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, Financial Accounting
and Reporting
(FAR)
#128 Maginhawa St., Brgy. Teacher’s Village East, Quezon City pinnaclecpareview.ph
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
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, CASH AND CASH EQUIVALENTS o Compensating balance
● If this amount is legally restricted to withdrawal,
DEFINITIONS: it is therefore excluded from cash. However, in
cases that it still remains to be unrestricted, the
o Cash - includes money in the form of currency and coins, compensating balance shall be part of cash. If the
negotiable instruments in the form of checks and money compensating balance is legally restricted the
orders acceptable by the bank for immediate credit and following rules shall be followed:
bank deposits whether in a savings or current account.
✓ The related loan is short-term: The
o Cash Equivalents - under PAS 7, cash equivalents are compensating balance shall be part of
short-term and highly liquid investments that are readily current assets but separately from cash.
convertible into cash and so near their maturity that they ✓ The related loan is long-term: The
present insignificant risk in changes in value because of compensating balance is part of
changes in interest rates. noncurrent assets as an investment.
● An informal agreement to maintain a minimum
o Bank Reconciliation - a statement that that settles the
amount of deposit will not be legally restricted
difference between the bank statement balance and the
and therefore included in cash.
cash balance per book which is the current balance in the
checkbook of the depositor.
Cash Equivalents
o The three important characteristics for cash
o Book Reconciling Items - include credit memos, debit
equivalents as mentioned in PAS 7 are short-term,
memos and errors that need to be adjusted by the
highly liquid and near maturity. In other words, short-
depositor to reconcile with the adjusted balance.
term debt instruments with low risk (also low yield)
and acquired 3 months or less from maturity date
o Bank Reconciling Items - these include deposits in transit,
shall be considered as cash equivalents.
outstanding checks and errors.
✓ Examples include Treasury Bills, Bonds and
o Petty Cash Fund - money set aside to pay small and
Notes, Time Deposits, Certificate of deposits
recurring expenses where it will be inefficient to settle
and Bankers Acceptances and Commercial
such payments by issuing checks. Petty cash fund may be
Papers.
accounted for using either imprest fund system or
fluctuating fund system.
o Time deposits – Bank savings account that earns
interest but not subject to immediate withdrawal or
o Imprest Control System - a control system where all cash
check issuance.
receipts including checks to be deposited intact and all
cash disbursements be made by the issuance of a check.
● Time deposits are excluded from cash because of
their restriction on availability as funds and are
Cash includes the following items plus adjustments:
classified as investments and shall follow these
✓ Undeposited currency and coins.
specific classifications:
✓ Checks and money orders held unless the checks are
a. Cash equivalents if the original term is 3
post-dated, defective or stale. Such items shall still be
months or less.
included as receivables.
b. Short term investments if the original
✓ Unrestricted bank deposits.
term is more than 3 months to 1 year
✓ Funds on hand and deposits that are for current use.
c. Long-term investments if the original
This includes petty cash fund, payroll fund and funds
term is more than 1 year.
for taxes and dividends as mentioned in PAS 1 but
excludes funds appropriated for non-current assets.
Example of Adjusted Balance Reconciliation:
✓ Foreign currencies converted to their peso values.
✓ Bank drafts.
Bank Book
Unadjusted Balance Unadjusted
Special Items of Cash X X
Balance
o Bank overdraft – A credit or negative balance in the
bank account of the depositor resulting from an Deposit in transit + Credit memo* +
issuance of a check that exceeds the amount of the Outstanding checks (-) Debit memo** (-)
deposit. Errors +/(-) Errors +/(-)
Adjusted balance X Adjusted balance X
✓ As a rule, an overdraft shall be classified as a
current liability and not offset against current o Credit memos include collections by the bank;
accounts with a positive or debit balance. interest credited by the bank and matured time
✓ As an exception, if the overdraft is in a bank deposits transferred to the current account.
where there are other accounts that have a
positive balance and those accounts are o Debit memos include NSF checks, bank service
sufficient to cover the overdraft, the total cash charges and authorized bank debits.
shall be shown net of the overdraft.
