Gash and Gash Byutoclente Tey aaa aaa Chapter 2 Cash and Cash Equivalents Learning Objectives 1. Define cash and identify the items that are included in the “Cash and Cash Equivalents” line item. : 2. Account for petty cash funds and cash shortages/overages. Definition of cash “Cash includes money or its equivalent that is readily available for “unrestricted use. Money is the standard medium of exchange and “the basis of accounting measurements. Other negotiable instruments that can be used to settle obligations and are readily available for unrestricted use may form part of cash. Cash includes cash on hand and in banks. a — refers to undeposited collections awaiting deposit and other current funds held as of the reporting date. . Cash in bank — refers to deposits in banks that are available for immediate withdrawal and unrestricted use. Examples of cash: 1. Coins and currencies ; 2. Demand deposits (checking or current accounts) and savings accounts 3. = guarantees by bank to advance funds on the ‘demand by the party to whom the draft was directed 4, Money orders ~ similar to bank drafts but are drawn from post "offices or other financial institutions. 5. ~ such as Cashier’s checks, Personal checks, Manager's checks, Traveller's checks, and Certified checks received from ‘customers or other external parties. ° 6. Cash funds set aside for use in current operations, such as: a. Petty cash fund ell| None Chapter 2 400 Revolving fund Payroll fund Change fund Dividend fund Tax fund . Travel fund . Interest fund other types of imprest bank accounts used in current operations Frame aos > Revolving fund is a fund similar to the petty cash fund but is used for a limited or specific purpose set by management (eg, revolving funds held by sales representatives and revolving funds held by field engineers in a construction firm). > Tax fund is a fund set aside to be used in paying taxes. Examples of items not included as cash: is ecks ~ checks dated at a future date. 2. ivances to employees 3. Cash funds not available for use in current operations, such as Sinking fund, Plant expansion fund, Depreciation fund, Preference share redemption fund, Contingency fund, and Insurance fund. 4. Postage stamps > Postdated checks and IOU’s (‘I owe you’) or advances Fo employees are treated as receivables. epreciation fund is a form of asset replacement fund wherein cash payments to the fund are equal to the periodic depreciation charges on the related asset. When the asset is fully depreciated, the fund can be used to acquire 2 replacement. ~ Restricted funds that are excluded from cash are commonly presented as part of “other assets.” > Unused posinge stamps are treated as prepaid suppliesCash and Cash Equivalents a Postdated checks received Postdated checks received by an entity do not qualify as cash because postdated checks are mot presently available for immediate use. They will only be available for use at a future date. Entities normally record check collections on account by debiting “Cash” and crediting “Accounts receivable,” regardless of whether the checks received are postdated or not. Thus, at the reporting date, an adjustment is necessary to revert back postdated checks to accounts receivable. oar Example: z You received customers’ checks totaling P100,000. The entry to record the receipt of the checks is as follows: Date | Cash 100,000 Accounts receivable 100,000 At the end of reporting period, you determined that a sstomer’s check of 20,000, included in the collections, is tdated. adjusting entry is as follows: Accounts receivable 20,000 Cash 20,000 You will report cash of P80,000 (100,000 less postdated k of 20,000) in your financial statements. You might ask “why would I record the postdated check as collection when it is not yet available for use?” Well, it is for internal control purposes and convenience of recording. If not recorded, the check might not be presented on time for encashment on due date. You might even forget about the check, misplace it, or someone might take it, and so on. Furthermore, maintaining separate records for postdated checks may be» cumbersome. (uc dan sory,Chapter? AA ee a ae the period of time before checks become stale is a matter o company policy. Stale checks are reverted back to cash. 4© Remember the following concepts: > Cash includes money or its equivalent that is readily availabe for unrestricted use. > Postdated check received | * Exclude fromcash. | from customer. | > Undelivered check drawn. @ Include in cash. 1 > Postdated check drawn. = Include in cash. Stale checks & Include in cash. Cash equivalents Cash equivalents are “short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.” (PAS 76) Only debt instruments acquired within 3 months or less before their maturity date can qualify as cash equivalents. Examples of cash equivalents: a. Treasury bills, notes, or bonds acquired 3 months before maturity date > government at a discount. ills normally have a maturity of 90. days to less than a year. > Treasury notes and treasury bonds are long-term obligations issued also by the government. Treasury notes have 4 maturity of 1 year to less than 10 years. Treasury bonds shave a maturity of 10 years or more. b. Money market instrument or commercial paper acquired 3 months before maturity date > Money market instruments are investments in portfolios of short-term securities. Faw 3 » Commercial papers consist of short-term, unsecured, notes Payable issued in large denominations by large companies with high credit” ratings to other companies and institutional investors. The maturity date of commercialCash and Cash Equivalents ‘quivalents S Paper is normally less than 270 