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DEFINITION
Cash includes money or its equivalent that is readily available for
unrestricted use.

Cash equivalents are “short-term, highly liquid investments (debt

instruments) that are readily convertible to known amounts of cash
and which are subject to an insignificant risk of changes in value.”

Only debt instruments acquired within 3 months or less before

their maturity date can qualify as cash equivalents.

PRESENTATION AND MEASUREMENT

Cash and Cash equivalents are presented as current assets, at face
value, 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.

ITEMS INCLUDED/EXCLUDED IN CASH AND CASH

EQUIVALENTS
I. Items INCLUDED as CASH (Mnemonic: CDCBMF)
1. Coins and currencies
2. Demand deposits (checking or current accounts) and savings
accounts
3. Checks – such as Cashier’s checks, personal checks, manager’s
checks, traveler’s checks, and certified checks received from
customers or other external parties
4. Bank Drafts- guarantees by bank to advance funds on the demand
by the party to whom the draft was directed
5. Money orders- similar to bank drafts but are drawn from post
offices or other financial institutions.
6. Cash funds set aside for use in current operations, such as:
a. Petty Cash Fund
b. Revolving fund- like PCF, but used for a limited/specific
purpose by mgt.
c. Payroll Fund
 d. Change Fund
e. Dividend Fund
f. Tax Fund
g. Travel Fund
h. Interest fund
i. other types of imprest bank account used in current operations

NOTE: Postdated checks drawn are given to payees within one period
but will only be available for encashment in the next period.
Drawn and unreleased checks are checks written, but not yet given to
payees.
Stale checks given to payees, but they have not been encashed within
a relatively long time (6 months or more)

Because these checks are not yet spent/deducted to the company’s

account, they are included in cash.

These checks, when drawn, are initially recorded as:

Accounts Payable/Operating Expense
Cash
Because they are supposed to be included in cash, these entries
should be reversed.

II. Items NOT INCLUDED as CASH

Item Examples Treatment

Postdated/Stale Checks dated at a Receivables
checks RECEIVED future date

IOUs or advances TO Opposite of Current Assets:

employees/suppliers Salaries/Accounts Advances to
Payable Employees/Suppliers

Company paid Advances to Emp

salaries in advance, Cr. Cash

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 which will be --------
expensed when
“earned” by Advances to supplier
employees Cr. Cash

Company paid Dr.

suppliers in advance, Purchases/Inventory
which will be Cr. Advances to
cancelled and supplier
recognized as
inventory when we
receive them from
suppliers

Cash Funds set aside Sinking Fund, Plant Other Noncurrent

for noncurrent expansion fund, Assets
purposes depreciation fund,
preference share
redemption fund,
contingency fund,
and insurance fund

Postage Stamps Supplies

Unused credit line Credit Line – Amount Disclose in footnotes

borrowed

NOTE: Postdated checks received from customers are checks written

within one period but will only be available for encashment in the
next period.
Stale checks received, are checks given by customers but they have
not been encashed within a relatively long time(6 months or more)

Because these checks are not yet deposited to the company’s account,
they are excluded in cash.
These checks, when received, are initially recorded as:
Cash

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 Receivables
Because they are supposed to be included in cash, these entries
should be reversed.

III. Items included as Cash Equivalents

1. Treasury bills, notes or bonds acquired 3 months before maturity
date
 Treasury Bills is a short-term obligation issued by the
government at a discount. Treasury bills 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 a maturity
of 1 year to less than 10 years. Treasury bonds have a maturity
of 10 years or more.

9-year treasury bond, issued on January 1, Year 1 : Company A

Maturity: January 1, Year 10
Acquired by Company B August 31, Year 9 (ACQUIRED 4 months)
On December 31, Year 9, Cash and Cash Equivalents in Company B?
NO

2. Money market instrument/commercial paper acquired 3 months

before maturity date
Money market instruments are investments in portfolios of short-term
securities.
 Commercial papers consist of short-term, unsecured, notes
payables issued in large denominations by large companies with
high credit ratings to other companies and institutional
investors. The maturity date of commercial 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.

3. 3-month time deposit

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  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.

OTHER ISSUES
Equity securities (investments in stocks) cannot qualify as cash
equivalents because shares of stocks do not have a maturity date.