- - END - -
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Page | 1
, CASH AND CASH EQUIVALENTS
THEORY
1. Cash and cash equivalents on the balance sheet may include the following items
I. Currency or cash items on hand
II. Deposits in foreign countries which are subject to foreign exchange restrictions
III. Short-term placements of excess cash which can be pre-terminated
IV. Postdated checks
V. Cash set aside for the acquisition or construction of noncurrent assets
a. 1, 2 and 3 only c. 1 and 3 only
b. 2, 3 and 5 only d. Not given
2. 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
3. All of the following can be classified as cash and cash equivalents, except
a. Bank drafts
b. Equity investments
c. Loan notes held due for repayment in 90 days
d. Redeemable preference shares acquired and due in 60 days
4. Which of the following items should not be included in “cash”?
a. Coins and currency in the cash register
b. Amounts on deposit in checking account at the bank
c. Checks from other parties presently in the cash register
d. Money market placement
5. Which of the following is not considered cash for financial reporting purposes?
a. Bank charges for the period c. Petty cash funds and change funds
b. Errors made by the company d. Postdated checks and IOUs
6. What is a compensating balance?
a. Savings account balances
b. Margin account held with brokers
c. Temporary investment serving as collateral for outstanding loan
d. Minimum deposit required to be maintained in connection with a borrowing arrangement
7. If the deposit is legally restricted as to withdrawal, the compensating balance related to a long-term loan is
shown as
a. Cash c. Long-term investment
b. Other asset d. Current liability
8. Bank overdraft, if material, should be
a. Reported as a deduction from the current asset section
b. Reported as a deduction from cash
c. Netted against cash and a net cash amount reported
d. Reported as a current liability
9. If a financial institution has cash funds in a company, which is in bankruptcy, and the amount recoverable is
estimated to be lower than the face amount, cash should be
a. Eliminated from the balance sheet
b. Written down to its discounted or present value
c. Written down to estimated realizable value
d. Stated at face amount
Page | 2
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, 10. The following statements relate to cash. Which statement is true?
a. The term “cash equivalent” refers to demand credit instruments such as money order and bank drafts
b. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all normal
operating expenses for a period of time
c. Classification of a restricted cash balance as current or non-current should parallel the classification
of the related obligation for which the cash was restricted
d. Compensating balances required by a bank should always be excluded from “cash and cash
equivalent”
11. Which of the following is not a basic characteristic of a system of cash control?
a. Use of a voucher system
b. Combined responsibility for handling and recording cash
c. Daily deposit of all cash received
d. Internal audits at irregular intervals
12. All cash receipts are deposited intact and all cash disbursements are made by means of check. This internal
control is known as
a. Administrative control c. Accounting control
b. Imprest system d. Auditing control
13. Entries to record the replenishment of petty cash fund result in a debit to various expense accounts and a
credit to cash in bank. This accounting procedure typically exemplifies the
a. Imprest petty cash system c. Internal control
b. Fluctuating petty cash system d. Administrative control
14. What is the major purpose of an imprest petty cash fund?
a. To effectively plan cash inflows and outflows c. To determine the honesty of the employees
b. To ease the payment of cash to vendors d. To effectively control cash disbursements
15. A cash over or short account
a. Is not generally accepted
b. Is debited when the petty cash fund proves out over
c. Is debited when the petty cash fund proves out short
d. Is a contra account to cash
16. Which is true when a petty cash fund is used?
a. The petty cash fund balance should be reported as investment
b. The reimbursement/replenishment of the petty cash fund should be debited to expenses and credited
to the cash account
c. The petty cashier’s summary of petty cash payments serves as a journal entry that is posted to the
appropriate general ledger account
d. Entries that include a credit to the cash account should be recorded at the time payments from the
petty cash fund are made
17. The following statements relate to the petty cash fund. Which statement is true?
a. The amount of coins and currency in the petty cash fund is the same before the fund is reimbursed as
it is afterwards
b. Entries to record the replenishment of the imprest petty cash fund result in debit to various expense
accounts and a credit to the petty cash funds
c. At any time, the sum of the cash in the petty cash fund and the total petty cash vouchers should equal
the amount for which the imprest petty cash fund was established
d. Under the imprest petty cash system, it is not necessary to adjust unreplenished petty cash expenses
at end of the year
18. A bank reconciliation is prepared monthly in order for the enterprise to
a. Arrive at the correct cash balance c. Correct book errors
b. Correct bank errors d. Unearth any undetected cash fraud
Page | 3
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, 19. Bank reconciliation
a. Is the process of transferring money in or out of a bank account
b. Requires that every transaction which will result in a cash payment be verified, approved and
recorded before a bank check is prepared
c. Is an analysis that reflects the bank transactions made by a depositor
d. Explains the difference between the bank balance and the balance shown in the depositor’s records
20. A bank statement provides information about all of the following, except
a. Bank charges for the period c. Errors made by the company
b. Check cleared during the period d. NSF checks
21. When preparing a bank reconciliation, bank credits are
a. Added to the bank statement balance c. Added to the balance per book
b. Deducted from the bank statement balance d. Deducted from the balance per book
22. For purposes of bank reconciliation, debit memos are
a. Added to the bank balance c. Deducted from the bank balance
b. Added to the book balance d. Deducted from the book balance
23. 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
24. In the process of preparing a bank reconciliation
a. Outstanding checks should be added to the bank balance of cash
b. Outstanding checks should be subtracted from the book balance of cash
c. All of the reconciling items shown on a bank reconciliation must be entered in the accounting
records after the reconciliation is completed
d. Items that appear on the reconciliation as corrections to the book balance of cash should be entered
in the accounting records
25. The reconciling item in bank reconciliation that will result in an adjusting entry by the depositor is
a. Outstanding checks c. Bank error
b. Deposit in transit d. Bank service charges
26. What is the adjusting entry for a customer NSF check?
a. Debit cash and credit accounts receivable c. Debit service charge and credit cash
b. Debit accounts receivable and credit cash d. No adjustment is necessary
27. If the cash balance shown in a company’s accounting records is more than the correct cash balance and neither
the company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Deposits in transit
c. Outstanding checks
d. Bank charges not yet recorded by the company
28. In reconciling the bank balance with the book cash balance, which of the following would not cause the bank
balance shown in the bank statement to be lower than the unadjusted book balance?
