Cash and cash equivalents, composition

Definitions: IAS 1.66, IAS 7

IAS 7.6 Cash comprises cash on hand and demand deposits.

IAS 7.6 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.

IAS 7.7 Cash equivalents are held for the purpose of meeting short‑term cash commitments rather than
for investment or other purposes. For an investment to qualify as a cash equivalent it must be readily
convertible to a known amount of cash and be subject to an insignificant risk of changes in value.
Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say,
three months or less from the date of acquisition. Equity investments are excluded from cash equivalents
unless they are, in substance, cash equivalents, for example in the case of preferred shares acquired within
a short period of their maturity and with a specified redemption date.

IAS 1.66 Current assets

An entity shall classify an asset as current when:

a. it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle
b. it holds the asset primarily for the purpose of trading;
c. it expects to realise the asset within twelve months after the reporting period; or
d. the asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve months after the reporting period. An
entity shall classify all other assets as non‑current.

Cash: Cash on hand items

Undeposited checks, Except: Post-dated checks

Undelivered checks, and delivered checks but post-dated
Currency and coins
Other cash on hand items (e.g. undeposited collections)
Money orders
Traveller’s check (Travel advances is not the same as traveller’s check. Travel advances are
receivables)

Cash: Cash in bank - Current and savings account

Including: Required monthly average daily balance (not a legal restriction)

Fund for operating expenses (e.g. payroll fund)
Note: To ensure future credit availability – NOT a legal restriction

Excluding: Fund for PPE – always a non-current asset, regardless of date of acquisition

BA 123 – 2nd Semester, S.Y. 2022-2023 Quick Notes on Cash Aratea/Placido/Magana

 Sinking fund for bonds payable or preference share redemption – classification
depends on the classification of related liability. If current, it will be presented
under current assets, but not on the cash and cash equivalents line item. (Note:
Valix classifies sinking fund under cash and cash equivalents if the related liability
is current.)

Legally restricted funds (usually for bank loans) – This should be specifically stated
so that the restriction/exclusion will apply.

Restricted bank account – should be a non-current asset, unless it is certain that

the amount is receivable currently (Example: Foreign bank account, restricted)

Bankrupt bank, or bank in the process of liquidation – should be presented at net

realizable value, and a non-current asset, unless it is certain that the amount is
receivable currently

Deduct: Bank overdraft if there is another account with the same bank that can absorb
the deficiency. Otherwise, it should be classified as a current liability.

Cash equivalents – Either: (a) Maturity is three (3) months or less, (b) Purchased three (3) months or less
from maturity date, regardless of the original term. There should be a specified redemption date and
redemption value is guaranteed.
Time deposits
Certificate of deposit
Treasury bills/bonds
Money market placements (but not money market placements that are redeemable anytime.)
Commercial papers
Redeemable preferred shares

BA 123 – 2nd Semester, S.Y. 2022-2023 Quick Notes on Cash Aratea/Placido/Magana

Audit Assertions for Cash
1. Existence or occurrence – Cash (both on hand and in bank) exists as of the balance sheet date and
the transactions occurred during the reporting period
a. General ledger vs subsidiary ledger
b. Cash count
c. Bank confirmations (Prepared and sent by the company, but should be received sealed
by the auditor)
d. Bank statements
e. Bank reconciliations
2. Completeness – All cash transactions are reported in the correct period
a. Cutoff bank statement
b. Proof of cash
3. Rights and obligations – Cash is available and unrestricted as to use
a. Bank statements (current vs available balance)
b. Review of bank confirmations
4. Valuation – Proper amount is recorded
a. Check banks under receivership, subject to TRO, or foreign restricted banks.
5. Presentation and disclosure – In accordance with GAAP
a. Proper presentation and disclosure in accordance with GAAP

CASH COUNT
1. Accountability - How much do we expect to see/count?
a. Total petty cash fund – Bills and coins, IOUs, unreplenished vouchers
b. Undeposited collections
c. Other items in the custody of the petty cash custodian or cashier
2. Accounted for – What is the total monetary amount of the items counted/inspected during the
cash count?
a. Bills and coins
b. IOUs, petty cash vouchers, and other unreplenished items
c. Checks in the name of the company
3. Accountability vs Accounted for – shortage/overage (last resort)
a. Accountability > Accounted for = Shortage
b. Accountability < Accounted for = Overage
i. Double checks records, inspect supporting documents, to determine the reason/s
for the difference

BANK RECONCILIATION
To ensure that the bank/book balances are adjusted. Because of timing differences, clearing of checks,
debit/credit memos that are not recorded on time, there are differences in the bank statement balance
and the book balance.
1. Unadjusted book balance – comes from the ledger balance in the books
2. Unadjusted bank balance – from the monthly bank statement
3. Bank side adjustments
a. Deposits in transit (vs undeposited collections)
b. Outstanding checks
c. Errors, if any (Assumption: Give bank the benefit of the doubt)
4. Book adjustments
a. Credit memos – note collection, interest received, customers deposits,

BA 123 – 2nd Semester, S.Y. 2022-2023 Quick Notes on Cash Aratea/Placido/Magana

 b. Debit memos – bank service charges, NSF checks
c. Errors, if any
5. Differences in bank/book balance
a. Bank > Book = Unrecorded receipts, overstated disbursements, overage, bank error
b. Bank < Book = Overstated receipts, understated disbursements, shortage, bank error

