CHAPTER

BLUE NOTES
2 S
L
Cash Cash Equivalents
Definition Definition
It includes money and any other These are short-term and highly liquid investments that are readily
negotiable instrument that is payable in convertible into cash and so near their maturity that they present
money and acceptable by the bank for insignificant risk of changes in value because of changes in interest rates.
deposit and immediate credit. (PAS 7, par. 6)
Only highly liquid investments that are acquired three months before
 Checks maturity can qualify as cash equivalents.
 Bank Drafts
 Money Orders  3-month BSP Treasury Bill
 Petty Cash Fund  BSP Treasury Bill (more than 3 months) purchased 3 months before
 Payroll Fund maturity date
 Travel Fund  3-month Time Deposit
 Interest Fund  3-month Money Market Instrument
 Dividend Fund  Preference shares (with specified redemption date) purchased 3
 Tax Fund months before redemption date
 Sinking Fund  Equity securities – no maturity date
 Preferred Redemption Fund
 Plant Expansion Fund
 Insurance Fund

Valuation
In Local Currency In Foreign Currency If Recoverable Value < Face Value*
= Face Value = Current Exchange Rate = Estimated Realizable Value
Note: *Cash in bank or in financial institutions having financial difficulty or in bankruptcy should be shown at its recoverable value.

Financial Statement Presentation

Aggregate cash and cash equivalents should be shown as the 1st line item among the current assets.
Details comprising the cash and cash equivalents should be disclosed in the notes to financial statements.

Financial Statement Classification

Classified as Cash and Cash Equivalents Classified as a separate line item
1. Unrestricted/Current Use Restricted/Noncurrent Use → Long-term Investment
Note: Classification of cash fund as current or noncurrent should parallel the classification of the related liability.
If material, foreign bank deposits subject to foreign exchange restriction shall be classified separately among noncurrent
assets and restriction clearly indicated.
2. Investment in Time Deposit, Money Market Instrument and Treasury Bills
If Term ≤ 3 months 3 months < Term ≤ 1 year → Short-term Investment
Term > 1 year → Long-term Investment
Note: There is an assumption of 3 month-term when the problem does not specify.

Practical Accounting 1 Theory of Accounts

Chapter 2 – Cash and Cash Equivalents USL Blue Notes 9

3. General Rule: Bank overdraft (Credit Balance Bank Account) → Current Liability
Exception: It can be an offset against other bank account if the amount is immaterial and/or when the
entity maintains 2 or more accounts in 1 bank.

4. Informal Compensating Balance Formal Compensating Balance

─ not legally restricted ─ legally restricted
If related loan is short-term → Cash held as compensating
balance
If related loan is long-term → Noncurrent Investment
Note: In the absence of any information, compensating balance is always considered not available for an unrestricted use.

Restoration of Cash Balance from: Check as payment Check as receipt

Unreleased Check ↑Cash ↓Account Payable ↓Cash ↑Account Receivable
Postdated Check ↑Cash ↓Account Payable ↓Cash ↑Account Receivable
Stale Check* ↑Cash ↓Account Payable ↓Cash ↑Account Receivable
Note: *A check becomes stale if not encashed within 6 months from the issuance date. However, the entity may issue a “stop payment order”
for cancelation of stale check even for less than 6 months.

Misstatement Practices Concerning Cash Balance:

1. 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.
2. Lapping consists of misappropriating a collection from one customer and concealing this defalcation when
collection is made from another customer.
3. Kiting is a transfer of cash from one bank to another bank usually employed at the end of the month.

Petty Cash Fund

1. Imprest Fund System
Petty cash expenses are recorded upon replenishment.
Replenishment amount = Petty cash disbursements
2. Fluctuating Fund System
Petty cash expenses are immediately recorded.
Replenishment amount = or > or < Petty cash disbursements

Bank Reconciliation
Book reconciling items
1. Credit Memos – deposits credited by the bank; not yet recorded as cash receipts in books
2. Debit Memos – checks debited by the bank; not yet recorded as cash disbursements in books
Bank reconciling items
1. Deposits in transit – already recorded as cash receipts in books; not yet credited by the bank
2. Outstanding checks – already recorded as cash disbursements in books; not yet debited by the bank
Forms
1. Adjusted balance method – book balance and bank balance → correct cash balance
2. Book to bank method
3. Bank to book method

Proof of cash is an expanded reconciliation in that it includes proof of receipts and disbursements.

Theory of Accounts Practical Accounting 1

10 USL Blue Notes Chapter 2 – Cash and Cash Equivalents

Illustrative Problem
1. On December 31, 2014, the cash account of Maktech Company showed the following details:
Undeposited collections 60,000
Cash in bank – PCIB checking account 500,000
Cash in bank – PNB (overdraft) (50,000)
Undeposited NSF check received from the customer, dated Dec. 1, 2014 15,000
Undeposited check from a customer, dated Jan. 15, 2015 25,000
Cash in bank – PCIB (fund for payroll) 150,000
Cash in bank – PCIB (saving 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 shares held as trading investment 120,000
Petty cash fund (all funds were reimbursed on 12/31/2014) 50,000
Time deposit (due February 1,2015) 250,000
Treasury bills 1,000,000
Traveler’s check 50,000

Solution:
Undeposited collections 60,000
PCIB checking account 500,000
PCIB payroll fund 150,000
PCIB saving deposit 100,000
Petty cash fund 50,000
Time deposit 250,000
Treasury bills 1,000,000
Traveler’s check 50,000
PCIB money market 2,000,000
Total cash and cash equivalents 4,160,000

Practical Accounting 1 Theory of Accounts