital has a
mandatory redemption and the redemption is already within one year from
the reporting period in which case this fund is already part of Cash
Equivalent
Acquisition of property, plant Always noncurrent even if expected to be disbursed next year
and equipment
Contingent fund Noncurrent investment
Insurance fund Noncurrent investment
Sinking fund If the related bonds payable is current, then sinking fund is current, thus
part of cash.
Note: Classification of cash fund as current or noncurrent should parallel
the classification applied to the related liability. Thus, an entity should
reclassify such noncurrent asset if the related liability becomes current.

Note:
 Part of cash, if fund is used to settle short term
obligation.
 Operating activities – part of cash
 Investing activities – Investment
 Financing activities – if related liability:
 Short-term – part of cash
 Long term – investment

Cash Equivalents
Cash Equivalents are short-term and highly liquid investments that are readily convertible to known amounts of
cash and that are subject to an insignificant risk of changes in value. Only highly liquid investments that are acquired
three months before maturity can qualify as cash equivalent.

Note:
 Only debt instruments acquired within 3 months or less before their maturity date can qualify as cash
equivalents.
 Equity securities cannot qualify as cash equivalents because shares do-not have a maturity date. However,
preference shares with specified redemption date and acquired three months before redemption date can
qualify as cash equivalents.

Examples of cash equivalents are as follows:

1. Time Deposit (Certificate of deposit)
2. Money Market Instrument or Commercial Paper
3. Treasury Bills
4. Redeemable preference shares with mandatory redemption period and acquired three months before maturity.

Time Deposit, Money Market Instrument, T-bills Treatment

1. Originally invested/acquired for more than three months before maturity
date Short-term investments
a. Remaining term is three months or less from the reporting date. Short-term investments
b. Remaining term is more than three months but within one year Long-term investments
c. Remaining term is more than one year
2. Originally invested/acquired for three months or less before maturity date Cash equivalents

Comparison among T-Bills, T-Notes and T-Bonds

Treasury Bills Treasury Notes Treasury Bonds
Difference in maturity 90 days to less than 1 year 1 year to less than 10 10 years or more
date years
Similarities Issued by the government Issued by the government Issued by the government

Page 2 of 18
FINANCIAL ACCOUNTING AND REPORTING

Note:
 If an item cannot be included as cash equivalent because it did not qualify the cut-off time period (i.e. three
months), it will always be classified as investment (short term or long term) depending on the period up to
maturity.
 If the problem is silent with regard to:
 1. Treasury Note – assumed investment
 2. Cash in money market account – cash and cash equivalent
 3. Time deposit – cash and cash equivalent

Explain the valuation of cash in the statement of financial position.

Cash is valued at face value. Cash in foreign currency is valued at the current exchange rate.
If a bank or financial institution holding the funds of the entity is in bankruptcy or financial difficulty, cash should
be written down to estimated realizable value if the amount recoverable is estimated to be lower than the face
value.

Explain the financial statement presentation and classification of cash and cash equivalents.
The caption "cash and cash equivalents" should be shown as the first item among the current assets. This caption
includes all cash items, such as cash on hand, cash in bank, petty cash fund and cash equivalents which are
unrestricted in use for current operations. However, the details comprising the "cash and cash equivalents"
should be disclosed in the notes to financial statements.

Some Measurement Issues and Frequent Encountered Tricks in Cash and Cash Equivalent Computation
Items Remarks
Cash Measured at face value
Cash in foreign currency Should be translated to Philippine Peso using the closing rate or spot rate at the
reporting date.
Deposit in foreign bank a. Unrestricted – included as cash
b. Restricted – if material, classified separately among noncurrent assets
Cash in closed bank/Banks in Measured at estimated realizable value and be included among noncurrent assets
bankruptcy if the amount recoverable is lower than face value.
Bank overdraft Definition: Negative balance in the cash in bank account.
Treatment: If the company is maintaining two accounts in:
a. Different banks – current liabilities or may be netted against other bank if
immaterial.
b. Same bank – may be netted against the account with positive amount but
cannot be offset against restricted account.

Note: An overdraft may also be netted against other account with positive
balance if it is part of cash management. (PAS 7.8)
Compensating balance Definition: Compensating balance is minimum checking or demand deposit
account balance that must be maintained in connection with a borrowing
agreement with a bank.
Treatment:
a. Not legally restricted – part of cash
b. Legally restricted – if the account is legally restricted as to withdrawal, check
the related loan:
1. Short-term – presented as “cash held as compensating balance” (current
asset)
2. Long-term – presented as “ cash held as compensating balance” (noncurrent
asset).
Note: If the problem is silent with regard to compensating balance, it is assumed
not legally restricted.

Effect of compensating balance on:

a. Yield rate (lender) – increase
b. Effective rate (borrower) – increase
Effective rate = Net interest expense ÷ Net proceeds
Undelivered / unreleased checks Reverted back to cash by a
Dr. Cash x
Cr. A/P x
Stale checks/checks long Definition: Checks not encashed by the payee with a relatively long period of
outstanding time (under normal banking practice, checks are considered stale if not encashed
within 6 months from its date.)

Treatment: Stale checks are reverted to cash by a:

Dr. Cash x
Cr. A/P x
Postdated checks Definition: Checks dated after the reporting date.

Treatment:
a. For company own PDC – reverted to cash
Dr. Cash x
Cr. A/P x

b. Customer’s check- not yet cash (A/R)

Dr. A/R x
Cr. Cash x
IOUs (I owe you) Included as part of receivable, not cash and cash equivalents
Equity securities Cannot be classified as cash equivalents because shares do not have a maturity
date (with the exception of redeemable preference shares)

Page 3 of 18
FINANCIAL ACCOUNTING AND REPORTING

Redeemable preference shares Preference shares with specified redemption date and acquired three months
before redemption date are classified as cash equivalents.
Callable preference shares Not classified as cash equivalents. It is part of shareholder’s equity on the part
of issuer and part of long-term investment of the holder.
NSF/DAUD/DAIF Definition:
NSF – no sufficient funds
DAUD-drawn against uncleared deposits
DAIF-drawn against insufficient funds

Treatment: Reverted back as part of receivables.