PROOF OF CASH
To ensure that all receipts and disbursements are authorized and recorded in the proper accounting
period.
1. Unadjusted balances, unadjusted receipts/disbursements – from ledger/bank statements
2. Deposits in transit PM (previous month)
a. Bank: (+) PM (-) Receipts
3. Deposits in transit CM (current month)
a. Bank: (+) Receipts (+) CM
4. Outstanding checks PM
a. Bank: (-) PM (-) Disbursements
5. Outstanding checks CM
a. Bank: (+) Disbursements (-) CM
6. Credit memos PM
a. Book: (+) PM (-) Receipts
7. Credit memos CM
a. Book: (+) Receipts (+) CM
8. Debit memos PM
a. Book: (-) PM (-) Disbursements
9. Debit memos CM
a. Book: (+) Disbursements (-) CM
10. NSF checks CM, not redeposited (no entry on return)
a. Book: (+) Disbursements (-) CM
11. NSF checks CM, not redeposited (correct entry on return)
a. Bank: (-) Receipts (-) Disbursements
12. NSF checks CM, redeposited CM (no entry on return or redeposit)
a. Bank: (-) Receipts (-) Disbursements
13. NSF checks PM, not redeposited (correct entry on return in CM)
a. Book: (-) PM, (+) Receipts
14. Cancelled checks issued CM, cancelled CM
a. Bank and book: (-) Disbursements, (+) CM
15. Cancelled checks issued PM, cancelled CM
a. Bank and book: (-) Disbursements, (+) CM

BA 123 – 2nd Semester, S.Y. 2022-2023 Quick Notes on Cash Aratea/Placido/Magana

Notes on selected problems from review books

Accounted for:
Cabrera #1 - Only checks payable to the company can be included in accountability and accounted for;
Exclude personal checks
Cabrera #5 - Adjusted book balance > Adjusted bank balance -> Cash shortage (misappropriation) or
bank error
Cabrera #13 - Checks payable to company in the possession of the cashier pr PCF custodian – payment
for IOUs if maker is an employee

Bank reconciliation items:

Cabrera #3 - Depositors note charged to account = debit memo
Charged = Debited = Decrease
Cabrera #6-8 Undeposited receipts =/= Deposits in transit (Two ways of doing it in the bank recon)
Undeposited collections – should be based on cash count!

NSF Checks:

Cabrera – General rule: Follow bank

Cabrera #13 - Explicitly stated: NSF check returned, recorded as reduction in cash receipts
● NSF returned this month, recorded this month:
Book (+) Receipts (+) Disbursement – Follow the bank
● NSF returned this month, recorded next month:
Book (+) Disbursement (-) Current month – Follow the bank

Cabrera #14 - Assumption made: NSF check recorded in the disbursements book (Follow the bank)
● NSF returned last month, recorded this month:
Book (-) Previous month (-) Disbursement
● NSF returned this month, not redeposited:
Book (+) Disbursement (-) Current month
● NSF returned and recorded this month: No adjustment made

Cabrera #15/18 - Assumption made: Follow bank, Adjust through disbursements book
NSF returned this month, unrecorded: (+) Disbursement (-) Current month

Roque #25 - NSF presented as credit but not included in either receipts/disbursements book

Roque #26 - Assumption: No entry on books for the return and redeposit of NSF check. To consider
this fact, it should be specifically stated.
● NSF redeposited (return and redeposit in the same month), but no entry on books
Books (+) Receipts (+) Disbursement
● NSF returned this month, not yet redeposited, no entry on books
Books (+) Disbursement (-) Current month

Roque #27 - Stated: The accountant records customers’ dishonored checks as a reduction of cash
receipts.

BA 123 – 2nd Semester, S.Y. 2022-2023 Quick Notes on Cash Aratea/Placido/Magana

 Stated: Cancellations by Chelsee Company checks are recorded by a reduction of cash
disbursements
● Cancellation of mutilated check issued during the current month
Book (-) Disbursements (+) Current month
Excluded cancelled check in the outstanding checks on the bank side
● NSF check returned and redeposited during the month. Accountant recorded it as well:
Book (+) Receipts (+) Disbursements

Roque #28 - Debit and credits, charges, customer collections

Roque #29 - Mutilated check should be added back.

● Previous month mutilated check: Book (+) Previous month (+) Current month
● My note: Current month mutilated check: Book (-) Disbursement (+) Current month

Roque #30 - NSF check returned and redeposited this month

Assumption: No entry on return, but redeposit was recorded as a regular receipt
● Roque: Book (+) Receipts (+) Disbursement
● Ocampo: Bank (-) Receipts (-) Disbursement

Roque #34 - Undeposited collection should be based on cash count

Roque #39 - Cash shortage/concealment

Roque #40 - Underfooting – always check totals given

Ocampo #10 - NSF deposited current month, returned and redeposited immediately during the same
month. It also states: No adjustment on books for return or redeposit (Assumed in some
cases) – Bank (-) Receipts (-) Disbursement

Ocampo #11 - Previous month mutilated check: Book (+) Previous month (+) Current month
Excluded cancelled check in the outstanding checks

Ocampo #12 - NSF check not yet redeposited: Book (+) Disbursement (-) Current month

BA 123 – 2nd Semester, S.Y. 2022-2023 Quick Notes on Cash Aratea/Placido/Magana