days and is traded in money markets and; thus, is-highly liquid. A commercial Paper acquired 3 months or less before its maturity date may qualify as cash equivalent. c. Samonth time deposit ' » Time deposit is a form of a bank deposit normally made in fixed denomination, bears interest higher than that of regular deposits, and has a pre-agreed maturity. A time deposit is evidenced by a certificate of deposit. Ilustration: Cash equivalents “ABC Co. holds the following short-term investments as of December 31, 20x1: 1) 1-year Treasury bill maturing on March 30, 20x2 acquired on July 1, 20x1. ; 2) 1-year Treasury bill maturing on March 30, 20x2 acquired on December 31, 20x1. Requirement: Which of the investments may qualify as cash equivalent? Answer: » Only the second T-bill qualifies as cash equivalent because it is acquired 3 months or less before maturity date, ic., acquired on December 31, 20x1 and matures on March 30, 20x1. > The first T-bill does not qualify as cash equivalent because it is acquired more than 3 months before maturity date, ie., acquired on July 1, 20x1 and matures on March 30, 20x2 - acquired 9 months before maturity. Note that what is important is the date of acquisition which should be 3 months or less before maturity date.id y 6 Chapter2 Checks and equity securities : Checks and bank drafts cannot qualify as cash equivalents because these are not short-term investments. When checks and bank drafts are available for unrestricted and immediate use, they are included as cash but nof as cash equivalents. Equity securities (investments in stocks) cannot qualify as cash equivalents because shares of stocks do not have a maturity date. DE i) aa Oe a " However, redeemable preference shares (preference shares with mandatory redemption) that are acquired 3 months or less before their specified redemption date may qualify as cash equivalents. This is because redeemable preference shares are debt instruments rather than equity instruments. Financial statement presentation — Cash and cash equivalents are normally presented as_current assets unless they are restricted from being exchanged or used to ‘settle a liability for at least twelve months after the reporting period. Unrestricted cash and unrestricted cash. equivalents are combined and presented on the statement of financial position in a single line item described as “Cash and cash equivalents.” The breakdown of the line item is disclosed in the notes, rg oe Restricted cash is excluded from cash and presented under other line item as either currenor non-current asset depending on the nature of the restriction. For example, restricted cash with restriction of more than 12 months may be presented under noncurrent assets.” Measurement of cash _ Cash is measured at face amount (face-value). Cash denominated in foreign currency is translated at the current exchange rate at the reporting date, Bate ot a intained in a bank undergoing bankruptcy is excluded from cash and presented as receivable measured at lizable value, Realizable value is the amount expected to be recovered from the deposit and is determined usually by reference MM ga, etCash and Cash Equivater 47 alte to the insured amount of the deposit, Ifthe realization is cleferred, the amount is discounted to its present value. Deposit in for Unrestricted "foreign banks that are available for t immediate withdrawal are included as cash at face amount translated at the current exchange rate as of the reporting date. Restricted deposits in foreign banks that are not available for immediate withdrawal are excluded from cash and presented as receivable subject to appropriate allowances for. uncollectability and impairment. The classification of the restricted deposit as current or noncurrent depends on the nature of the restriction, The nature of the restriction is disclosed i in the notes. Compensating balance _ Compensating balance is a minimum amount that must be maintained in an ents. bank account as support for funds borrowed from th compensating balance can be used by the bank as ‘cushién = ie days when cash demands are greatest and deposits fail to materialize. Compensating balances that are legally restricted as to withdrawal by the borrower are excluded from cash and shown as part of other current assets or other noncurrent assets depending on the nature of the restriction. ‘Compensating balances that are not legally restricted as to withdrawal are included in cash. Whether restricted or not, compensating, balances are disclosed in the notes. _ Compensating balances increase both the yield rate for the, Jender and and the ¢ effective interest rate for the borrower., 4© Remember the following con > Cash equivalents - debt instruments acquired 3 months or less before maturit > The line item “Cash and cash equivalents” includes only unrestricted cash and cash equivalents. Restricted cash is presented under other line item, eg, receivable or other assets, depending on the nature of the restricted cash.48. Chapter 2 RA ee Qt Illustration: Cash balance The books of ABC Co. show the following balances at December 31, 20x1: ’ Cash on hand P 100,000 Cash in Bank ~ current account 350,000 Cash in Bank - peso savings deposit 2,000,000 Cash in Bank - dollar deposit (unrestricted) $ 100,000 Cash in Bank - dollar deposit (restricted) 20,000 Cash in money-market account , P 250,000” 6-month Time Deposit $ 60,000 Treasury Bill, purchased 12/1/20x1, maturing 2/28/20x2 P 800,000 Treasury Bond, purchased 3/1/20x1, maturing 2/28/20x2 500,000 Treasury Note 200,000 Unused Credit Line 2,000,000 Redeemable preference shares, purchased 12/1/20x1, 370,000 ‘due on 3/1/20%2 Treasury shares, purchased 