Cash and Cash Equivalents

Question 1

Choose the statement that correctly describes the characteristics of cash and cash equivalents.

a. Money restricted for the purchase of property, plant and equipment (PPE)
b. Money that is unrestricted in use for current operations
c. Money in a bank account
d. That which is restricted for current use

Answer 1

b.

Question 2

Choose which item can form part of “Cash”.

a. Traveler’s check
b. Pension fund
c. Savings deposit in Land Bank of the Philippines - restricted for payment of long-term debt due in 3 years
d. Postdated checks from customers

Answer 2

a.

Question 3

Which of the following may not form part of cash?

a. Coins and bills
b. Preference shares
c. Savings account in BPI
d. Manager’s check

Answer 3

b.

Question 4

Postdated checks received from a customer is classified as:

a. Receivable/Asset
b. Payable/Liability
c. Cash/Asset
d. Expense

Answer 4

a.

To visualize, let’s make journal entries.

To record collection from customer,

Dr. Cash
Cr. Accounts receivable

However, since it is postdated (e.g. you cannot encash it yet to the bank after a certain date), then common sense dictates that a check that you can’t encash means you can’t receive cash just yet. So, at period end, if it can’t be encashed because it is postdated, the entries would be to revert it back to receivables, that is:

Dr. Accounts receivable
Cr. Cash

Question 5

What is the treatment of postdated checks issued to suppliers in payment for dues?

a. Reinstate liability and cash
b. Treat as outstanding checks
c. Treat as outstanding checks until encashed
d. Do nothing

Answer 5

a.

To record payment to supplier:

Dr. Accounts payable
Cr. Cash

But, since it is postdated, supplier cannot encash it yet. Therefore:

Dr. Cash
Cr. Accounts payable

Question 6

What is a compensating balance?

a. Loan collateralized by a temporary investment
b. Minimum deposit requirement in conjunction with a borrowing agreement
c. Savings account balance
d. Demand account balance

Answer 6

b.

Question 7

Select the true statement/s.

I. If compensating balance is unrestricted as to withdrawal, it is part of cash.
II. If compensating balance is restricted as to withdrawal, it is part of cash
III. If compensating balance is restricted as to withdrawal for settlement of short-term obligation, it is part of cash
IV. If compensating balance is restricted as to withdrawal for purchase of PPE, it is part of non-current assets.

a. I & IV
b. I & III
c. II & III
d. II & IV

Answer 7

a.

II. Not part of cash
III. Current assets, but not cash

Question 8

I. Bank overdraft is presented as a current asset
II. Bank draft is presented as a current liability
III. Bank draft in one bank account should be offset against another bank account provided that the amount is immaterial and that it pertains to the same bank (e.g. BPI & BPI).

a. All statements are true
b. Statement I is false, the rest is true
c. All statements are false
d. Statement II is true, the rest is false.

Answer 8

c.

Bank overdraft is a liability, while bank draft is part of cash (and hence a current asset). If a bank overdraft exists in a bank account and there is another bank account with a positive balance, then it can be offset to such account provided amount is immaterial and that it is of the same bank (e.g. BPI & BPI).

Question 9

Which of the following meets the definition of a cash equivalent?

a. Acquired exactly 3 months before maturity
b. Acquired 3 months or less after maturity
c. Acquired 3 months or less before maturity
d. None of the choices

Answer 9

c.

Question 10

Which of the following is a cash equivalent?

a. 3-month treasury bill
b. 1-year treasury bill
c. Treasury notes
d. Savings deposit, restricted for payment of short-term liability due in 3 months time

Answer 10

a.

Question 11

There are 2 methods on how to record petty cash funds. What are these methods?

a. Journal entry and Credit memorandum method
b. Journal entry and Debit memorandum method
c. Imprest system and fluctuating fund system
d. Impressed system and fluctuating fund system

Answer 11

c.