Expense Advances (e.g. travel Receivable or prepaid expense
advances, postage stamps)
Temporary Investments in Shares Either FVTPL or FVTOCI but never to be included as part of cash and cash
of stocks equivalents.
Unused Credit Line Definition: Difference between the amount of line of credit applied for and
approved by a bank and the amount actually borrowed.

Treatment: Disclosed in the notes

Treasury warrants Definition: A warrant for the payment of money into or from public treasury.

Treatment: Included as part of cash

Escrow deposit Definition: Restricted amount held in trust for another party, e.g., a deposit
required by a court of law for a pending case.

Treatment: Part of other current/noncurrent asset and reported as liability.

Unrecorded cash disbursement Record the disbursements by debit to Accounts payable or other appropriate
account and credit to Cash
Unrecorded cash Record the collection by debit to Cash and Credit to Accounts receivable or other
collections/receipts appropriate account.
Certificate of Deposit (CD) Definition: A savings certificate entitling the bearer to receive interest. A CD
bears a maturity date, a specified fixed interest rate and can be issued in any
denomination. CDs are generally issued by commercial banks and are insured by
the PDIC. The term of a CD generally ranges from one month to five years.

Treatment:
a. Invested three months before maturity – cash equivalents
b. Invested for more than three months – investment (short or long-term)
Postage stamps on hand Should be reported as office supplies or as a prepaid expenses
Cryptocurrencies /Bitcoins 1. Cryptocurrencies can be treated as Inventory under PAS 2,
“Inventories”

PAS 2 does not require inventories to be in a physical form, but inventory should
consist of assets that are held for sale in the ordinary course of business.
Inventory accounting might be appropriate if an entity holds cryptocurrencies for
sale in the ordinary course of business. An entity that actively trades the
cryptocurrencies, purchasing them with a view to their resale in the near future,
and generating a profit from fluctuations in the price or traders’ margin, might
consider whether the guidance in PAS 2 for commodity broker-traders should be
applied.

However, if the entity holds cryptocurrencies for investment purposes (that is

capital appreciation) over extended periods of time, it would likely not meet the
definition of inventory.

2. Cryptocurrencies can be treated as Intangible asset under PAS 38

Cryptocurrencies appear to meet the definition of an intangible asset: identifiable

as can be sold, exchanged or transferred individually; not cash and non-monetary
asset; have no physical form.

PAS 38.12 describes an asset as identifiable if it is separable (i.e., it is capable of

being separated or divided from the entity and sold, transferred, licensed, rented
or exchanged) or if it arises from a contractual or legal right.

PAS 38.8 and 38.13 define an asset as a resource controlled by an entity as a

result of past events and from which future economic benefits are expected to
flow to the entity. Control in this context means that the entity has the power to
obtain the future economic benefits that the asset will generate and to restrict
the access of others to those benefits.

It appears therefore, that cryptocurrencies would meet the definition of an

Intangible asset.

Note: Bank overdraft that was netted or deducted from cash in bank should be added back to compute for the correct
balance of cash in bank and should be presented as current liability.

Petty Cash Fund

Page 4 of 18
FINANCIAL ACCOUNTING AND REPORTING

Imprest System – the imprest sytem is a system of control of cash which requires that all receipts should be deposited
intact and all cash disbursements should be made by means of check.

Petty cash fund – is a money set aside to pay small expenses which cannot be paid conveniently by means of check.

Two methods of petty cash fund

1. Imprest fund system – is the one usually followed in handling petty cash transactions.
2. Fluctuating fund system – the checks drawn to replenish the fund do not necessarily equal the petty cash
disbursements.
Transactions(Petty Cash Fund) Imprest Fund System Fluctuating Fund System

a. Establish the fund or Increase in the fund Petty cash fund xxx Petty cash fund xxx
Cash in bank xxx Cash in bank xxx

b. Payment of expenses out of the fund No formal journal entries are made Expenses xxx
Prepare memorandum entries Petty cash fund xxx

c. Replenishment of petty cash payments Expenses xxx Petty cash fund xxx
Cash in bank xxx Cash in bank xxx

d. At the end of Acctng, period, adjust Expenses xxx No adjustment is necessary, because the
Unreplenishment Petty Cash fund xxx petty cash expenses are recorded outright

Note: The cash over and short account is used as a plug (miscellaneous expense or miscellaneous revenue) when the
petty cash fund fails to turn out to be satisfactory. Replenishment will be the total expense plus the cash shortage and
less the cash overage.

Cash Count Problem

 Formula:
Cash as accounted for xxx
Less cash accountability xxx
Cash (short)/over (x)/x

If the cash as accounted for is less than the cash accountability, there is cash shortage while if the cash as accounted for
is more than the cash accountability, there is a cash overage.

Accountability Accounted
1) Imprest balance X 1) Remaining currency and coins X
2) Employee contributions (sealed or not sealed) X 2) Envelope containing employee contribution (sealed) (C) X
3) Undeposited customer cash collections X 3) Undeposited customer currency collection X
4) Undeposited customer check X 4) Undeposited customer check collection (depositable only) x
collections(depositable only)(A)
5) Unclaimed salary X 5) Paid expense voucher (regardless of date) X
6) Excess of advance travel X 6) Replenishment checks (payee custodian) (B) X
7) IOUs X
8) Accommodation check (maker employee) (D) (whether X
depositable or not depositable)
Total X Total X

(A) – Undeposited customer’s checks only include those check that are withdrawable, meaning it excludes : (1) NSF;
(2) postdated; and (3) stale checks.
(B) – Replenishment checks are checks that are payable to the custodian.
(C)- Employee contribution will be included in the accounted only if it the envelop actually contains the employee
contribution. (sealed, closed)
(D)- Accommodation checks are checks made by the employee payable to the company.
(E) – Checks issued by the company are ignored in computing the cash shortage.

Note:
1. For unexpended employee contributions, unclaimed salary and cash collections of accounts receivable or sales
should be included in the accounted only when it is intact or the envelop is still closed on the cash count date.
However, it is included as part of cash accountabilities whether intact or not.