12/15/20x1, to be reissued on 3/5/20x2 50,000 Sinking fund 200,000 Additional information: Cash on hand includes a P20,000 check payable to ABC Co. dated January 10, 202. During December 20x1, checks amounting to P60,000 and 40,000 were drawn against the Cash in bank - current account in payment of accounts payable. The P60,000 check is dated January 15, 20x2. The P40,000 check is dated December 31, 20x1 but was delivered to the payee only on January 18, 20x2. The Cash in Bank — peso savings deposit includes a deposit in escrow in the amount of P340,000 and a compensating balance amounting to P250,000 which is legally restricted. The Cash in Bank — dollar deposit (unrestricted) account includes interest of $2,000, net of tax, directly credited to ABC Co’s account. The exchange rate at year-end is $1 is to P40. aye dopa - ye drovkeher nitescoh end Cah Dao 3 p 49 Ragadreorent: Compete for the amount of cash and cash equivalents to be reporteal in the AT financial statements, Sakations ‘ * ‘Cast on hand (LOOK ~ 20K postdated! customer check) 80,000 Cast in Bank = current account (BOK + 60K posttated company check + 40K undelivered company check) 450,000 Cashin Bank — peso savings 2M = MOK deposit in exrow* - 22K restricted! compensating balance) 1,410,000 Cash in Bank — dollar deposit ($100K x P40) 4,000,000, Cash in money-market account: 250,000, ‘Treasury bill, purchased 12/1/20N1, maturing 2/28/20\2 Redeemable preference shares, purchased 121/201, due on YUAN Cash amd cash equivalents - adjusted balance Sais: = The postdated check received is excluded while the postdated check drawn and the undelivered check drawn are include d@ amount held in trust ie = party, eg, a a Tequired by a court of law for a pending labor case. This is excluded from cash because it is restricted. se = The restricted compensating balance is excluded from cash. + The Cash in Bank — dollar deposit (restricte) and Sinking fund are excluded from cash because they are restricted. ‘© ~The G-month Time Deposit, Treasury bond, purchased 3/1/20x1, maturing 2/28/20x2, and Treasury Note are excluded because they do not meet the “acquired 3 months or less before maturity” iterion. * The Unused Credit Line is disclosed only in the notes. © The Treasury shares are excluded because these are not assets but rather contra-equity, ie, deduction -in shareholders’ . I50 et Bank overdraft | Bank overdraft (cash overdraft) is a negative (credit) balance in the . wulting from overpayment of checks in cash in bank account rest excess of the amount of deposit. Overdrafts occur.only in checking “accounts; not in savings and time deposits. ne Oyerdrafts are payable on demand; thus, they are presented as current liabilities, ‘except in cases where offsetting is permitted. Some banks offer overdraft privileges on their checking check in excess of accounts, This means that if a depositor writes 2 the bank will advance the required the checking account balance, funds to “cover” the check, rather than have the check “bounce.” Such advances are considered as current liabilities. When two or more bank accounts are maintained in the same bank and one account results to an overdraft, the overdraft may be offset or deducted from the other bank account with a ided the other bank account is also positive balance - provi unrestricted. Offsetting is not permitted if the other bank account with a positive balance is restricted. Bank overdrafts that are repayable on demand and form an ‘integral part of the entity's cash management, are included as component of cash and cash equivalents as deduction or offset. (ras?) ‘An example is the zero-halancing checking account, which is a disbursement account offered by some banks. The account is maintained at zero balance until a check comes in. The resulting overdraft is covered by a transfer from a master (parent) account earning interest. Any resulting overdraft at reporting date due to outstanding checks may be offset to cash. The example above is a form of cash management. Checking accounts do not normally pay interest (or pay interest but at very low interest rates) so entities would rather maintain cash in savings accounts. It should be noted that offsetting of assets and liabilities is appropriate only when permitted by a PERS. Financial assets and financial liabilities may be offset if the entity has both:Cash and Cash Equivalents 51 a. a legal right of setoff; and b. aft intention to settle the amounts on a net basis or simultaneously Illustration: Bank overdraft The cash balance of ABC Co. comprises the following: Cash on hand 100,000 a Cash in bank ~ savings — BPI 200,000 Cash in bank ~ current ~ BPI (80,000) ‘Cash in bank — deposit in escrow - Metrobank 100,000 Cash in bank - current ~ Metrobank (20,000) Cash in bank - current - BDO ' (30,000) _ Total iditional information: Cash on hand includes undeposited collections of P20,000. The cash in bank ~ savings maintained at BPI includes a _ 50,000 compensating balance which is not restricted. quirement: Compute for the amount of cash to be reported in the ancial statements. sh on hand ae 100,000 sh in bank ~ savings — BPI . 