Question 12

This is a fund used for payment of small expenses.

a. Patty cash fund
b. Perry cash fund
c. Petty cash fund
d. Penge cash fund

Answer 12

c.

Question 13

An entity established a petty cash fund of P10,000, had expenses of P5,000. The journal entry for the incurrence of expense under the imprest system involves a debit to:

a. Expenses of P5,000
b. Petty cash fund of P5,000
c. No entry
d. Cash in bank of P5,000

Answer 13

c.

Question 14

An entity established a petty cash fund of P10,000, had expenses of P5,000. The journal entry for the incurrence of expense under the fluctuating fund system involves a debit to:

a. Expenses of P5,000
b. Petty cash fund of P5,000
c. No entry
d. Cash in bank of P5,000

Answer 14

a.

Question 15

An entity established a petty cash fund of P10,000, had expenses of P5,000. The journal entry for the replenishment of fund under the imprest system involves a debit to:

a. Expenses of P5,000
b. Petty cash fund of P5,000
c. No entry
d. Cash in bank of P5,000

Answer 15

a.

Question 16

An entity established a petty cash fund of P10,000, had expenses of P5,000. The journal entry for the incurrence of expense under the fluctuating fund involves a debit to:

a. Expenses of P5,000
b. Petty cash fund of P5,000
c. No entry
d. Cash in bank of P5,000

Answer 16

b.

Question 17

An entity established a petty cash fund of P10,000, had expenses of P5,000. The entity replenished the fund and the journal entry recorded accordingly. If the entity wants to increase the petty cash fund balance by P3,000, the entries would be to debit petty cash fund and cash under which method?

a. Imprest fund system
b. Fluctuating fund system
c. Choices a and b
d. No entry (memorandum entry only)

Answer 17

c.

Question 18

These are items representing collections other than deposits which are already recognized per bank statements, but are not recorded per books.

a. Debit memo
b. Credit memo
c. Deposits in transit
d. None of the choices

Answer 18

b.

Question 19

These are items representing deductions other than withdrawals which are already recognized per bank statements, but are not recorded per books.

a. Debit memo
b. Credit memo
c. Deposits in transit
d. None of the choices

Answer 19

a.

Question 20

While comparing an entity’s book balance of cash in bank, the entity noticed that the amount per bank statement is lower than the ones reported per book. Assuming no errors were made and no adjusting entries were made yet, the entity could deduce that:

a. The bank collected a promissory note plus interest
b. The entity made a deposit beyond the bank’s cutoff time
c. The bank returned a customer check to the entity, reason being “drawn against insufficient funds”
d. None of the choices

Answer 20

c.

Choice c is a debit memo in the form of an NSF/DAIF check

Question 21

BPI made an erroneous debit to JKL Co’s account. What is the effect of this transaction assuming that this is the only error made and that there have been no reconciling items made (i.e. all transactions are recorded except for the said error)?

a. Bank balance is overstated
b. Book balance is overstated
c. Bank balance is understated
d. Book balance is understated

Answer 21

c.

For example:

Balance per book (also should-be adjusted balance) = P220,000
Balance per bank (error included) = P218,000

Since the error is included here, the should-be balance is P220,000. The bank is lacking P2,000 because of the erroneous debit/deduction on the part of BANK. Thus, bank should add back P2,000 to the bank account.

Question 22

BPI made an erroneous debit to JKL Co’s account. Assuming that the ending balance of JKL Co.’s Cash in Bank - BPI is also the adjusted balance (only BPI has made the error and no reconciling items exist), what action should JKL do?

a. Do nothing
b. Increase bank balance per books
c. Decrease bank balance per books to reflect that of bank
d. Increase bank balance per bank statement

Answer 22

a.

Remember: BPI (not JKL) made the error. Since this is the case, JKL must not do anything in its books. Choice d. is the proper answer if the question pertains to BPI’s ACTIONS. However, since what is implied here is of JKL, they must do nothing, since JKL is not BPI. Remember: economic entity theory.