a. Deposits in transit
b. Cash on hand at the company
c. Interest credited to the account by the bank
d. NSF checks from a customer as reported on the bank statement
29. If the cash balance in a company’s bank statement is less than the correct cash balance and neither the
company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
Page | 4
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, c. Bank charges not yet recorded by the company
d. Deposits in transit
30. If the cash balance in a company’s bank statement is more than the correct cash balance and neither the
company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
c. Bank charges not yet recorded by the company
d. Deposits in transit
31. A proof of cash
a. Is a physical count of currencies on hand at the end of reporting period
b. Is a formal statement showing the total cash receipts during the year
c. Is a four-column bank reconciliation showing reconciliation of cash balances per book and per bank
at the beginning and end of the current month and reconciliation of cash receipts and cash
disbursement of the bank and the depositor during the current month
d. Is a summary of cash receipts and cash payments
ILLUSTRATIVE EXAMPLES
1. [Bank reconciliation] Pinnacle Company provided the following information:
Cash in Bank - BPI
Dec. 1 Deposit P100,000 Dec. 4 Check No. 101 P5,000
Dec. 21 Deposit 50,000 Dec. 6 Check No. 102 15,000
Dec. 27 Deposit 10,000 Dec. 8 Check No. 103 40,000
Dec. 31 Deposit 80,000 Dec. 8 Check No. 104 10,000
Dec. 10 Check No. 105 30,000
Dec. 14 Check No. 106 25,000
Dec. 28 Check No. 107 50,000
Deposit Liability - Pinnacle Company
Date Check Withdrawal Deposits Balance
No.
Dec. 2 100,000 100,000
Dec. 18 104 10,000 90,000
Dec. 20 101 5,000 85,000
Dec. 22 106 25,000 60,000
Dec. 27 50,000 110,000
Dec. 29 10,000 120,000
Dec. 29 103 40,000 80,000
Dec. 29 CM 30,000 110,000
Dec. 31 Service charge DM 2,000 108,000
The credit made by bank on December 29 represents the proceeds of a note received from a customer which was given
to the bank for collection by the entity on December 26.
Requirements:
a. Prepare a bank reconciliation on December 31.
b. Prepare adjusting entries.
Page | 5
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, 2. CPA Company provided the following information for the month of December:
Balance per bank statement, December 31 P2,800,000
Bank service charge for December 12,000
Interest paid by bank to CPA Company for December 10,000
Deposits made but not yet recorded by the bank 350,000
Checks written but not yet recorded by the bank 650,000
The entity discovered that it had drawn and erroneously recorded a check for P46,000 that should have been
recorded for P64,000.
What is the cash balance per ledger on December 31?
a. P2,500,000
b. P2,520,000
c. P2,540,000
d. P2,800,000
3. BSA Company provided the following data relating to the cash transactions and bank account for the month of July:
Cash balance per ledger ?
Cash balance per bank statement ?
Debit memo for July service charge 5,000
Deposit of July 31 not recorded by bank until August 1 450,000
Outstanding checks, including certified check of P50,000 750,000
Proceeds of bank loan not recorded in ledger 500,000
Proceeds from a customer note, face P450,000, collected by bank,
collection fee of P15,000 435,000
A creditor check had been entered into the book as P20,000 and was
erroneously deducted by the bank at 200,000
A customer check was returned by bank marked DAIF (NSF) 50,000
Correct cash balance 3,000,000
1. What is the cash balance per ledger?
a. P2,120,000
b. P3,055,000
c. P2,555,000
d. P2,065,000
2. What is the cash balance per bank statement?
a. P3,700,000
b. P3,070,000
c. P3,050,000
d. P2,370,000
4. [Petty cash fund] Mastery Company established a petty cash fund for P6,000. The petty cash fund included the
following details:
Coins and currency P2,000
Paid vouchers
Transportation P1,600
Gasoline 400
Office supplies 500
Postage stamps 300
Due from employees 1,200 4,000
Employee’s check returned by bank marked “NSF” 1,000
Check drawn to the order of petty cash custodian 4,000
What amount of petty cash should be reported?
a. P2,000
Page | 6
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, b. P7,000
c. P6,000
d. P9,000
MAIN PROBLEMS
1. The composition of Adi Company’s “cash account” as of December 31, 2021 is as follows:
Demand deposit account P2,000,000
Time deposit – 30 days 1,000,000
NSF check of customer 40,000
Money market placement (due June 30, 2022) 1,500,000
Savings deposit in a closed bank 100,000
IOU from employee 20,000
Pension fund 3,000,000
Petty cash fund 10,000
Customer’s check dated January 1, 2022 50,000
Customer’s check outstanding for 18 months 40,000
Total P7,760,000
Additional information follows:
• Check of P200,000 in payment of accounts payable was recorded on December 31, 2021 but mailed
to suppliers on January 5, 2022.