200,000 “tates "© Undeposited collections are properly included in cash on hand. = The BPI savings account properly includes the compensating balance because the compensating balance is riot restricted. © The overdraft in the BPI current account can be properly offset with the BPI savings account. ash in bank ~ current ~ BPI (80,000) ijusted balance of cash : 220,00052 Chapter 2 © The overdraft in the Metrobank current account cannot be offset with the Metrobank savings account because the savings account is restricted. The overdraft is presented as current liability while the restricted account may be presented in “other assets.” © The overdraft in the BDO account is presented as current liability. Internal controls over cash “Internal control is any action or process effected by management that is designed to help an entity achieve its objectives. Such objectives may be categorized as follows: a. Reliability of financial reporting, b. Effectiveness and efficiency of operations, c. Compliance with laws and regulations, and d. Safeguarding of assets. Inherent risk is normally higher for_cash compared to other assets because cash is exposed more to risk of theft and other types of fraud. Adequate and effective internal controls should be in place to ensure that cash is reasonably safeguarded. _Examples of internal controls over cash 1. Segregation of incompatible duties’ - The duties of (a) authorization, (b) execution, (c) recording, and (d) custody ~over cash should be be segregated. For example, in a typical organization, purchases are authorized by the manager (authorization), purchases are ‘made by the purchasing department (execution), check payments are released to payees by the treasurer (custody), and purchase transactions are recorded by the accountant (recording). The custody over cash should be given only to the treasurer. Neither the purchasing department, manager, nor the accountant should have access to cash. If the incompatibleCash and Cash Equivalents 53 dutie t ; shea luties are not segregated, the tisk of embezzlentent is greatly increased. 2. Imprest system - The imprest system requires that all_cash receipts should be deposited intact and all cash disbursements should be made through checks. & > Collections should be deposited intact within a reasonable Period of time from the date of collection and should not be used for any type of disbursement > Disbursements should be made through checks and not from cash collections. Disbursements for small amounts are made through the petty cash fund. 3, Bank reconciliation ~ Bank reconciliation should be prepared regularly, immediately upon the receipt of the monthly bank statement, to reconcile on a timely basis the differences between the cash balance per books and the cash balance per bank statement. The differences should be duly investigated and accounted for. Yond ovaye Og Neg da wh ot h counts - Periodic cash counts should be performed to wide reasonable assurance that actual cash tallies with the per records. Reconciliation of any difference should be le immediately after the count. Surprise counts should also performed at irregular intervals as part of internal audit. ‘mum cash balance - Minimum cash balance should be tained, especially for cash funds, sufficient only to defray ific business requirements. For example, entities often ise | rest bank accounts which are amounts specifically set le for a limited purpose, such as for the payment of or taxes. Maintaining excessive cash balances yroll, interest, may increase the risk of embezzlement. 6. ‘ox accounts — Entities often utilize lockbox accounts to dite cash collections and to ensure that cash collections : ns ba i ace sh Sl callChapter 2 SoZ tl ot te | Nebr ee ‘A lookbox is rented for a fee and to remit their payments directly to the ank empties the box at least once a day the entity’s account for collections, are deposited intact. customers are advised lockbox account. The bi and immediately credit: 7. Nonencashment_ of personal checks from petty cash fund — encashment of personal checks from the petty cash fund Should be prohibited to discourage concealment of cash shortages. Yang 8. Voucher system - The voucher system is an internal control over all cash disbursements. Under this system, a voucher is prepared for every cash disbursement in order to ensure that each disbursement is properly authorized, made for a valid expenditure, and properly recorded. Voucher system + Voucher (check disbursement voucher or CDV) is a business document or written authorization that supports every disbursement made by anentity. Supporting documents (e.g, purchase order, purchase invoice, delivery receipt) are attached to the voucher to form the “voucher package.” Unpaid vouchers are filed in the order of their required payment dates so that available cash discounts are not missed. The supporting documents are reviewed and compared to determine their validity before each check disbursement is drawn. The individual preparing the check (i.e,, treasurer) stamps the supporting documents as “paid” to ensure that they are not presented for payment more than once. ‘The check number and journal entry are indicated in the voucher. One check is drawn for each voucher to ensure proper audit trail. Also, vouchers are pre-numbered to help ensure their completeness. Cancelled _vouchers_or cancelled checks are not destroyed or removed from the file,= Accounting for cash shortages and overages When the cash count results to an amount less than the balance per records, there is cash shortage, Cash shortage is initially debited to a suspense account called “Cash shortage or overage” pending proper ‘investigation of the cause of shortage. ‘The shortage is initially recorded as follows: Date] Cash shortage or overage 7 Cash on hand xx When financial statements are prepared the “Cash shortage or overage” account is closed to either a nominal or real account. Suspense accounts should not appear in the financial statements. i Depending on the result of investigation, the shortage may be: a. closed to a “receivable” account if the shortage was due to the fault of an employee; or b. charged to “loss” if the investigation was without merit. The entry to