2. Unused postage is not a valid support where the accountability is the Petty Cash

3. Unused postage stamp (valid support where accountability is Undeposited Collections)

4. Return of an expense advances (e.g. excess from travel advance) is added to the accountability to get the total
accountability and not added to valid supports

Page 5 of 18
FINANCIAL ACCOUNTING AND REPORTING

Cash short or over

 Compare cash accountability with cash and cash items counted

 Accountability (Should be) > items counted (Actual) = shortage
 Accountability (should be) < items counted (Actual) = Overage
 Total accountability  total value of cash entrusted to the petty cash custodian
 Total accounted  evidences, documents and explanation where the accountability went.

COMPUTATION OF ADJUSTED PETTY CASH BALANCE at year end

Currencies and coins at the date of cash count X
Plus: vouchers or payments from January 1 up to date of cash count X
Minus: any cash collections to whoever from January 1 up to date of cash count (x)
Currencies and coins at December 31 after workback Xx
Minus: currencies and coins that do not belong to petty cash but included in the count
a. Unclaimed salary (only if in the form of currencies and coins) X
b. Excess of advance travel (only if in the form of currencies and coins) X
c. Employee contributions (only if the envelope contains nothing/open) X
d. Undeposited cash collections x (x)
Currencies and coins belonging to petty cash fund X
Plus:petty cash fund not in the form of currencies and coins
1. Accommodation checks that are withdrawable at year-end X
2. Replenishment checks x X
Adjusted petty cash fund at December 31 Pxx
Less: Imprest balance (Xx)
Net adjustment xx

Simplified (for FAR)

C urrencies and coins x
+ vouchers dated January 1 onwards (or after year-end) x
+replenishment check x
+accomodation check (withdrawable as of year-end) x
-employee contribution (in case the enveloped is opened) (x)
Adjusted petty cash balance at year-end x

Bank reconciliation
The monthly reconciliation of bank accounts by an independent person is an important internal control over cash balances
because:
1. It provides an opportunity for an internal verification of the cash receipts and cash disbursements transactions.
2. Investigation of reconciling items on the bank reconciliation.
3. Verification of the ending cash balance

A bank reconciliation statement is a statement that brings the balance per bank and the balance per book into agreement.

What is a bank reconciliation?

A bank reconciliation is a statement which brings into agreement the cash balance per book and cash balance per
bank. It is usually prepared monthly because the bank provides the depositor with the bank statement at the end of
every month.

A bank statement is a monthly report of the bank to the depositor showing the cash balance per bank at the beginning,
the deposits acknowledged, the checks paid, other charges and credits and the daily cash balance per bank during
the month. Actually, the bank statement is an exact copy of the depositor's ledger in the records of the bank.

What are credit memos and debit memos?

Credit memos refer to items not representing deposits credited by the bank to the account of the depositor but not
yet recorded by the depositor as cash receipts. They have the effect of increasing the bank balance. Typical examples
of credit memos are note collected by bank in favor of the depositor and proceeds of bank loan credited to the account
of the depositor.

Debit memos refer to items not representing checks paid by bank which are charged or debited by the bank to the
account of the depositor but not yet recorded by the depositor as cash disbursements. They have the effect of
decreasing the bank balance. Typical examples of debit memos are NSF checks (No sufficient fund), DAIF checks
(Drawn against insufficient fund) and bank service charges.

Explain deposits in transit.

Deposits in transit are collections already recorded by the depositor as cash receipts but not yet reflected on the bank
statement.

Deposits in transit include:

a. Collections already forwarded to the bank for deposit but too late to appear in the bank statement.
b. Undeposited collections or those still in the hands of the depositor. In effect, these are cash on hand awaiting
delivery to the bank for deposit.

Explain outstanding checks.

Page 6 of 18
FINANCIAL ACCOUNTING AND REPORTING

Outstanding checks are checks already recorded by the depositor as cash disbursements but not yet reflected on the
bank statement. Outstanding checks include:

a. Checks drawn and already given to payees but not yet presented for payment.

b. Certified checks - A certified check is one where the bank has stamped on its face the word "accepted" or
"certified" indicating sufficiency of fund.

When the bank certifies a check, the account of the depositor is immediately debited or charged to insure the eventual
payment of the check.

Certified checks should be deducted from the total outstanding checks (if included therein) because they are no longer
outstanding for bank reconciliation purposes.

Bank Reconciliation Problem

* Use the adjusted balance method, thus:
Bank Book
Unadjusted balance X x (B) Unadjusted balance
Deposit in transit/undeposited collection X X Unrecorded bank credits (Note collection by
bank, Customer payments to bank)
Outstanding check (x) (x) Unrecorded bank debits (BSC, NSF Check,
Note/Loan payments direct thru bank)
Bank errors x/(x) x/(x) Book errors
Adjusted balance X (A) X (C) Adjusted balance
(A) The adjusted balance per bank shall be the correct cash balance
(A) – (B) The net adjustment to cash shall be the difference between the –
unadjusted balance per book and the adjusted balance per bank
(A) – (C) The cash shortage/overage shall be the difference between the two
adjusted balances (Bank Accounted For / Book Accountability)
Shortage if : Bank < Book
Overage if: Bank > Book

The following are rules for errors assuming the company is using the adjusted balance method of presenting
bank reconciliation:
Effects of the errors Treatment
1 Understatement of cash receipts Add on the unadjusted cash in bank balance
2 Overstatement of cash receipts Deduct from the unadjusted cash in bank balance
3 Understatement of cash disbursement Deduct from the unadjusted cash in bank balance
4 Overstatement of cash disbursement Add on the unadjusted cash in bank balance

Bank Reconciliation
 Balance per book – add note receivable collected by bank minus NSF and service charge
 Bank per bank – add deposit in transit minus outstanding checks. Certified checks are no longer outstanding.