• Check of P100,000 dated January 15, 2022 in payment of accounts payable was recorded and mailed
on December 31, 2021.
• The company uses the calendar year. The cash receipts journal was held open until January 15, 2022,
during which time P400,000 was collected and recorded on December 31, 2021.
The cash and cash equivalents to be shown on the December 31, 2021 balance sheet is:
a. P3,310,000 c. P2,910,000
b. P1,910,000 d. P4,410,000
2. Juan Company reported the checkbook balance on December 31, 2021 at P8,000,000. In addition, the entity
held the following items in the safe on that date:
Check payable to the entity, dated January 2, 2022 in payment P1,000,000
of a sale, not included in December 31 check book balance
Check payable to the entity, deposited December 15 and
included in December 31 checkbook balance, but returned by
bank on December 30 stamped “NSF”. The check was
redeposited on January 2, 2022 and cleared on January 5, 2022 3,000,000
Check drawn on the entity’s account, dated and recorded on
December 31, 2021 but not mailed until January 15, 2022 2,500,000
Coins and currencies on hand 800,000
Three-month money market instruments 1,500,000
What is the correct amount of Cash on December 31, 2021?
a. P7,500,000 c. P8,300,000
b. P9,300,000 d. P9,000,000
3. On December 31, 2021, the cash account of Christopher Company has a debit balance of P3,500,000. An
analysis of the cash account shows the following details:
Undeposited collections P60,000
Cash in bank-PCIB checking account 500,000
Cash in bank-PNB (overdraft) (50,000)
Undeposited NSF check received from a customer, dated Dec. 1, 2021 15,000
Undeposited check from a customer, dated January 15, 2022 25,000
Cash in bank-PCIB (fund for payroll) 150,000
Page | 7
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, Cash in bank-PCIB (savings deposit) 100,000
Cash in bank-PCIB (money market instrument, 90 days) 2,000,000
Cash in foreign bank (restricted) 100,000
IOUs from officers 30,000
Sinking fund cash 450,000
Listed stock held as temporary investment 120,000
P3,500,000
Cash and cash equivalents on its December 31, 2021 statement of financial position should be
a. P2,760,000 c. P2,885,000
b. P2,810,000 d. P2,935,000
4. The current assets of Rosendy Company on December 31, 2021 include the following:
Cash on hand P 50,000
Petty cash fund 10,000
Cash in bank 200,000
Accounts receivable 400,000
Inventory 500,000
Marketable equity securities 145,000
Deferred charges 20,000
Total P1,325,000
A. Cash on hand includes:
• Customer’s check of P4,000 returned by bank on December 26, 2021 due to insufficient funds but
subsequently redeposited and cleared by bank on January 5, 2022.
• Customer’s check for P6,000 dated January 15, 2022, received December 22, 2021.
• Postal money orders received from customers, P5,000.
• Cash withheld from wages for income tax of employees, P15,000.
B. The petty cash fund consists of the following items on December 31, 2021:
• Currency and coins, P2,800.
• Employees’ vales, P2,000.
• Currency in envelope marked “collections for birthday party”, P1,000.
• Unreplenished petty cash vouchers, P2,000.
• Check drawn payable to petty cashier, P2,200.
C. Included among the checks in payment of accounts payable drawn by the company against its current
account and recorded in December 2021 are:
• Check written and dated December 22, 2021 and delivered to payee on January 5, 2022, P10,000.
• Check written December 26, 2021 and dated January 21, 2022, delivered to payee on December 26,
2021, P15,000.
Question 1: How much is the adjusted cash on hand on December 31, 2021?
a. P40,000 c. P5,000
b. P1,328,000 d. P225,000
Question 2: How much is the adjusted petty cash fund balance on December 31, 2021?
a. P40,000 c. P5,000
a. P1,328,000 d. P225,000
Question 3: How much is the adjusted cash in bank balance on December 31, 2021?
a. P40,000 c. P5,000
b. P1,328,000 d. P225,000
Question 4: How much is the correct cash balance on December 31, 2021?
a. P270,000 c. P275,000
b. P265,000 d. P280,000
Page | 8
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
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https://scholarfriends.com
Downloaded by: | https://scholarfriends.com/singlePaper/618241/financial-accounting-and-reporting-far-pinnacle-cpa-
review-school-notes-study-guide-plus-qa
Distribution of this document is illegal.