close the suspense account is as follows: Daie | Receivable from cashier/ Loss on cash shortage] xx Cash shortage or overage xx When the cash count results to an amount more than the balance per records, there is cash overage. Cash overage is initially “credited to the “Cash shortage or overage” account pending proper investigation of the cause of overage. f Depending on the result of investigation, the overage may be closed to a “payable” account if the overage was due to cash belonging to an employee that was commingled with the entity’s cash or to “gain” if the investigation was without merit. Concealment of cash shortages Cash shortages are fraudulently concealed in various ways Examples include, but not limited to, the following:e a Ee Chapter 1. Lapping - occurs when collection of receivable from customer is misappropriated and then concealed by apply, a subsequent collection from another, customer. Lapping » made possible when the incompatible duties of recording ay cash custody are combined. N\ © Illustration: Lappin Dec.22 | Cashier/Bookkeeper collects ?10,000 from Customer A, pug money in her purse, and makes no journal entry. Dec.31 | Cahier/Bookkeeper goes on a date with security guard and | spends all money. Tan. | Cashier/Bookkeeper collects P15,000 from Customer B, puts 5,000 in her purse, and makes the following journal entry: Cash 10,000 Accounts receivable ~ Mr. A 10,090 Jan.5| Mr. Auditor comes to audit, confirms only “material” accounts, and won't detect lapping. Mr. Auditor is happy — audit is finished. Cashier/Bookkeeper is happier (LOL- lapping out loud); plans date with janitor. Observe from the above transactions that the misappropriation of the collection from Mr. A is concealed by applying the collection from Mr. B to Mr. A’s account. In effect, the initial discrepancy in Mr. A’s account is transferred to Mr. B’s account. The current discrepancy in Mr. Bs account will then be transferred again to another account when another customer pays (i.e., overlapping). Lapping may be discovered through various audit procedures which may include analytical procedures and confirmation using proper sampling techniques. In the illustration above, if Mr. B’s account is confirmed, he will dispute the balance being confirmed as he had already made payment. This leads to the detection of the lapping, In most cases though, lapping is concealed in more that one account and amounts are broken down into smaller amounts to avoid being selected for audit. Small amounts, even whe? _detected, may still be waived by an inexperienced auditor for further substantive testing due to "immaterality.” Although, technically not considered lapping, cash shortages are often times concealed by improperly writing-off receivables and misappropriating subsequent collections. This is also made possible when the incompatible duties of authorization, recording, and cash custody are combined. 2. Kiting - occurs when cash shortage is concealed by _ overstating the balance of cash. Kiting is made possible by exploiting the float period (ie, the time it takes for a check to clear at the bank where it was drawn), Bost \s word: Kiting normally occurs at month-end when a check is written to transfer funds from one bank account to another bank account where the misappropriation was made. The “fraudster” would include the check as a deposit (addition) to the account where he misappropriated the money. Because of the float period, the check drawn on the other bank account will not yet be reported (not yet deducted) in the month-end bank statement. The overstatement of cash conceals the shortage. ‘A fund transfer should not affect the total cash balance because it just involves transferring funds from one bank account to another. However, by increasing the baldnce of one bank account and not decreasing the other, the cash shortage is concealed. Kiting is done in various ways but there is only one purpose and that is to conceal cash shortage by overstating the cash balance. Cash and Cash Equivalents 57 a ee dl arta Re le PY PL | | | "Illustration 1: Kiting Dec.23 | Bookkeeper draws P100,000 check from Metrobank account for herself. No journal entry is made. Dee 2 | Bookkeeper encashes check and spends all money shopping at Es-em.58 Chapte eS ee oS Dec. 31] Fearing auditors will detect the fraud, the bookkeeper: 1. Draws unrecorded check of P100,000 from BPI account | and deposits it to Metrobank account. The shortage is concealed because Metrobank increases the account | balance upon deposit while the check drawn does not ye, clear at BPI (not yet deducted) until the following month No entry is made until after year-end. 2. Prepares bank reconciliation for BPI account showing no outstanding check Kiting may be detected by preparing a bank transfer schedule, obtaining a cutoff bank statement, or preparing a proof of cash. > >= A bank transfer schedule shows the dates of all transfers of cash among the various bank accounts. Its primary purpose is to help auditors detect kiting. See Illustration below for a sample bank transfer schedule. A cut-off bank statement is a bank statement prepared a few days after month-end. Its purpose is to help auditors verify reconciling items on the year-end bank reconciliation. Proof of cash is discussed in the next chapter. Kiting is done by recording only the receipt portion of the fund transfer but not the disbursement portion. In effect, cash is overstated in order to conceal a shortage. Illustration: Kiting Given the data below, identify the transfers that might indicate kiting. Transfers Disbursement date Receipt date Checks | From | To | Perbooks | Per bank | Per books | Per bank | 100_| BankA | BankB | Dec.30 | Jan.4 | Dec.30_| Jan.3 200_| Banke | BankD | Jan.3 | Jan.2 | Dec.30_| Dec.31 300__| BankB | BankD |" Jan.2 | Jan.2 Jan.2__| Dec.31 400_| Banke [ Banke | Dec31 | Jan.3 | Jan2 | Jan2Cash and Cash Equivalents es oe hts Concepts and procedures: To detect kiting, we will compare the following: 1. Disbursement date per books with the receipt date per books 2. Disbursement date per bank with the receipt date per bank Fund transfers should not affect the total balance of cash. Therefore, receipt per books mist be recorded in the same period the disbursemerit per books is recorded (i.e., plus and minus in the same iod do not affect the cash balance). Similarly, receipt per bank must also be recorded in the same period the disbursement per bank is recorded. > If the receipt is recorded in the current period (December) but the disbursement is recorded in the next period (January), the balance of cash as of year-end (December 31) is overstated i.e., plus without minus overstates the cash balance). This” indicates kiting. > If the receipt is recorded in the next period but the disbursement is recorded in the current period, the balance of cash as of year-end is understated (minus without plus understates cash balance). This does not indicate kiting but rather deposit in transit and/or outstanding check. Analyses: Check #100: Step 1: Transfers Disbursement date Receipt date Check? | From | To | Perbooks | Perbank | Per books | Per bank 100 | BankA | BankB | Dec.30 | Jan | Dec.30 | Jan.3 Disbursement per books and receipt per books are recorded in the same period, ie,, both December of current year ~ “Dec. 30” and “Dec. 30.”Chapter 2 Step 2: = a Disbursement date Receipt date Per books | Per bank | Per books | Per bank Check# | From | To 100 | BankA | BankB | Dec. 30 Jan. 4 Dec. 30 jan. 3) Disbursement per bank and receipt per bank are also recorded in the same period, ie, both January of subsequent year ~ “Jan 4” and “Jan. 3.” Transfers 4 Check #100 does not indicate kiting, although it indicates both a deposit in transit and an outstanding check because the recording per bank came later than the recording per books. Check #200: Step 1: ‘Transfers Disbursement date Receipt date Check | From [To | Per books | Perbank | Per books | Per bank 200 | Banke | BankD | Jan.3 Jan.2 jec. 30 | Dec. 31 Disbursement per books is recorded in the subsequent year, i.e, “Jan. 3,” while receipt per books is recorded in the current year, i.e,, “Dec. 30.” a Check #200 indicates kiting. Cash as of the end of current year is overstated because receipt is recorded in the current year but disbursement is recorded in the subsequent year (a ‘plus’ without a ‘minus’ overstates cash). Check #300: Disbursement per books and receipt per books are recorded in the same period, i.e., both January of subsequent year ~ “Jan. 2” and “Jan. 2.”Cash and Cash Equivalents a ee als e However, disbursement per bank is recorded in the subsequent year, ie, “Jan. 2,” while receipt per bank is recorded in the current year, ive., “Dec. 31.” Check #300 indicates kiting. Cash as of current year-end is overstated because receipt is recorded in the current year but disbursement is recorded in the subsequent year (plus without ‘minus results to overstatement). Check #400: e 3 Wi Disbursement per books is recorded in the current year, ie, “Dec. 31” while receipt per books is recorded in the subsequent period, ie., “Jan. 2.” This results to understatement cash as of year-end (minus without plus results to understatement). Check #400 does not indicate kiting, although it indicates an outstanding check. Jindow dressing. In a broad sense, window dressing is a form of fraudulent financial reporting and not primarily a method of concealing cash shortages. Window dressing occurs when books are not closed at year-eid and transactions in the subsequent period are deliberately recorded in the current in order to improve the entity's financial performance or financial ratios. This fraudulent reporting is also called “cooking the books.” For instance, sales in subsequent period are recorded as current period sales in order to improve the current period’s profit and current ratio or to increase management bonuses that are based on sales. Window dressing can also be used to conceal cash shortages as of the reporting date by: a. including collections in the subsequent period to the current period; or b._ by deferring the recording of current year’s disbursements to the subsequent period.AA eh Egle I ner Petty cash fund 4 mya The imprest system requires all cash receipts to be deposited intag and all cash disbursements to be made through checks. However, requiring cash disbursements for relatively small amounts to by made through checks is inexpedient. Thus, it becomes necessary for an entity to establish a petty cash fund. Petly cash fund (PCF) is money set aside to defray relatively ‘small amounts of cash disbursements. What constitutes a “smal amount is a matter of company policy. For example, an entity may provide for a policy that all disbursements amounting to P5,000 o, more should be made through checks while disbursements below 5,000 may be made through the petty cash fund. Accounting for petty cash fund The accounting procedures for PCF are shown below: a. Petty cash fund is established PCE is established by means of a check in conformance with the imprest system of internal control for cash. The check is typically drawn to the order of a petty cash custodian who is responsible for the custody of the fund. The entry to record the establishment of a petty cash fund is as follows: Date] Petty cash fund A ee } Cash in bank x The amount of PCF initially