Two Dates bank reconciliation:

Balance per book, beg xxx
Add: book debits/receipts xxx
Total xxx
Less: book credits/disbursement/charges (xxx)
Balance per book, end xxx
Balance per bank, beg xxx
add: bank credits xxx
Total xxx
Less: bank debits (xxx)
Balance per bank, end xxx

Page 7 of 18
FINANCIAL ACCOUNTING AND REPORTING

Deposit in transit, beg xxx

Add: deposit recorded by depositor(deposit made by the company this month):

Book receipts (Debits) xxx
Less: Credit memo last month – if included (xxx)
Errors:
Book error last month corrected this month:
Understatement of CR (xxx)
Overstatement of CD (xxx)
Book errors this month:
Overstatement of CR (xxx)
Understatement of CR Xxx Xxx
Total xxx
Less: deposit received by bank (deposit acknowledged by the bank this month)
Bank receipts (Credits) Xxx
Less: Credit memo this month – if included (xxx)
Errors:
Bank error last month corrected this month:
Understatement of CR (xxx)
Overstatement of CD (xxx)
Bank error this month:
Overstatement of CR (xxx)
Understatement of CR Xxx (xxx)
Deposit in transit, end xxx

Outstanding checks, beg xxx

add: checks issued/drawn by depositor (checks issued by the company this month)
Book disbursements (credits) Xxx
Less: Debit memo last month – if included (xxx)
Errors:
Book error last month corrected this month:
Overstatement of CR (xxx)
Understatement of CD (xxx)
Book error this month:
Overstatement of CD (xxx)
Understatement of CD Xxx xxx
Total xxx
Less: Checks paid by bank (checks paid by the bank this month)
Bank debits Xxx
Less: Debit memo this month – if included (xxx)
Errors:
Bank error last month corrected this month:
Overstatement of CR (xxx)
Understatement of CD (xxx)
Bank errors this month:
Overstatement of CD (xxx)
Understatement of CD Xxx (xxx)
Outstanding checks, end xxx

Proof of Cash
Proof of Cash - is 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.
1. Definition
Proof of cash is a four column bank reconciliation’s which includes:
a. Reconciliation of the end of the prior period cash balances per the bank statement and the
books (first column)
b. Reconciliation of the current period cash receipts (deposits) per the bank statement to
receipts recorded in the books (second column)
c. Reconciliation of the current period cash disbursements per the bank statement to
disbursements recorded in the books (third column)

Page 8 of 18
FINANCIAL ACCOUNTING AND REPORTING

d. Reconciliation of the end of the current period cash balances per the bank statement and
the books (fourth column)
2. Purpose
a. Means of identifying all differences between the books and the bank statement during the period
b. Prepared by auditors to assists in identifying unauthorized and unrecorded transfer of cash.

Note:
Window dressing is a practice of opening the books of accounts beyond the close of the accounting period
for the purpose of showing a better financial position and performance.

Window dressing is usually perpetrated as follows:

a. By recording as of the last day of the accounting period collections made subsequent to the close of
the period.
b. By recording as of the last day of the accounting period payments of accounts made subsequent to
the close of the period.

Lapping consists of misappropriating a collection from one customer and concealing this defalcation when
collection is made from another customer.

Kiting is a transfer of cash from one bank to another bank. Kiting is usually employed at the end of the month.
Kiting occurs when a check is drawn against a first bank and depositing the same check in a second bank to
cover the shortage in the latter bank.

Summary of Treatment for Proof of Cash

November 30 December December 31
Beginning balance Receipts Disbursement Ending Balance
Cash in bank per books X X X X
Credit Memo – last month X (x)
Credit Memo – this month X X
Debit Memo – last month (x) (x)
Debit Memo – this month X (x)
Adjusted balance X X X X

Beginning balance Receipts Disbursement Ending Balance

Cash in bank per bank X X X X
Deposit in transit– last X (x)
month
Deposit in transit – this X X
month
Outstanding check – last (x) (x)
month
Outstanding check – this X (x)
month
Adjusted balance X X X x

R e c e ipt s D is burs e m e nt s
Bo ok B ank Book B ank
Unadjusted x Unadjusted x Unadjusted x Unadjusted x
CM - LM (x) DIT-LM (x) DM - LM (x) OC-LM (x)
CM - TM x DIT-TM x DM - TM x OC-TM x

A djus t e d re c e ipt s x A djus t e d re c e ipt s x A djus t e d dis burs e m e nt s x A djus t e d dis burs e m e nt s x

ERRORS (Both on books and banks)

The amount to be presented herein is the DIFFERENCE between the correct amount and the erroneous
amount)

1. Errors last month corrected this month

Beginning balance Receipts Disbursement Ending Balance
A. Overstatement of CR (x) (x)
B. Understatement of CR X (x)
C. Overstatement of CD X (x)
D. Understatement of CD (x) (x)

2. Errors this month not yet corrected

Beginning balance Receipts Disbursement Ending Balance
A. Overstatement of CR (x) (x)
B. Understatement of CR X X
C. Overstatement of CD (x) X
D. Understatement of CD X (x)

Page 9 of 18
FINANCIAL ACCOUNTING AND REPORTING

3. Errors last month not yet corrected this month

Beginning balance Receipts Disbursement Ending Balance
A. Overstatement of CR (x) (x)
B. Understatement of CR X X
C. Overstatement of CD X X
D. Understatement of CD (x) (x)
Paid out in currency (payment out of collection)

Adjusted balance method Books February Books

Bank
Beginning Receipts Disbursement Ending
Unadjusted cash in bank- x X X X
bank
Paid out of collection X X

Note:
Paid out in currency (payment out of collection). According to imprest system, all cash collection received
by the company should be deposited intact to the bank, and all disbursements should be made through the
use of check, except for payment of small and miscellaneous items. Therefore payment directly out of the
collection is a violation of internal control. For purposes of accounting all the receipts and disbursements
during a certain period, the following treatment should be presented in the proof of cash starting from the
unadjusted cash balance bank

FREQUENTLY ENCOUNTERED TRICKS IN PROOF OF CASH

Note: All amounts are assumed figures. Current month (end) is February while previous period (beginning) is
assumed January

