NORTHEASTERN COLLEGE

Santiago City, Philippines

UPDATES IN FINANCIAL REPORTING STANDARDS

Jimmy I. Peru, JD,MBM,MICB,CPA

CASH AND CASH EQUIVALENTS

A. Cash. 7. Undelivered checks at the end of the reporting period

1. Cash is the standard medium of exchange in business
transactions.
2. To include as cash, it must be unrestricted in use.
3. Composition of cash
a. Coins – 10, 5, .25, .10, .05, .01
b. Currency – 1000, 500, 200, 100, 50, 20
c. Available funds on deposit at the bank
(1) checking accounts
(2) savings accounts
d. Negotiable instruments
(1) bank drafts
(2) money orders
(3) checks
i. certified check
ii. cashier’s check
iii. manager’s check
iv. traveler’s check
e. Cash Equivalents – (PAS 7) are short term and highly
liquid investments that are readily convertible into
cash and so near their maturity that they represent
insignificant risk of changes in value because of
changes in interest rates.
i. Three-month BSP treasury bill
ii. Three-year BSP treasury bill purchased three
months before date of maturity
iii. Three-month time deposit
iv. Three-month market instrument
commercial paper
4. Money Market Instruments
a. Treasury bills (issued by the government)
b. Treasury bonds (issued by the government)
c. Treasury notes (issued by the government)
d. Commercial paper (issued by corporation of good credit
rating)
e. Time deposit (issued by a bank or cooperative)
5. Presentation of Money Market Instruments
a. Cash Equivalents – investments with original
maturities of 3 months or less.
b. Temporary Investments – investments with maturity
of more than 3 months to 12 months
c. Long-term Investments – investments with maturity
of more than 12 months
6. Items which are NOT cash.
a. Postdated checks, NSF checks and IOUs should be
listed as receivables.
b. Travel advances and postage stamps should be
reported as prepaid expenses.
c. A bank overdraft should be reported as a current
liability, unless there are sufficient funds in another
account with the same bank to cover the overdraft,. If
there are, overdraft maybe offset against cash.
d. Equity securities cannot qualify as cash equivalents
because shares do not have a maturity date.
(1) Preference shares with specified redemption date
and acquired 3 months before redemption date
can qualify as cash equivalent.
Jimmy I. Peru, Juris Doctor,MBM,MICB,CPA
should be included in cash.
8. Information about compensating balance should be
included in the financial statement notes. (see section F)
9. Foreign currency
a. Cash in foreign currency should be translated to
Philippine Pesos using the current exchange rate.
b. Deposits in foreign currencies which are not subject
to any foreign exchange restriction are in included in
cash.
c. Deposits in foreign currencies which are subject to
foreign exchange restriction, if material should be
classified separately among noncurrent assets and the
restriction is clearly disclosed.
B. Financial statement presentation.
a. A single “cash and cash equivalents” balance is
usually reported.
b. Cash is reported at its face value.
c. Cash is usually listed first in the current asset section.
d. Restricted cash should be reported in the investments
section. (see section F)
C. Management of cash.
1. Effective cash management involves a balance between
risk and profitability.
or a. Too little cash on hand runs the risk of not meeting of
obligations.
b. Too much cash on hand leads to missed earnings.
2. Effective cash management requires careful planning and
control.
a. The major tool of cash planning is the cash budget, an
internal statement of projected cash flows.
D. Petty Cash.
1. As a general rule, all business payments should be
made by check, but this is impractical for some small
payments.
2. Some small payments may be handled through a petty
cash fund.
a. Imprest fund-- A fund that is established for a
fixed amount.
(1) A petty cashier is appointed.
(2) The fund is established by a debit to Petty Cash
Fund and a credit to Cash in Bank.
(3) Money is disbursed from the fund in exchange
for a receipt. No entry is made.
(4) When the cash is low, the fund is replenished.
The receipts are removed and cash is added to
achieved the total fund amount. An entry is made
to record the expenses (debit) represented by the
receipts and to credit Cash.
(5) The Cash Short and Over account is used when
the amount of the receipts do not match the
amount of cash disbursed from the fund.
(a) Any difference usually results from errors in
making change or failing to get a receipt for
very small amounts.
(b) At the end of the period, a small debit
balance in Cash Short and Over is classified
CASH AND CASH EQUIVALENTS page 1
 as Miscellaneous Expense on the financial
statements. A credit balance is
Miscellaneous Revenue. A material
shortage is classified as a receivable if
recovery is expected and as a loss if no
recovery is expected.
(6) If the fund is not replenished at the end of the
period, the receipts should be still be removed
and recorded as expenses, but the credit is to
Petty Cash.
(7) A change in the basic petty cash amount should
be made if it runs out early or lasts too long.
E. Cash in Bank.
1. A business should keep most of its cash in the bank.
Cash on hand normally includes only petty cash,
change funds and undeposited receipts.
2. Keeping the cash in the bank provides a double
record of cash transactions.
3. A bank reconciliation should be prepared each time a
bank statement is received, to verify the cash in the
bank and to determine any necessary journal entries.
4. A bank reconciliation is a schedule that explains any
differences between the bank’s record of the cash in
the account and the company’s record of the cash in
the account.
a. Undeposited collections.
b. Bank collections for the company.
c. Bank charges, such as service charges.
d. Errors by the bank or the company.
5. The preferred format is to reconcile both the bank’s
balance and the company’s balance to the corrected
balance.
6. Journal entries will generally be necessary once the
bank reconciliation is complete in order to update the