established is supported by a board resolution. Such amount is fixed, meaning if the original amount established is P10,000 and disbursements during the period reduced the fund balance to P2,000, the amount of subsequent replenishment is P8,000, the amount needed to bring the fund balance back to its original amoutt of P10,000. Any subsequent increase or decrease to the fixed amount of the fund should also be supported by a board resolution.Cash and Cash Equivalents 6 b. Disbursements out of the petty cash fund No journal entries are recorded when disbursements are made out of the petty cash fund. Instead, petty cash payments are initially recorded in a petty cash register (e.g., a log book) and supported by signed petty cash vouchers. The types of éxpenditures that can be paid out of the PCF are normally predetermined by management; thus, petty cash vouchers may require only the authorization of the PCF custodian or the petty cash requester’s immediate supervisor rather than’the entity's CEO. The petty cash requester signs the petty cash voucher to acknowledge the receipt thereof. “Replenishment of petty cash disbursements The PCF is replenished when its balance becomes low. The replenishment is made through check and is supported by a check disbursement voucher (CDV). This time, a journal entry is made for the disbursements during the period that were initially recorded in the petty cash register. The petty cash custodian shall nof retain the supporting documents for replenished petty cash disbursements but rather surrenders them to the accounting department. This is to avoid presenting supporting documents for replenishment more than once. If there is no shortage or overage, the amount of ishment is equal to the petty cash disbursements. repl The entry to record the replenishment is as follows: Date | Various expense accounts xx Cash in bank : xx d. Adjustment for unreplenished fund at reporting date When preparing financial statements, any unreplenished petty cash fund should be adjusted in order not to overstate cash and not to understate expenses.Chapter 2 bk ut A The adjusting entry is as follows: Date | Various expense accounts l Petty cash fund xx e. Subsequent changes in ledger balance of petty cash fund If, subsequently, a board resolution is made to change the ledger balance of the petty cash fund, the entries are: | > To increase the petty cash fund balance: Date | Petty cash fund xx Cash in bank sai > To decrease the petty cash fund balance: Date Cash in bank XX Petty cash fund aot Again, the PCF balance should stay relatively fixed in the absence of a board resolution authorizing a change in its original balance. This is to promote best internal: control over cash disbursements. For example, if the established petty cash fund is P10,000, at any given point of time, the balance of coins and currencies and petty cash vouchers in the petty cash box should be equal to 10,000. If the total of cash and vouchers in the petty cash box is not equal to the fixed balance of P10,000, there js either a shortage or an overage. If the balance of P10,000 is frequently changed without proper authorization, any shortage or overage may not be readily detected. | Q Summary: The “Petty cash fund” account is: Debited Credited > When it is initially established. > When the fund is not replenished but adjusted prior to the preparation of financial statements. beCash and Cash Equivalents 65 > Whenit is subsequently > When itis subsequently increased (through a board decreased (through a board resolution) resolution) > The “Petty cask fund” account is unaffected when disbursements are made out of the fund, _Shortage in petty cash fund | “When there is a petty cash shortage, the amount of replenishment » is increased by the cash shortage inorder to maintain the fixed balance of the fund. The entry to record the replenishment when there is shortage is as follows: Date | Various expense accounts xx Cash shortage or overage xx Cash in bank xx Notice that the “Cash shortage or overage” account is debited when there is a shortage: This is because a cash shortage is closed either to a receivable or a loss account which has a normal debit balance. ige in petty cash fund there is a petty cash overage, the amount of replenishment is decreased by the cash shortage in order to maintain the fixed lance of the fund. The entry to record the replenishment when there is an overage is as follows: Date | Various expense accounts x Cash short or over xx Cash in bank. : x Notice that the “Cash shortage or overage” account is credited when there is an overage. This is because a cash overage is closed either to a payable or a gain account which has a normal credit balance.Gosh ase 2, hig eh eee ne ceperey Shortages/overages in the PCF are normally treated as receivable from/payable to the petty cash custodian because the petty cash custodian is responsible for the PCF at all times. Illustration 1: Petty cash fund — journal entries On September 1, 20x1, the board of directors of ABC Co. passed a resolution for the establishment of a P10,000 petty cash fund, Single disbursements amounting to less than P2,000 will be made through this fund, Those amounting to 2,000 or more will be made through checks, The following were the transactions during the period. Spit, | Established P10,000 petty cash fund. | 20x1 Sept.1 | Disbursements are made for the following: | throush21, | . Groceries for use of employees in the pantry P1400 "1 | Transportation of Mang Benny, the messenger boy 500 - Snacks during meetings and conferences 1,000 = Gasoline for company vehicles 3,000 - Pedicure of Ms, Ana (secretary of the boss) - authorized 3,000 Total ‘ P8900 | St.22, | Total coins and currencies in the petty cash box is P500. 