Adjusted balance method Book Books February Books

Beginning Receipts Disbursement Ending
1. NSF check amounting to P1 returned in February. This was deposited in (1) (1)
January.
2. NSF check amounting to P1 deposited in February and returned in March 1* (1)
3. NSF check recorded as reduction of cash receipts
a. Returned January recorded February, P1 (1) 1
b. Returned February recorded February 1 1
4. Unrecorded disbursements January corrected in February, P1 (1) (1)
5. Unrecorded receipts January corrected in February, P1 1 (1)
6. Unrecorded disbursements January not yet corrected in February, P1 (1) (1)
7. Unrecorded receipts January not yet corrected in February P1 1 1
8. Unrecorded disbursements for the month of February, P1 1 (1)
9. Unrecorded receipts for the month of February, P1 1 1
10. Post dated or unreleased check of the company included as outstanding (1) 1
checks for the month of February, P1
11. Post dated check from customer in February recorded as receipts in (1) (1)
February, P1
12. Cancellation of company’s checks recorded by a reduction of cash 1 (1)
disbursements, P1
13. Check of the company issued in January was mutilated and returned by 1 1
the payee. A replacement check were issued. Both checks were entered
in the Check register but no entry was made to cancel the mutilated
check, P1 (in addition, this should not be included as part of
outstanding checks in January)
14. Checks issued in January and was included in the outstanding checks in 1 1
January was recorded for P1.50 but when the bank statement was
received in February the correct amount of this check is P.50. No
correction was made in February. (P.50 should be included as
outstanding checks in January)
15. The company issued a stop payment order to the bank in February for (1) (1)
check issued in February which was not received by the payee. A new
check was written and recorded in the Check register in February. The
old check was written off by a journal entry also in February, P1

Adjusted balance method Bank Books February Books

Beginning Receipts Disbursement Ending
1. Customer’s NSF check returned by bank in January and redeposited and (1) 1
cleared in February (no entry in January and February), P1
2. Payment directly from the collections (Paid out in currency), P1. See 1 1
Note
3. Erroneous bank credit made in February corrected by (1) (1)
Debit/Disbursements also in February, P1
4. Customer’s dishonoured checks in February are recorded as reduction of (1) (1)
cash. The dishonoured checks are redeposited also in February and are
recorded as regular receipts, P1
5. NSF check amounting to P1 returned this month and redeposited this (1) (1)
month (no entry was recorded in the books both on the return and
redeposit)

Page 10 of 18
FINANCIAL ACCOUNTING AND REPORTING

CLASSROOM DISCUSSION

Cash

1. The records of SML Co. on December 31, 20x1 show the following:
Checks drawn but not yet issued to payees P120,000
Customers’ checks dated January 15, 20x2 35,000
Customers’ checks dated December 31, 20x1 40,000
SML’s check dated January 15, 20x2 already mailed to payee 16,000
Cash on hand 130,000
Employees’ checks representing unclaimed salaries, held by the treasurer 14,000
Petty cash fund (full replenished) 20,000

Requirement: How much is included as cash on December 31, 20x1?

Solution:
Checks drawn but not yet issued to payees 120,000
Customers’ checks dated Dec. 31, 20x1 40,000
SML’s check dated Jan. 15, 20x2 already mailed to payee 16,000
Cash on hand 130,000
Employees’ checks representing unclaimed salaries,
14,000
held by the treasurer
Petty cash fund (fully replenished) 20,000
Total 340,000

Cash Equivalents

2. Behringer Co. holds the following securities on December 31, 20x1:

Treasury bill acquired on November 1, 20x1, maturing on January 31, 20x2 P300,000
Money market placements to RCBC trust, made on December 15, 20x1, maturing 800,000
on August 31, 20x2
Redeemable preference shares acquired on December 31, 20x1 and redeemable on 1,600,000
March 31, 20x2
Three-month time deposit with UCPB 950,000
Investment in shares of stock acquired on December 31, 20x1 to be sold in January 450,000
20x2

Requirement: How much is presented as cash equivalents?

Solution:
Treasury bill acquired on Nov. 1, 20x1 300,000
Investment in redeemable preference shares 1,600,000
Three-month time deposit with UCPB - unrestricted 950,000
Total 2,850,000

FS presentation, Measurement and Deposit in foreign bank

3. Smile Co. has the following items on December 31, 20x1:

Cash on hand (peso) P1,800,000
Cash on hand (USD, translated at P50:$1) 2,900,000
Revolving fund 200,000
Contingency fund 80,000
Cash in bank – BPI 6,000,000
Cash in bank – Swiss Savings Account (translated P51:CHF1) 1,400,000
Treasury Bill acquired September 28, 20x1, maturing January 28, 20x2 600,000

Additional information:
 The current exchange rates on December 31, 20x1 are as follows: (P52:$1 and P49:CHF1).
 The Swiss Savings Account is restricted as to withdrawals.

Requirement: How much is presented as cash and cash equivalents in Smile Co.’s December 31, 20x1
statement of financial position?

Solution:
Cash on hand (peso) 1,800,000
Cash on hand (2.9M ÷ 50) x 52 3,016,000
Revolving fund 200,000
Cash in bank – BPI 6,000,000
Cash and Cash Equivalents - Dec. 31, 20x1 11,016,000

 The contingency fund is a noncurrent asset.

 The restricted deposit in foreign bank (i.e., Swiss Savings Account) is excluded from cash and, preferably
presented as receivable or as “other asset,” depending on the nature of the restriction. For example, if the
restriction is imposed by the Philippine Government, such as when it results from a pending litigation, the more
appropriate classification would be “Other assets,” with appropriate disclosure in the notes. If the restriction is
bank-imposed, the more appropriate classification would be “Receivable.” Rarely, that a savings account (foreign
or local) qualifies as an investment, unless the deposit earns interest above the normal rate for regular savings
accounts.

Page 11 of 18
FINANCIAL ACCOUNTING AND REPORTING

Compensating balance and Bank Overdraft

4. Cloudy Co.’s cash in bank consists of the following:

Piggy Bank savings account P480,000
Piggy Bank checking account (20,000)
Oink Bank checking account 360,000
Porky Bank savings account #123456789 200,000
Porky Bank checking account #987654321 (70,000)
Unused credit line – Bombay Bank 250,000

Additional information:
 The Piggy Bank savings account includes P40,000 compensating balance that is not legally restricted.
 The Oink Bank checking account includes P100,000 compensating balance that is legally restricted.
 The Porky Bank savings account #123456789 represents a cash bond that is mandated by a law court
to be held pending the final settlement of an on-going litigation.

Requirement: What amount of cash in bank is presented in the financial statements?

