CASH AND CASH EQUIVALENTS

INCLUSION AND EXCLUSIONS

Cash: money and any other negotiable instrument that is payable in money and
acceptable by the bank for deposit and immediate credit (face value)

financial asset also a financial instrument (contract that gives rise to a financial
asset of one entity)

Most liquid asset (readily convertible to cash)

includes checks, bank drafts and money orders

To be reported as "cash" or the criteria, an item must be unrestricted in use or

readily available in the payment of current obligation (purpose of the cash)

Entity shall classify an asset as current when the asset is cash or a cash
equivalent unless it is restricted to settle a liability for more than twelve
months after the end of the reporting period.

Even if the cash is restricted if it is used for the normal operation of the
company it will classified to the current asset

💡 When problem is silent, the assumption is you are going to compute for
the current assets

Cash items included in cash

a. Cash on hand: includes undeposited cash collections and other cash items
awaiting deposit e.g customer's checks, cashier's or manager's check, bank
drafts and money orders (postal money order)

Money orders: used as a form of payment Post Office, Western Union)

Cashier's check: assures the payee that the funds are there because
the check is backed by the bank's funds, not the payer's bank account.
: Certified by the bank employees and officer

CASH AND CASH EQUIVALENTS 1

 Traveler's checks: purchesed for set amounts and can be used to buy
goods or services or be exchanged for cash

b. Cash in bank: includes demand deposit or checking account and saving

deposit w/c are unrestricted as to withdrawal (needed input: adjusted balance)

Post-dated check: unacceptable by the bank for deposit and immediate

credit or outright encashment as it is written w/ a future date

Stale checks: presented to be cashed or deposited at a bank 6 months

more after the date it was written

Date written in the check is the date you can encash the checks

c. Cash fund: working funds segregated for current purposes:

a. Petty cash fund: fund that is set aside for minor or small expenditure
(restricted)

Coins, bills, replenishment and employee checks (included in petty

cash fund; included in CA

b. Change fund

c. Payroll fund
d. Dividend fund
e. Tax fund
f. Interest fund

d. Unrestricted compensating balances: need to maintain in the bank that is

imposed by the creditor (short-term)

Cash Equivalent: short-term and highly liquid investments that are readily
convertible into cash and near their maturity that present insignificant risk of
changes in value bcos of changes in interest rates

matures 3 months or less from the date of acquisition

Short term/temporary investement: matures less than 1 year from the date of
acquisition

Long term investment: matures more than 1 year from the date of acquisition

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 Temporary investments in equity shares are not included as part of cash
equivalents because these securities do not have maturity dates.

Reedemable Preference share w/ mandatory redemption (debt instrument)

period can be reported as cash equivalent provided these are originally
invested or acquired for three months or less before maturity date

Examples:

Treasury Bills

Commercial Paper

Money Market funds

Time Deposit

Presentation and Measurement

CASH AND CASH EQUIVALENTS should be shown as the first item among current
assets in the Statement of Financial Position Balance Sheet)

CASH AND CASH EQUIVALENTS 3

 Restricted Cash

Segregated restricted cash from "regular" cash

Current asset or non-current asset

Consideration in reporting cash balance in balance sheet:

Foreign currency: if unrestricted, it should be translated to Philippine

currency using the exchange rate at the end of the reporting period. If
restricted as to withdrawal, then it should be reported as non current asset

Bank Overdraft: when a company writes a check for more than the amount
in its cash account Cash in bank credit balance) . Reported as current
liability, but not permitted in the Ph

CASH AND CASH EQUIVALENTS 4

 Example:

WASHURPROBLEM Co. had the ff cash balance items listed in its trial
balance at 12/31/14

BDO savings and loan P50,000

RCBC Bank 5,000

Metrobank 10,000

If WASHURPROBLEM Co. reports under PFRS, its 12/13/14 balance

sheet would show that cash balance?

P60,000 - The credit balance of P5,000 should be recorded under

liabilities

For example, an entity maintains two bank accounts:

a. Cash in Bank - First Bank, w/c is overdrawn by P10,000

b. Cash in Bank - Second Bank, w/ a debit balance of P100,000

The net cash balance is P90,000

Entry:
Current Asset:

Cash in bank - Second Bank 100,000

Current Liability

Bank overdraft - First Bank 10,000

CASH AND CASH EQUIVALENTS 5

 Cash in closed banks or in banks having financial difficulty or in bankruptcy:
should be reclassified as receivables and should be written down to its
recoverable amount