, Financial Accounting
and Reporting
(FAR)
#128 Maginhawa St., Brgy. Teacher’s Village East, Quezon City pinnaclecpareview.ph
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
fb.com/pinnaclecpareviewschool youtube.com/c/MrAccounting +63 917-629-4875
, CASH AND CASH EQUIVALENTS o Compensating balance
● If this amount is legally restricted to withdrawal,
DEFINITIONS: it is therefore excluded from cash. However, in
cases that it still remains to be unrestricted, the
o Cash - includes money in the form of currency and coins, compensating balance shall be part of cash. If the
negotiable instruments in the form of checks and money compensating balance is legally restricted the
orders acceptable by the bank for immediate credit and following rules shall be followed:
bank deposits whether in a savings or current account.
✓ The related loan is short-term: The
o Cash Equivalents - under PAS 7, cash equivalents are compensating balance shall be part of
short-term and highly liquid investments that are readily current assets but separately from cash.
convertible into cash and so near their maturity that they ✓ The related loan is long-term: The
present insignificant risk in changes in value because of compensating balance is part of
changes in interest rates. noncurrent assets as an investment.
● An informal agreement to maintain a minimum
o Bank Reconciliation - a statement that that settles the
amount of deposit will not be legally restricted
difference between the bank statement balance and the
and therefore included in cash.
cash balance per book which is the current balance in the
checkbook of the depositor.
Cash Equivalents
o The three important characteristics for cash
o Book Reconciling Items - include credit memos, debit
equivalents as mentioned in PAS 7 are short-term,
memos and errors that need to be adjusted by the
highly liquid and near maturity. In other words, short-
depositor to reconcile with the adjusted balance.
term debt instruments with low risk (also low yield)
and acquired 3 months or less from maturity date
o Bank Reconciling Items - these include deposits in transit,
shall be considered as cash equivalents.
outstanding checks and errors.
✓ Examples include Treasury Bills, Bonds and
o Petty Cash Fund - money set aside to pay small and
Notes, Time Deposits, Certificate of deposits
recurring expenses where it will be inefficient to settle
and Bankers Acceptances and Commercial
such payments by issuing checks. Petty cash fund may be
Papers.
accounted for using either imprest fund system or
fluctuating fund system.
o Time deposits – Bank savings account that earns
interest but not subject to immediate withdrawal or
o Imprest Control System - a control system where all cash
check issuance.
receipts including checks to be deposited intact and all
cash disbursements be made by the issuance of a check.
● Time deposits are excluded from cash because of
their restriction on availability as funds and are
Cash includes the following items plus adjustments:
classified as investments and shall follow these
✓ Undeposited currency and coins.
specific classifications:
✓ Checks and money orders held unless the checks are
a. Cash equivalents if the original term is 3
post-dated, defective or stale. Such items shall still be
months or less.
included as receivables.
b. Short term investments if the original
✓ Unrestricted bank deposits.
term is more than 3 months to 1 year
✓ Funds on hand and deposits that are for current use.
c. Long-term investments if the original
This includes petty cash fund, payroll fund and funds
term is more than 1 year.
for taxes and dividends as mentioned in PAS 1 but
excludes funds appropriated for non-current assets.
Example of Adjusted Balance Reconciliation:
✓ Foreign currencies converted to their peso values.
✓ Bank drafts.
Bank Book
Unadjusted Balance Unadjusted
Special Items of Cash X X
Balance
o Bank overdraft – A credit or negative balance in the
bank account of the depositor resulting from an Deposit in transit + Credit memo* +
issuance of a check that exceeds the amount of the Outstanding checks (-) Debit memo** (-)
deposit. Errors +/(-) Errors +/(-)
Adjusted balance X Adjusted balance X
✓ As a rule, an overdraft shall be classified as a
current liability and not offset against current o Credit memos include collections by the bank;
accounts with a positive or debit balance. interest credited by the bank and matured time
✓ As an exception, if the overdraft is in a bank deposits transferred to the current account.
where there are other accounts that have a
positive balance and those accounts are o Debit memos include NSF checks, bank service
sufficient to cover the overdraft, the total cash charges and authorized bank debits.
shall be shown net of the overdraft.