Solution:
Piggy Bank savings account 480,000
Piggy Bank checking account (20,000)
Oink Bank checking account (360K - 100K compensating bal.) 260,000
Cash in bank 720,000

 The ₱40,000 compensating balance on the Piggy Bank savings account is properly included because it is not
restricted.
 The ₱40,000 overdraft on the Piggy Bank checking account can be offset from the Piggy Bank savings account.
 The ₱100,000 compensating balance on the Oink Bank checking account is excluded because it is restricted.
 Porky Bank savings account #5100342120, which is legally restricted, is excluded from cash and presented
under other line item (e.g., ‘Other assets’).
 The overdraft in the Porky Bank checking account is presented as current liability.

Accounting for PCF

5. An entity established a petty cash fund (PCF) of P30,000 on October 1, 20x1. During the month, P24,260 have
been disbursed from the PCF, and by the end of the month, the PCF box contains coins and currencies amounting
to P5,625.

Requirement: Provide the journal entries including the replenishment of the fund at month-end. Use a
suspense account to record any discrepancy.

Solution:
Oct. 1, 20x1 Petty cash fund 30,000
Cash in bank 30,000
Oct. 1 to 31,
No journal entry
20x1
Oct. 31, 20x1 Various expenses 24,260
Cash shortage or overage 115
Cash in bank (30,000 – 5,625) 24,375

6. Use the information in #5 above but assume the PCF is not replenished and financial statements are prepared
at month end. Assume further that all discrepancies in the PCF are chargeable for the petty cash custodian.

Requirement: Provide the adjusting entry and determine the amount of PCF that will be reported in the
financial statements.

Solution:
Oct. 31, 20x1 Various expenses 24,260
Receivable from PCF custodian 115
Petty cash fund (30,000 – 5,625) 24,375

 Amount reported in financial statements = 5,625 (equal to the coins and currencies contained in the PCF box)
or (30,000 imprest balance - 24,375 AJE = 5,625 adjusted balance).

Use the following information for the next two (2) questions:

The auditor for Raki-Raki, Inc. examined the petty cash fund immediately after the close of business, June 30, 20x3,
the end of the company’s fiscal year. The following fund composition was arrived at:
Currency P 1,272
Fund vouchers:
Office supplies expense 388
Travel expense 240
Office equipment repairs 170
Loans to officers and employees 400
A check drawn by Raki-raki, Inc., payable to the order of Jingle, fund custodian 1,100
An employee’s check, returned by bank, stamped NSF 230
A sheet of paper bearing the signatures of several employees, together with their contribution (total
P200) for a gift for a departing employee. Attached to the paper is currency of 200

Page 12 of 18
 FINANCIAL ACCOUNTING AND REPORTING

The petty cash fund general ledger account has an imprest balance of P4,000.

7. What audit adjustment should be prepared as of June 30, 20x3?

A. Office supplies expense 388 C. Office supplies expense 388
Travel expenses 240 Travel expenses 240
Repair expense 170 Repair expense 170
Receivable from employee 400 Receivable from employee 630
Cash short/over 430 Cash short/over 430
Petty cash fund 1,628 Petty cash fund 1,858

B. Office supplies expense 388 D. Office supplies expense 388

Travel expenses 240 Travel expenses 240
Repair expense 170 Repair expense 170
Receivable from employee 400 Receivable from employee 630
Cash short/over 430 Cash short/over 200
Cash 1,628 Petty cash fund 1,628

8. At what amount should the cash fund be sown in the balance sheet as of June 30, 20x3?
A. P2,602 B. P1,272 C. P2,372 D. P2,142

ANSWER: D, C
Accountability Accounted
a. Imprest balance 4,000 a) Remaining currency and coins 1,272
b. Undeposited cash collections - b) Envelope containing employee contribution 200
c. Undeposited check collections - c) Customers checks accounted -
d. Unclaimed salary - d) Paid expense voucher 1,198
e. Excess of advance travel - e) Replenishment checks 1,100
f. Employee contributions 200 f) IOUs -
g) Accommodation check 230
Total 4,200 Total 4,000

Accountability........... ........... ........... ........... ........... ...... 4,200

Accounted........... ........... ........... ........... ........... ........... 4,000
Shortage........... ........... ........... ........... ........... ........... . 200

COMPUTATION OF ADJUSTED PETTY CASH BALANCE

Currencies and coins at the date of cash count 1,272
plus:petty cash fund not in the form of currencies and coins
1. Accommodation checks
2. Replenishment checks 1,100 1,100
Adjusted petty cash fund at December 31 2,372

Use the following information for the next two (2) questions:

The Petty Cash Fund of Andrei Company has an imprest balance of P20,000. The following items are found in its
drawer on December 31, 20x1:
Currencies and coins P4,700
Vouchers for expenses during the year:
Office supplies P1,500
Postage stamps 500
Transportation 100 2,100
IOU notes of several employees all dated December 20x1 2,500
Unused postage stamps 100
Replenishment check drawn by the Company payable to the order of petty cash custodian 1,500
Check received from customers representing sales for the month of December 1,700
Check received from Doug, an officer, dated December 30, 20x1 2,000
Envelope containing contributions from employee for field trip in Taytay Rizal 5,000

9. What is the correct amount of petty cash fund on December 31, 20x1?
A. P4,700 B. P6,200 C. P20,000 D. P8,200

10. What is the amount of shortage/overage?

A. P400 short B. P400 over C. P7,200 short D. P7,200 over

ANSWER: D, C
Accountability Accounted
a. Imprest balance 20,000 g) Remaining currency and coins 4,700
b. Undeposited cash collections h) Envelope containing employee contribution 5,000
c. Undeposited check collections 1,700 i) Customers checks accounted 1,700
d. Unclaimed salary j) Paid expense voucher 2,100
e. Excess of advance travel k) Replenishment checks 1,500
f. Employee contributions 5,000 l) IOUs 2,500
m) Accommodation check 2,000
Total 26,700 Total 19,500

Accountability........... ........... ........... ........... ........... ...... 25,000

Accounted........... ........... ........... ........... ........... ........... 17,800
Shortage........... ........... ........... ........... ........... ........... . 7,200

Page 13 of 18
 FINANCIAL ACCOUNTING AND REPORTING

COMPUTATION OF ADJUSTED PETTY CASH BALANCE

Currencies and coins at the date of cash count 4,700
plus:petty cash fund not in the form of currencies and coins
1. Accommodation checks (a) 2,000
2. Replenishment checks 1,500 3,500
Adjusted petty cash fund at December 31 8,200

Bank reconciliation – Depositor vs. Bank Journal Entries

11. The cash balance per books on June 30, 20x1 is P100,000, equal to the cash balance per bank statement on the
same date. The transactions in July 20x1 are summarized below:

a. Collections from customers totaled P500,000. All the collections were deposited; However, only P480,000
were credited by the bank to the entity’s account as of July 31, 20x1. The difference was due to bank cut-
off.
b. Checks drawn totaled P200,000, of which P140,000 were encashed during the period.
c. Customers deposited a total of P360,000 to the entity’s bank account as payment of accounts receivable.
The entity was not yet notified of the collections.
d. The bank debited the entity’s account for P40,000 representing payment for mobile phone charges. The
entity was not yet notified of the payment.