Customer's Post-dated checks, NFS No Sufficient Fund Checks): should be

reported as receivables rather than cash. NSF checks in the ph are often
described as DAIF Drawn Againts Insufficient Funds) and DAUD Drawn
Against Unclear Deposits) checks

Entry:

Account Receivable xxx

Cash xxx
IOU's I Owe You notes)

Entry:

Advances to Employees xxx

Cash xxx

Postage Stamps and expense advances: reported as prepaid expenses

Undelivered or Unreleased Checks: company's checks drawn recorded as

disbursed but are not actually issued or delivered to the payees as of the
reporting period

Should not be deducted from the company's cash balance until they have
been mailed or otherwise delivered, these should be reverted to the cash
balance

As a result, liabilities that the checks are intended to liquidate still exist
and should be reported as current payables

CASH AND CASH EQUIVALENTS 6

 Entry:

Cash xxx

Accounts Payable xxx

Postdated Checks delivered: company's check w/c has been recorded as

issued and delivered to payee before or at the end of the reporting period, but
the date is later than the current date

Should be reverted to cash and the corresponding liability shall continue to

recognized, because there is no actual payment

Entry:
Cash xxx

Accounts Payable xxx

Stale Check or Check Long Outstanding: not encash by the payee within six
months from the time of issuance.

Entries:
Stale check is immaterial
Cash xxx

Miscellaneous Income xxx

Amount is material and liability is expected to continue

Cash xxx
Accounts payable xxx

Compensating balance: are minimum amounts that a company agrees to

maintain in a bank checking account as support or collateral for a loan by the
depositor

Not legally restricted: the amount is reported as part of Cash. Disclosed in

the notes of the financial statements

CASH AND CASH EQUIVALENTS 7

 Legally Restricted: the amounts should be classified separately either as
current asset or non-current asset depending on the nature of the loan

Cash set aside for long-term specific purpose or acquisition of a non-

current asset: reported as non-current asset

Cash Management

requires controls to protect cash from loss through theft or fraud.

System of Cash control:

Segregation of duties for handling cash and recording cash transactions

COR - Custody, Operating, Recoding)

Imprest System:

Daily deposit of all cash receipt intact to the bank

All disbursements should be in the form of checks (lahat ng lalabas na

pera thru checks)

Expenditures involving small amounts are made from Petty Cash Fund

Voucher System: all disbursements must be supported by properly

approved vouchers, w/c must be recorded in the voucher register (paper
trail that documents the event of the cash)

Internal Audits at Irregular intervals

Periodic Bank Reconciliation (balance in the bank and the book)

Bad deeds in Cash Management

Window Dressing

opening the books of accounts beyond the close of the reporting period for
the purpose of showing a better financial position

Entries made to window dress must be reversed to correct the statements

It is usually accomplished as follows:

a.) By recording as of the last day of the reporting period collections made
subsequent to the close of the period

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 b.) By recording as of the last day of the reporting period payments of
accounts made subsequent to the close period

Lapping

Used for concealing cash shortage by misappropriating a collection from one

customer and concealing this defalcation by applying a subsequent collection
made from another customer

Involves a series of postponements of the entries for the collection of

receivables

Kiting

Used to conceal a cash shortage

Employed at the end of the month

An entity maintains current accounts in different banks in which check is a

check is drawn against a first bank and depositing the same check in a second
back to cover the shortage

NO ENTRY is made for both the drawing and deposit of the check

Accounting for Cash Shortage

Entry when cash count shows cash is less than the balance per book:
Entry:
Cash short or over xxx

Cash xxx

Cash short or over account is only a temporary or suspense account w/c

means that when financial statements are prepared the same should be
adjusted or closed to appropriate account

Entry:
Cash short or over xxx
Cash xxx

Undetermined shortage

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 Adjustment entry if the cashier or cash custodian is held responsible for cash
shortage:
Entry:

Recievable/Due from cashier xxx

Cash short or over xxx

Cashier is accountable

Adjustment entry if reasonable efforts fail to disclose the cause of the

shortage or cannot locate:
Entry:

Loss from cash shortage xxx

Cash short or over xxx
Cannot locate; immaterial

If the cash shortage is not material, it can be debited to miscellaneous

expense)

Accounting for Cash Overage

Entry when cash count shows cash w/c is more than the balance per book:
Entry:

Cash xxx
Cash short or over xxx
Undetermined overage

Adjusted entry if the cash overage has no claim:

Entry:

Cash short or over xxx

Other revenue xxx

Cannot locate; immaterial

Adjusted entry if the cash overage is found to be the money of the cashier:

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 Entry:
Cash short or over xxx

Payable to cashier xxx

Found to be of the cashier

CASH AND CASH EQUIVALENTS 11