OSIAS COLLEGES, INC.

F. Tanedo St., Tarlac City Philippines 2300

(045)9820245, e-mail:osiastrc@pldtdsl.net
http:/www.osiascolleges.edu.ph

SUBJECT: FIN AC 1- Financial Accounting and Reporting Conceptual Framework and Ac-
counting Standard Part 1
TOPIC: ACCOUNTING FOR CASH
MODULE: 3
OBJECTIVES:
a. Definition of cash and cash equivalents
b. Types of cash and cash equivalents
c. Cash flow

d. Management and control of cash

LESSON PROPER:

I. READ

Cash and cash equivalents refer to the sum of a company’s cash on hand, demand deposits,
and short-term highly liquid investments.

The following equation shows the composition of cash and cash equivalents:

Cash and Cash Equivalents = Cash on Hand + Demand Deposits + Short-term Investments

Cash refers to cash on hand and demand deposits. Demand deposits are the amounts held
in bank accounts which can be withdrawn right away.

Cash equivalents are short-term highly liquid investments which can be readily converted to
known amounts of cash and which carry an insignificant amount of risk of change in value.
An investment is cash equivalent only if it is primarily acquired with the objective of cash
management. They almost always have a very short maturity, say up to three months, and
rarely include equity investments.

Cash and cash equivalents and statement of cash flows

The statement of cash flows prepared by a company reconciles its cash and cash equivalents
balance at the start of a period with their balance at the end of the period. The company
may either present cash and cash equivalents as a single line item on the statement of finan-
cial position (in which case a breakup is shown in the notes) or separately as short-term in-
vestments and cash.

As cash equivalents are considered part of cash, any conversion from cash equivalents to
cash at bank or from cash at bank to cash on hand is not reflected in the statement of cash
flows as a cash inflow or outflow. The statement of cash flows also shows the impact of
movement in foreign exchange rate on cash and cash equivalents held.
 P a g e (2)

The cash and cash equivalents balance impacts a company’s cash ratio, the ratio of cash to
current liabilities; and current ratio, the ratio of current assets to current liabilities. A higher
cash ratio shows that the company is expected not to face any difficulty in paying its very
short-term liabilities.

Examples

1. A $20 million term deposit by a company for 1 month would qualify as a cash equiva-
lent because the maturity value is known and there is very low risk of change in
value.
2. A saving deposit for 6 month would not qualify as a cash equivalent particularly if the
interest rate environment is volatile. This is because the duration involved and the in-
terest rate situation may cause the value of the investment to fluctuate between to-
day and the maturity date.
3. A company made a large payment from one of its bank accounts which is not the en-
tity’s primary bank account. This resulted in a negative balance in the bank account
but the company informed the bank that it would replenish the funds within a week.
The management does not expect the balance to turn negative again any time in
near future. This overdraft would most-likely not meet the definition of cash equiva-
lents.
4. An investment today in preferred stock which is due to mature within 1 month is a
cash equivalent because the maturity value is known and there is low risk of change
in value during a week’s time.

Types of Cash and Cash Equivalents

Examples of cash are as follows:

 Coins

 Currency

 Cash in checking accounts

 Cash in savings accounts

 Bank drafts

 Money orders

 Petty cash
 P a g e (3)

Examples of cash equivalents are as follows:

 Commercial paper

 Marketable securities

 Money market funds

 Short-term government bonds

 Treasury bills

Cash Controls

Cash is a company's most liquid asset, which means it can easily be used to acquire other as-
sets, buy services, or satisfy obligations. For financial reporting purposes, cash includes cur-
rency and coin on hand, money orders and checks made payable to the company, and avail-
able balances in checking and savings accounts. Most companies report cash and cash equiv-
alents together. Cash equivalents are highly liquid, short‐term investments that usually ma-
ture within three months of their purchase date. Examples of cash equivalents include U.S.
treasury bills, money market funds, and commercial paper, which is short‐term corporate
debt.

Cash is a liquid, portable, and desirable asset. Therefore, a company must have adequate
controls to prevent theft or other misuses of cash. These control activities include segrega-
tion of duties, proper authorization, adequate documents and records, physical controls, and
independent checks on performance.

 Segregation of duties. Cash is generally received at cash registers or through the

mail. The employee who receives cash should be different from the employee who
records cash receipts, and a third employee should be responsible for making cash
deposits at the bank. Having different employees perform these tasks helps minimize
the potential for theft.
 Proper authorization. Only certain people should be authorized to handle cash or
make cash transactions on behalf of the company. In addition, all cash expenses
should be authorized by responsible managers.
 Adequate documents and records. Company managers and others who are responsi-
ble for safeguarding a company's cash assets must have confidence in the accuracy
and legitimacy of source documents that involve cash. Important documents such as
checks, are prenumbered in sequential order to help managers ascertain the disposi-
tion of each document. This helps prevent transactions from being recorded twice or
from not being recorded at all. In addition, documents should be forwarded to the
accounting department soon after their creation so that recordkeeping can be han-
dled professionally and efficiently. Allowing documents that describe cash transac-
tions to go unrecorded for an unnecessarily long period of time increases the likeli-
 P a g e (4)

hood that fraudulent or inaccurate records will pass undetected through the ac-
counting department.
 Physical controls. Cash on hand must be physically secure. This is accomplished in a
variety of ways. Cash registers should contain only enough cash to handle customer
transactions. When a cashier finishes a shift—or perhaps more frequently—excess
cash should be moved from cash registers to a safe or another location that provides
additional security. In addition, daily bank deposits are made so that excess cash
does not remain on the premises. Blank checks, which can be used for forgery, are
stored in locked, fireproof files.
 Independent checks on performance. Employees who handle cash or who record
cash transactions must be prepared for independent checks on their performance.
These checks should be done periodically and may be done without fore-warning.
Having a supervisor verify the accuracy of a cashier's drawer on a daily basis is an ex-
ample of this type of control.
 Other cash controls. Most companies bond individuals that handle cash. A com-
pany bonds an employee by paying a bonding company for insurance against theft by
the employee. If the employee then steals, the bonding company reimburses the
company. Companies may also rotate employees from one task to another. Embez-
zlement or serious mistakes may be uncovered when a new employee takes over a
task. Although specific cash controls vary from one company to the next, all compa-
nies must implement effective cash controls.

Reference: https://www.accountingtools.com/articles/what-are-cash-and-cash-equiva-
lents.html

II. REFLECT
Based on the lesson, can you discuss and explain accounting for cash?

III. RESPOND

Accomplish the Learning Activity Sheets (LAS) provided for this lesson