Requirements:
a. Prepare the journal entries in the books of (1) the entity and (2) the bank, respectively.
b. Compute for the following: (1) deposits in transit, (2) outstanding checks, (3) credit memo; and (4) debit
memo.
c. Prepare the July 31, 20x1 bank reconciliation.
d. Prepare the reconciling entries in the entity’s books.

Solution:
Requirement (a):
Per books Per bank
Cash on hand 500,000 Cash on hand 480,000
Accounts receivable 500,000 Deposit liability 480,000

Cash in bank 500,000

Cash on hand 500,000

Accounts payable 200,000 Deposit liability 140,000

Cash in bank 200,000 Cash on hand 140,000

No entry Cash on hand 360,000

Deposit liability 360,000

No entry Deposit liability 40,000

Cash on hand 40,000

Requirement (b):
(1) Deposits in transit: (500,00 – 480,000) = 20,000
(2) Outstanding checks: (200,000 – 140,000) = 60,000
(3) Credit memo = 360,000
(4) Debit memo = 40,000

Requirement (c):
The unadjusted balances are determined as follows:
Cash in bank
June 30, 20x1 100,000
(a) Deposits 500,000 200,000 (b) Checks drawn
400,000 July 31, 20x1

Deposit liability
100,000 June 30, 20x1
(b) Checks encashed 140,000 480,000 (a) Deposits
(c) Customer
(d) Payments for bills 40,000 360,000 remittances
July 31, 20x1 760,000

Per books, July 31 400,000 Per bank, July 31 760,000

Credit memo 360,000 Deposits in transit 20,000
Debit memo (40,000) Outstanding checks (60,000)
Adjusted balance 720,000 Adjusted balance 720,000

Requirement (d):

Page 14 of 18
FINANCIAL ACCOUNTING AND REPORTING

Cash in bank 320,000

Telecommunications expense 40,000
Accounts receivable 360,000

Bank reconciliation

12. On October 31, 20x1, Dark Co.’s cash balance per records is P7,540, while the balance per bank statement is
P8,510. The following information is determined:
a. The bank statement reflects a P780 deposit that is not yet recorded in the books. The deposit pertains to a
collection of note receivable with a principal balance of P700; The difference represents the interest on the
note.
b. The bank statement also reflects a P25 withdrawal representing service charges for the month.
c. Dark Co. erroneously recorded a check drawn for P140 as P410. The check, which is payment for an account
payable, cleared the bank at the correct amount.
d. Dark Co. erroneously recorded a P910 collection of an account receivable as P190. The bank statement
reflects the correct amount of deposit.
e. A P1,900 check deposit on October 31 is not yet reflected in the bank statement.
f. The following checks drawn by Dark Co. are not yet presented to the bank for payment: Check #75 for
P325, Check #80 for P100, and Check #94 for P700.

Requirements:
a. Prepare the bank reconciliation for the month of October.
b. Prepare the reconciling entries in Dark Co.’s books.

Solutions:

Requirement (a):
Bal. per books, end. 7,540 Bal. per bank, end. 8,510
Add: CM (collection of N/R & int.) 780 Add: DIT 1,900
Less: DM (bank service charge) (25) Less: OC (325+100+700) (1,125)
+/-: Book errors +/-: Bank errors -
Overstated disb. (410 - 140) 270
Understated coll’n. (910 - 190) 720
Adjusted balance 9,285 Adjusted balance 9,285

Requirement (b):
Cash in bank 1,745
Bank service charge 25
Note receivable 700
Interest income 80
Accounts payable (410 – 140) 270
Accounts receivable (910 – 190) 720

Bank reconciliation – Bank to Book

13. The information below is from the books of the Seminole Corporation on June 30:
Balance per bank statement P11,164
Deposits in transit 1,340
Bank charges not yet recorded by Seminole 16
Note collected by the bank; not yet recorded 1,120
Outstanding checks 1,100
NSF checks – not yet recorded nor re-deposited 160

Requirement: How much is the cash balance per books on June 30 before adjustments?

Solution:
Per books 10,460 (squeeze) Per bank, June 30 11,164 (start)

Credit memo 1,120 Deposits in transit 1,340

Debit memo Outstanding checks (1,100)

(16 + 160) (176)

Adjusted balance 11,404 Adjusted balance 11,404

Page 15 of 18
FINANCIAL ACCOUNTING AND REPORTING

Bank reconciliation – DIT and OC computations

14. Adcock Plastics Company deposits all receipts and makes all payment by check. The following information is
available from the cash records:

March 31 Bank Reconciliation

Balance per bank P26,746
Add: Deposit in transit 2,100
Deduct: Outstanding checks (3,800)
Balance per books P25,046

Month of April Results

Per Bank Per Books

Balance April 30 P27,995 P24,355
April deposits 10,784 12,889
April checks 11,100 13,080
April note collected (not included in April deposits) 3,000
April bank service charge 35
April NSF check of a customer returned by the bank (recorded by 900
bank as a charge)

Requirements:

a. Compute for the April 30 Deposits in transit.

b. Compute for the April 30 Outstanding checks.
c. Prepare the April 30 bank reconciliation.

Solutions:
Requirement (a):
Deposits in transit
beg. 2,100
April deposits per
April deposits per books 12,889 10,784 bank
4,205 end.