- - END - -
This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
Page | 1
, CASH AND CASH EQUIVALENTS
THEORY
1. Cash and cash equivalents on the balance sheet may include the following items
I. Currency or cash items on hand
II. Deposits in foreign countries which are subject to foreign exchange restrictions
III. Short-term placements of excess cash which can be pre-terminated
IV. Postdated checks
V. Cash set aside for the acquisition or construction of noncurrent assets
a. 1, 2 and 3 only c. 1 and 3 only
b. 2, 3 and 5 only d. Not given
2. 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
3. All of the following can be classified as cash and cash equivalents, except
a. Bank drafts
b. Equity investments
c. Loan notes held due for repayment in 90 days
d. Redeemable preference shares acquired and due in 60 days
4. Which of the following items should not be included in “cash”?
a. Coins and currency in the cash register
b. Amounts on deposit in checking account at the bank
c. Checks from other parties presently in the cash register
d. Money market placement
5. Which of the following is not considered cash for financial reporting purposes?
a. Bank charges for the period c. Petty cash funds and change funds
b. Errors made by the company d. Postdated checks and IOUs
6. What is a compensating balance?
a. Savings account balances
b. Margin account held with brokers
c. Temporary investment serving as collateral for outstanding loan
d. Minimum deposit required to be maintained in connection with a borrowing arrangement
7. If the deposit is legally restricted as to withdrawal, the compensating balance related to a long-term loan is
shown as
a. Cash c. Long-term investment
b. Other asset d. Current liability
8. Bank overdraft, if material, should be
a. Reported as a deduction from the current asset section
b. Reported as a deduction from cash
c. Netted against cash and a net cash amount reported
d. Reported as a current liability
9. If a financial institution has cash funds in a company, which is in bankruptcy, and the amount recoverable is
estimated to be lower than the face amount, cash should be
a. Eliminated from the balance sheet
b. Written down to its discounted or present value
c. Written down to estimated realizable value
d. Stated at face amount
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, 10. The following statements relate to cash. Which statement is true?
a. The term “cash equivalent” refers to demand credit instruments such as money order and bank drafts
b. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all normal
operating expenses for a period of time
c. Classification of a restricted cash balance as current or non-current should parallel the classification
of the related obligation for which the cash was restricted
d. Compensating balances required by a bank should always be excluded from “cash and cash
equivalent”
11. Which of the following is not a basic characteristic of a system of cash control?
a. Use of a voucher system
b. Combined responsibility for handling and recording cash
c. Daily deposit of all cash received
d. Internal audits at irregular intervals
12. All cash receipts are deposited intact and all cash disbursements are made by means of check. This internal
control is known as
a. Administrative control c. Accounting control
b. Imprest system d. Auditing control
13. Entries to record the replenishment of petty cash fund result in a debit to various expense accounts and a
credit to cash in bank. This accounting procedure typically exemplifies the
a. Imprest petty cash system c. Internal control
b. Fluctuating petty cash system d. Administrative control
14. What is the major purpose of an imprest petty cash fund?
a. To effectively plan cash inflows and outflows c. To determine the honesty of the employees
b. To ease the payment of cash to vendors d. To effectively control cash disbursements
15. A cash over or short account
a. Is not generally accepted
b. Is debited when the petty cash fund proves out over
c. Is debited when the petty cash fund proves out short
d. Is a contra account to cash
16. Which is true when a petty cash fund is used?
a. The petty cash fund balance should be reported as investment
b. The reimbursement/replenishment of the petty cash fund should be debited to expenses and credited
to the cash account
c. The petty cashier’s summary of petty cash payments serves as a journal entry that is posted to the
appropriate general ledger account
d. Entries that include a credit to the cash account should be recorded at the time payments from the
petty cash fund are made
17. The following statements relate to the petty cash fund. Which statement is true?
a. The amount of coins and currency in the petty cash fund is the same before the fund is reimbursed as
it is afterwards
b. Entries to record the replenishment of the imprest petty cash fund result in debit to various expense
accounts and a credit to the petty cash funds
c. At any time, the sum of the cash in the petty cash fund and the total petty cash vouchers should equal
the amount for which the imprest petty cash fund was established
d. Under the imprest petty cash system, it is not necessary to adjust unreplenished petty cash expenses
at end of the year
18. A bank reconciliation is prepared monthly in order for the enterprise to
a. Arrive at the correct cash balance c. Correct book errors
b. Correct bank errors d. Unearth any undetected cash fraud
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This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.
, 19. Bank reconciliation
a. Is the process of transferring money in or out of a bank account
b. Requires that every transaction which will result in a cash payment be verified, approved and
recorded before a bank check is prepared
c. Is an analysis that reflects the bank transactions made by a depositor
d. Explains the difference between the bank balance and the balance shown in the depositor’s records
20. A bank statement provides information about all of the following, except
a. Bank charges for the period c. Errors made by the company
b. Check cleared during the period d. NSF checks
21. When preparing a bank reconciliation, bank credits are
a. Added to the bank statement balance c. Added to the balance per book
b. Deducted from the bank statement balance d. Deducted from the balance per book
22. For purposes of bank reconciliation, debit memos are
a. Added to the bank balance c. Deducted from the bank balance
b. Added to the book balance d. Deducted from the book balance
23. 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
24. In the process of preparing a bank reconciliation
a. Outstanding checks should be added to the bank balance of cash
b. Outstanding checks should be subtracted from the book balance of cash
c. All of the reconciling items shown on a bank reconciliation must be entered in the accounting
records after the reconciliation is completed
d. Items that appear on the reconciliation as corrections to the book balance of cash should be entered