261 | Replenishment is made. Requirement: Provide the journal entries. Solutions: The pertinent entries are: Sept. | Petty cash fund 10,000 ha Cash in bank 10,000 Sole | No journal entry. PCF disbursements are recorded in # Jetty cash register or log book. The summary of petty cash count is shown below:Cash and Cash Equivalents —¥W—«——__ TO eS 67 Coins and currencies 500 Petty cash vouchers 8,900 Total cash count 9,400 Less: Total accountability (Ledger balance of PCF) (10,000) PCF shortage (600) Ledger balance 10,000 Coins and currencies (500) Cash needed to bring the PCF back to its fixed balance 9,500 ‘The entry to record the replenishment is as follows: Sept.22, | Pantry supplies 1,400 20:1 | ‘Transportation expense (500 + 3,000) 3,500 Meetings and conferences 1,000 Miscellaneous expense 3,000 Cash shortage or overage 600 Cash in bank 9,500, > ‘Assume that the petty cash custodian a mon ey from the fund but forgot to replace it. dmits to have taken The entry to close the suspense account is as follows: Sepl.22, | Receivable from custodian 600 a Cash shortage or overage 600 > ‘Assume that the PCF is not replenished and financial statements are prepared on September 30), 20x1. The unreplenished PCF is adjusted as follows: Sept. 30, | Pantry supplies 1,400 20:1 | ‘Transportation expense (500 + 3,000) 3,500 Meetings and conferences 1,000 Miscellaneous expense 3,000 Receivable from custodian 600 L Petty cash fund 9,50068 ‘Chapter 2 SD a i When the PCF is not replenished, the amount of petty cash to be presented in the September 30, 20x1 financial statements jg equal to the coins and currencies of P500 (or #10,000 fixed balance mings P9500 credit ajstment). Illustration 2: Petty cash fund As of December 31, 20x1, the petty cash fund of ABC Co. with a general leger balance of P5,000 comprises the following: Coins and currencies Petty cash vouchers: Gasoline for delivery equipment Medical supplies for employees 1ou's: ‘Advances to employees A sheet of paper with names of several employees together with contribution to bereaved employee, attached is a currency of 800 Checks: f Check drawn to the order of the petty cash custodian 1,000 Personal check drawn by the petty cash custodian 800 Requirements: ‘ a. How much petty cash fund will be included as part of cash in the December 31, 20x1 statement of financial position? b. Whatis the entry to replenish the fund on December 31, 20x1? Solutions: Requirement (a): Petty cash fund included in cash Coins and currencies 850 Check drawn to the order of the petty cash custodian _1,000. Petty cash fund included as part of cash 1,850 ——Cash and Cash Equivalents 6 Usually, only coins and currencies are included as part of cash. However, the check drawn to the order of the petty cash custodian is actually a petty cash Fund replenishment, so it is also included as part of cash. Requirement (b): Replenishment journal entry Before replenishment, a petty cash count should be performed as shown below: Coins and currencies P 850 Check drawn to the order of the petty cash custodian 1,000 Petty cash vouchers: Gasoline for delivery equipment 1,000 Medical supplies for employees 680 1,680 1ou's: Advances to employees : 140 Total as accounted (cash count) 4,270 Total accountability (ledger balance) (5,000) Shortage (P 730) The contribution to a bereaved employee is not included in the count because, clearly, this money does not belong to ABC Co. For best internal control, encashment of checks from the petty cash fund should be strictly prohibited because this provides an opportunity to conceal shortage. For example, if a count is performed and the custodian knows that she has a shortage of say 800, she would just draw a personal check for the same amount. When this check is included in the cash count, no shortage will be identified. In the count shown above, the personal check drawn by the petty cash custodian is not included in the count because it is obviously placed there to conceal the cash shortage. If the check was erroneously included in the count, the shortage would not have been identified. There would even be an overage of P70!Chapter 2 Doe ee pene ceed The entry to record the replenishment is as follows: Dec. 31, | Transportation expense 1,000 20:1 | Medical supplies 680 Advances to employees 740 Cash shortage or overage 730 | Cash in bank 3,139) After making the replenishment entry the petty cash fund is brought to its ledger balance of P5,000 (P1850 see requirement ‘’s replenishment of P3,150).. iter 2: Summa © Postdated checks received from customers are excluded from) cash and reverted back to accounts receivable. * Undelivered checks drawn and postdated checks drawn are) included in cash and reverted back to accounts payable. * Only highly liquid investments that are acquired 3 months or less before maturity can qualify as cash equivalents. Shares of stocks generally cannot qualify as cash equivalents, except for redeemable preference shares acquired 3 months or| less before redemption date. * Bank overdrafts are reported as current liabilities except in cases where offsetting is permitted © Compensating balances that are legally restricted are excluded from cash. Those that are not legally restricted are included in cash. Whether restricted or not, compensating balances are. disclosed in the notes. © The voucher system is an internal control over cash disbursements which require that every disbursement should be supported by a written authorization embodied in @ document called the voucher. * Cash shortages are initially debited, while cash overages at “Cash shortage or overage” account