Requirement (b):
Outstanding checks
3,800 beg.
April checks per bank 11,100 13,080 April checks per books
end. 5,780

Requirement (c):
Per books, Mar. 31 24,355 Per bank, Mar. 31 27,995
April note collected 3,000 Deposits in transit 4,205
April bank service charge (35) Outstanding checks (5,780)
April NSF check (900)
Adjusted balance 26,420 Adjusted balance 26,420

Proof of Cash

15. Information on Blue Curtain Co. is shown below:

January 31 February 28
Book balance P264,400 P360,000
Book debits 120,000
Book credits 24,400
Bank balance 201,200 370,820
Bank debits 17,320
Bank credits 186,940
Credit memos 30,000 52,500
Bank charges 15,600 10,680
Understatement of book receipts 4,000
Overstatement of book receipts 2,800
Deposit in transit 95,040 43,800
Outstanding checks 13,440 15,600

Requirement: Prepare a proof of cash.

Page 16 of 18
FINANCIAL ACCOUNTING AND REPORTING

Solution:
31-Jan Receipts Disbursements 28-Feb
Per books 264,400 120,000 24,400 360,000
ADD: CM
January 30,000 (30,000)
February 52,500 52,500
LESS: DM
January (15,600) (15,600)
February 10,680 (10,680)
Book errors:
January 4,000 (4,000)
February (2,800) (2,800)
Adjusted bal. 282,800 135,700 19,480 399,020

31-Jan Receipts Disbursements 28-Feb

Per bank 201,200 186,940 17,320 370,820
ADD: DIT
January 95,040 (95,040)
February 43,800 43,800
LESS: OC
January (13,440) (13,440)
February 15,600 (15,600)
Adjusted bal. 282,800 135,700 19,480 399,020

FINANCIAL ACCOUNTING AND REPORTING-THEORIES

1. Cash equivalents are

A. Short-term and highly liquid investments that are readily convertible into cash.
B. Short-term and highly liquid investments that are readily convertible into cash with remaining maturity of
three-months.
C. Short-term and highly liquid investments that are readily convertible into cash and acquired three months
before maturity.
D. Short-term and highly liquid marketable equity securities.

2. A compensating balance
A. Must be included in “cash and cash equivalents”.
B. Which is legally restricted and related to a long-term loan is classified as current asset.
C. Which is legally restricted and related to a short-term loan is classified separately as current asset.
D. Which is not legally restricted as to withdrawal is classified separately as current asset.

3. Which of the following is usually considered cash?

A. Certificate of deposit.
B. Checking account.
C. Money market saving certificate.
D. Customer’s Postdated check.

4. Petty cash fund is

A. Separately classified as current asset.
B. Money kept on hand for making minor disbursements of coin and currency rather than by writing checks.
C. Set aside for the payment of payroll.
D. Restricted cash.

5. The petty cash fund account under the imprest fund system is debited
A. Only when the fund is created.
B. When the fund is created and every time it is replenished.
C. When the fund is created and when the size of the fund is increased.
D. When the fund is created and when the fund is decreased.

6. Which of the following statements is not true?

A. Adjustment of the petty cash account is made at the end of the period to avoid understatement of expenses
and overstatement of cash.
B. Entries are made to the petty cash account to increase or decrease the size of the fund or to adjust the
balance if not replenished at year-end.
C. The imprest petty cash system in effect adheres to the rule of disbursements by check.
D. The petty cash account is debited when the fund is replenished.

7. A cash short and over account is

A. A contra account to cash.
B. Debited when the petty cash fund proves out over.
C. Debited when the petty cash fund proves out short.

Page 17 of 18
FINANCIAL ACCOUNTING AND REPORTING

D. Not generally accepted.

8. What is the major purpose of an imprest petty cash fund?

A. To effectively plan cash inflows and outflows.
B. To ease the payment of cash to vendors.
C. To determine the honesty of the petty cashier.
D. To effectively control cash disbursements.

9. If the cash balance shown in the company’s cash records is less than the correct cash balance and neither the
company nor the bank has made any errors, there must be
A. Outstanding checks.
B. A no-sufficient fund check returned by the bank.
C. Bank charges not yet recorded by the depositor.
D. An interest credited by the bank in the depositor’s account.

10. A bank reconciliation is

A. A formal financial statement that lists all of the bank account balances of an entity.
B. A merger of two banks that previously were competitors.
C. A statement sent by the bank to depositor on a monthly basis.
D. A schedule that accounts for the difference between an entity’s cash balance as shown in the bank statement
and the cash balance as shown in the general ledger.

11. Which of the following items must be added to the cash balance per ledger in preparing a bank reconciliation
which ends with adjusted cash balance?
A. Note receivable collected by bank in favor of the depositor and credited to the account of the depositor.
B. NSF customer check.
C. Service charge.
D. Erroneous bank debit.

12. Bank reconciliation are normally prepared on a monthly basis to identify adjustments needed in the depositor’s
records and to identify bank errors. Adjustments on the part of the depositor should be recorded for
A. All items except bank errors, outstanding checks and deposits in transit.
B. Bank errors, outstanding checks and deposits in transit
C. Book errors, bank errors, deposits in transit and outstanding checks.
D. Outstanding checks and deposits in transit.

13. Following are reconciling items in an enterprise’s bank reconciliation statement.

I. Deposits in transit
II. Company’s check for P32,500 recorded in the books for P23,500
III. Note collected by bank in behalf of the company
IV. Deposit of another company erroneously credited by bank to the company’s account
V. No sufficient fund check charged back by bank
VI. Company deposit for P32,500 recorded in the books for P23,500

Which of these adjustments would be shown as addition to the cash balance per books in order to arrive at the
correct cash balance?
A. II, III, and VI
B. II and III
C. II, V and VI
D. III and VI

14. Bank statements provide information about all of the following, except
A. Bank changes for the period.
B. Errors made by the company.
C. Checks cleared during the period.
D. No sufficient fund checks.

15. In preparing a bank reconciliation, interest paid by the bank on the depositor’s account is
A. Added to the bank balance.
B. Added to the book balance.
C. Subtracted from the bank balance.
D. Subtracted from the book balance.

In preparing a bank reconciliation, interest paid by the bank on the depositor’s account behalf is
A. Added to the bank balance.
B. Added to the book balance.
C. Subtracted from the bank balance.
D. Subtracted from the book balance.

Page 18 of 18