in the accounting records
25. The reconciling item in bank reconciliation that will result in an adjusting entry by the depositor is
a. Outstanding checks c. Bank error
b. Deposit in transit d. Bank service charges
26. What is the adjusting entry for a customer NSF check?
a. Debit cash and credit accounts receivable c. Debit service charge and credit cash
b. Debit accounts receivable and credit cash d. No adjustment is necessary
27. If the cash balance shown in a company’s accounting records is more than the correct cash balance and neither
the company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Deposits in transit
c. Outstanding checks
d. Bank charges not yet recorded by the company
28. In reconciling the bank balance with the book cash balance, which of the following would not cause the bank
balance shown in the bank statement to be lower than the unadjusted book balance?
a. Deposits in transit
b. Cash on hand at the company
c. Interest credited to the account by the bank
d. NSF checks from a customer as reported on the bank statement
29. If the cash balance in a company’s bank statement is less than the correct cash balance and neither the
company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
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, c. Bank charges not yet recorded by the company
d. Deposits in transit
30. If the cash balance in a company’s bank statement is more than the correct cash balance and neither the
company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
c. Bank charges not yet recorded by the company
d. Deposits in transit
31. A proof of cash
a. Is a physical count of currencies on hand at the end of reporting period
b. Is a formal statement showing the total cash receipts during the year
c. Is a four-column bank reconciliation showing reconciliation of cash balances per book and per bank
at the beginning and end of the current month and reconciliation of cash receipts and cash
disbursement of the bank and the depositor during the current month
d. Is a summary of cash receipts and cash payments
ILLUSTRATIVE EXAMPLES
1. [Bank reconciliation] Pinnacle Company provided the following information:
Cash in Bank - BPI
Dec. 1 Deposit P100,000 Dec. 4 Check No. 101 P5,000
Dec. 21 Deposit 50,000 Dec. 6 Check No. 102 15,000
Dec. 27 Deposit 10,000 Dec. 8 Check No. 103 40,000
Dec. 31 Deposit 80,000 Dec. 8 Check No. 104 10,000
Dec. 10 Check No. 105 30,000
Dec. 14 Check No. 106 25,000
Dec. 28 Check No. 107 50,000
Deposit Liability - Pinnacle Company
Date Check Withdrawal Deposits Balance
No.
Dec. 2 100,000 100,000
Dec. 18 104 10,000 90,000
Dec. 20 101 5,000 85,000
Dec. 22 106 25,000 60,000
Dec. 27 50,000 110,000
Dec. 29 10,000 120,000
Dec. 29 103 40,000 80,000
Dec. 29 CM 30,000 110,000
Dec. 31 Service charge DM 2,000 108,000
The credit made by bank on December 29 represents the proceeds of a note received from a customer which was given
to the bank for collection by the entity on December 26.
Requirements:
a. Prepare a bank reconciliation on December 31.
b. Prepare adjusting entries.
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, 2. CPA Company provided the following information for the month of December:
Balance per bank statement, December 31 P2,800,000
Bank service charge for December 12,000
Interest paid by bank to CPA Company for December 10,000
Deposits made but not yet recorded by the bank 350,000
Checks written but not yet recorded by the bank 650,000
The entity discovered that it had drawn and erroneously recorded a check for P46,000 that should have been
recorded for P64,000.
What is the cash balance per ledger on December 31?
a. P2,500,000
b. P2,520,000
c. P2,540,000
d. P2,800,000
3. BSA Company provided the following data relating to the cash transactions and bank account for the month of July:
Cash balance per ledger ?
Cash balance per bank statement ?
Debit memo for July service charge 5,000
Deposit of July 31 not recorded by bank until August 1 450,000
Outstanding checks, including certified check of P50,000 750,000
Proceeds of bank loan not recorded in ledger 500,000
Proceeds from a customer note, face P450,000, collected by bank,
collection fee of P15,000 435,000
A creditor check had been entered into the book as P20,000 and was
erroneously deducted by the bank at 200,000
A customer check was returned by bank marked DAIF (NSF) 50,000
Correct cash balance 3,000,000
1. What is the cash balance per ledger?
a. P2,120,000
b. P3,055,000
c. P2,555,000
d. P2,065,000
2. What is the cash balance per bank statement?
a. P3,700,000
b. P3,070,000
c. P3,050,000
d. P2,370,000
4. [Petty cash fund] Mastery Company established a petty cash fund for P6,000. The petty cash fund included the
following details:
Coins and currency P2,000
Paid vouchers
Transportation P1,600
Gasoline 400
Office supplies 500
Postage stamps 300
Due from employees 1,200 4,000
Employee’s check returned by bank marked “NSF” 1,000
Check drawn to the order of petty cash custodian 4,000
What amount of petty cash should be reported?