company’s records. These entries are based on the
information in the “balance per books” section.
7. A bank reconciliation should be prepared for each
checking account.
8. The amount listed as cash at the end of the reporting
period will be the sum of all checking account
balances plus any cash on hand.
9. Proof of cash. An expanded reconciliation in that it
includes proof of receipts and disbursements.
a. Four-column bank reconciliation:
(1) Reconciliation of beginning balances.
(2) Reconciliation of checks for the current
month.
(3) Reconciliation of receipts for the current
month.
(4) Reconciliation of ending balances.
b. The proof of cash is a stronger control because it
provides a reconciliation of transactions as well
as cash balances.
c. This approach is particularly useful when there
have been cash transferred between accounts.
F. Restricted Cash
1. Compensating Balances- a portion of any demand
deposit maintained by a corporation which constitutes
support for existing borrowing arrangements of the
corporation with a lending institution.
a. legally restricted deposits held as compensating
balances against short term borrowing
arrangements be stated separately among the
“cash and cash equivalent items” in Current
Assets as “cash held as compensating balance”
b. legally restricted deposits held as compensating
balances against long-term borrowing
arrangements be stated separately as noncurrent
investment.
c. Arrangement without legal restriction should be
classified as cash with disclosure.
Jimmy I. Peru, Juris Doctor,MBM,MICB,CPA
2. Other types of Restrictions
a. Cash set aside for a particular purpose. These
fund balances are not material and therefore, are
not segregated from cash when reported in the
financial statement.
(1) Petty Cash Fund
(2) Payroll Fund
(3) Tax Fund
(4) Dividend Fund
b. Cash classified as noncurrent asset:
(1) plant expansion fund
(2) long-term debt retirement fund
(3) insurance fund
(4) contingent fund
(5) sinking fund.
G. Malpractices related to handling of cash
1. Window-dressing. It is the showing of a better picture
of the financial highlights and profit activities of the
company through deliberate misstatement of the
assets, liabilities, capital, income and expenses. It is
usually accomplished 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.
2. Lapping
a. This is a practice used for concealing a cash
shortage. It consists of misappropriating a
collection from one customer and concealing this
defalcation by applying a subsequent collection
made from another customer.
b. Lapping involves a series of postponements of
the entries for the collection of receivables. This
is possible when a company has poor internal
control and especially when the bookkeeper and
cashier are one and the same person.
3. Kiting
a. It is another device used to conceal a cash
shortage. This practice is possible when a
company maintains current accounts in different
banks. Kiting is usually employed at the end
of the month. It 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. No entry is made for both the
drawing and deposit of the check.
b. This fraudulent device is made possible because
when the check is drawn against the first bank at
the end of the month, the bank statement for such
month does not yet show the check drawn
because the said check is yet to be cleared or
presented for payment to the first bank. As such,
the cash balance in the first bank at the end of the
month is not affected.
c. On the other hand, when the check is deposited
in the second bank at the end of the month, the
bank statement for such month will already show
the deposit thereby increasing the cash in said
bank and covering the cash shortage therein.
d. This practice is uncovered by simultaneous
preparation of bank reconciliation statements.
APPENDIX
A certified check is a form of check for which the bank
verifies that sufficient funds exist in the account to cover the
CASH AND CASH EQUIVALENTS page 2
check, and so certifies, at the time the check is written. Those
funds are then set aside in the bank's internal account until the
check is cashed or returned by the payee.
A cashier's check (managers check, bank draft, treasurer's
check) is a check guaranteed by a bank, drawn on the bank's
own funds and signed by a cashier. Cashier's checks are treated
as guaranteed funds because the bank, rather than the
purchaser, is responsible for paying the amount. They are
commonly required for real estate and brokerage transactions.
A traveler's check is a preprinted, fixed-amount check
designed to allow the person signing it to make an
unconditional payment to someone else as a result of having
paid the issuer for that privilege. They were generally used by
people on vacation instead of cash as many businesses used to
accept traveler's check as currency. If a traveler's check were
lost or stolen, they could be replaced by the issuing financial
institution. Alternatives, such as credit cards, debit
cards and automated teller machines became more widely
available and were easier and more convenient for travelers.
Jimmy I. Peru, Juris Doctor,MBM,MICB,CPA
A check sold by a post office for payment by a third party for a
customer is referred to as a money order or postal order.
These are paid for in advance when the order is drawn and are
guaranteed by the institution that issues them and can only be
paid to the named third party. This was a common way to send
low value payments to third parties, avoiding the risks
associated with sending cash via the mail, prior to the advent
of electronic payment methods.
Oversized checks are often used in public events such as
donating money to charity or giving out prizes. The checks are
commonly 18 by 36 inches (46 cm × 91 cm) in
size. Regardless of the size, such checks can still be redeemed
for their cash value as long as they have the same parts as a
normal check, although usually the oversized check is kept as
a souvenir and a normal check is provided. A bank may levy
additional charges for clearing an oversized check.
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