a. P2,000
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, b. P7,000
c. P6,000
d. P9,000
MAIN PROBLEMS
1. The composition of Adi Company’s “cash account” as of December 31, 2021 is as follows:
Demand deposit account P2,000,000
Time deposit – 30 days 1,000,000
NSF check of customer 40,000
Money market placement (due June 30, 2022) 1,500,000
Savings deposit in a closed bank 100,000
IOU from employee 20,000
Pension fund 3,000,000
Petty cash fund 10,000
Customer’s check dated January 1, 2022 50,000
Customer’s check outstanding for 18 months 40,000
Total P7,760,000
Additional information follows:
• Check of P200,000 in payment of accounts payable was recorded on December 31, 2021 but mailed
to suppliers on January 5, 2022.
• Check of P100,000 dated January 15, 2022 in payment of accounts payable was recorded and mailed
on December 31, 2021.
• The company uses the calendar year. The cash receipts journal was held open until January 15, 2022,
during which time P400,000 was collected and recorded on December 31, 2021.
The cash and cash equivalents to be shown on the December 31, 2021 balance sheet is:
a. P3,310,000 c. P2,910,000
b. P1,910,000 d. P4,410,000
2. Juan Company reported the checkbook balance on December 31, 2021 at P8,000,000. In addition, the entity
held the following items in the safe on that date:
Check payable to the entity, dated January 2, 2022 in payment P1,000,000
of a sale, not included in December 31 check book balance
Check payable to the entity, deposited December 15 and
included in December 31 checkbook balance, but returned by
bank on December 30 stamped “NSF”. The check was
redeposited on January 2, 2022 and cleared on January 5, 2022 3,000,000
Check drawn on the entity’s account, dated and recorded on
December 31, 2021 but not mailed until January 15, 2022 2,500,000
Coins and currencies on hand 800,000
Three-month money market instruments 1,500,000
What is the correct amount of Cash on December 31, 2021?
a. P7,500,000 c. P8,300,000
b. P9,300,000 d. P9,000,000
3. On December 31, 2021, the cash account of Christopher Company has a debit balance of P3,500,000. An
analysis of the cash account shows the following details:
Undeposited collections P60,000
Cash in bank-PCIB checking account 500,000
Cash in bank-PNB (overdraft) (50,000)
Undeposited NSF check received from a customer, dated Dec. 1, 2021 15,000
Undeposited check from a customer, dated January 15, 2022 25,000
Cash in bank-PCIB (fund for payroll) 150,000
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, Cash in bank-PCIB (savings deposit) 100,000
Cash in bank-PCIB (money market instrument, 90 days) 2,000,000
Cash in foreign bank (restricted) 100,000
IOUs from officers 30,000
Sinking fund cash 450,000
Listed stock held as temporary investment 120,000
P3,500,000
Cash and cash equivalents on its December 31, 2021 statement of financial position should be
a. P2,760,000 c. P2,885,000
b. P2,810,000 d. P2,935,000
4. The current assets of Rosendy Company on December 31, 2021 include the following:
Cash on hand P 50,000
Petty cash fund 10,000
Cash in bank 200,000
Accounts receivable 400,000
Inventory 500,000
Marketable equity securities 145,000
Deferred charges 20,000
Total P1,325,000
A. Cash on hand includes:
• Customer’s check of P4,000 returned by bank on December 26, 2021 due to insufficient funds but
subsequently redeposited and cleared by bank on January 5, 2022.
• Customer’s check for P6,000 dated January 15, 2022, received December 22, 2021.
• Postal money orders received from customers, P5,000.
• Cash withheld from wages for income tax of employees, P15,000.
B. The petty cash fund consists of the following items on December 31, 2021:
• Currency and coins, P2,800.
• Employees’ vales, P2,000.
• Currency in envelope marked “collections for birthday party”, P1,000.
• Unreplenished petty cash vouchers, P2,000.
• Check drawn payable to petty cashier, P2,200.
C. Included among the checks in payment of accounts payable drawn by the company against its current
account and recorded in December 2021 are:
• Check written and dated December 22, 2021 and delivered to payee on January 5, 2022, P10,000.
• Check written December 26, 2021 and dated January 21, 2022, delivered to payee on December 26,
2021, P15,000.
Question 1: How much is the adjusted cash on hand on December 31, 2021?
a. P40,000 c. P5,000
b. P1,328,000 d. P225,000
Question 2: How much is the adjusted petty cash fund balance on December 31, 2021?
a. P40,000 c. P5,000
a. P1,328,000 d. P225,000
Question 3: How much is the adjusted cash in bank balance on December 31, 2021?
a. P40,000 c. P5,000
b. P1,328,000 d. P225,000
Question 4: How much is the correct cash balance on December 31, 2021?
a. P270,000 c. P275,000
b. P265,000 d. P280,000
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