Redeemable preference shares(preference shares with mandatory

redemption), which is an equity security, can qualify as cash
equivalents if they are acquired 3 months or less before their specified
redemption date.

Bank overdraft (cash overdraft) is a negative (credit) balance in the

cash in bank checking account resulting from overpayment of checks
more than its deposits.
They are presented as current liabilities, except in cases where
offsetting is permitted.
 Offsetting: When two or more bank accounts are maintained in
the same bank and one account results to an overdraft, they
may be offset/deducted from the other bank account with a
positive unrestricted balance.
 Financial assets/liabilities may be offset if the entity has both
(1) legal right of setoff and (2) intention to settle the amounts on
a net basis or simultaneously

Deposits in foreign banks that are unrestricted 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
receivables.

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Compensating Balance is a minimum amount that must be maintained
in an entity’s bank account as support for funds borrowed from the
bank.
If legally restricted, excluded from cash and presented as other
(non)current assets. If NOT legally restricted, included as cash.

PRE-DISCUSSION: True or False

1. Cash includes money or its equivalent that is either readily
available and/or for unrestricted use.
2. Not all items falling under the definition of cash are cash
equivalents, vice versa.
3. 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.
4. Cash equivalents are only for debt instruments; equity securities, in
general, are not included in cash equivalents.
5. Bank drafts are recognized as cash equivalents.
6. Restricted money can never be presented as cash.
7. Postdated checks received from customers are reverted from cash
back to receivable.
8. An investment in equity securities that is acquired 3 months or less
before maturity date is presented as cash equivalent.
9. Cash funds set aside for use in current operations are included as
cash.
10. Postdated checks drawn and given to payees, which are available
for encashment by payees in the next period, should be included as
cash.
11. Unreleased but drawn checks should be excluded as cash.
12. Postdated checks received from customers, which are available for
encashment by the company in the next period, should be included as
cash.
13. Advances to employees are excluded as cash but presented as
current assets.
14. A 1-year treasury bill acquired 3 months before its maturity is
excluded as cash equivalents.

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15. An 8-month time deposit acquired 6 months ago will be included
as cash equivalents.
16. A fund established to cover certain contingencies will be excluded
as cash.
17. Customers have given a check to the company for products that
will be delivered to them 4 months from now. The said check is
already encashed by the company. This check will be included as
cash, by the company.
18. A 9-month commercial paper acquired a month before its
maturity date is excluded as cash.
19. A company has three unrestricted checking accounts under one
bank. One of the accounts have a negative balance, and its amount
cannot be covered by any of the other two bank accounts individually;
combined, however, the two bank accounts’ total positive amount is
more than the negative amount of one bank account. Under this
situation, offsetting is permitted.
20. Compensating balance in a company’s bank account, which is not
legally binding, is not included as cash.
21. At the end of the current year, an entity had cash accounts at three
different banks.  One account is segregated solely for payment into a
bond sinking fund.  A second account, used for branch operations, is
overdrawn.  The third account, used for regular corporate operations,
has a positive balance.  The company should report the segregate
account as a noncurrent asset, the regular account as current asset and
the overdraft account as current liability.
22. Businesses who have several bank accounts, petty cash, and cash
on hand, would maintain a separate ledger account for each type of
cash.
23. Cash in foreign currency shall be translated to Philippine peso
using the average exchange rate and are classified as cash if it's not
subject to any restrictions.
24. The basic requirement for inclusion in cash and cash equivalent is
that it is deposited in the bank.
25. Cash equivalents should be measured at maturity value, meaning
face value plus interest.

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DISCUSSION QUESTIONS
The books of ABC Co. show the following balances at December 31,
20x1:
Cash on hand 300,000
Cash in bank- current account 3,000,000
Cash in bank- peso savings deposit 200,000
Cash in bank- dollar deposit (unrestricted) $5,000
Cash in bank- dollar deposit (restricted) $2,000
Cash in money-market account 400,000
6-month Time deposit 20,000
Treasury bill, purchased 12/31/20x1, maturing 2/28/20x2 30,000
Treasury bond, purchased 3/1/20x1, maturing 2/28/20x2 50,000
Treasury Note 100,000
Unused Credit Line 225,000
Redeemable preference shares, purchased 12/1/20x1, due 30,000
3/1/20x2
Treasury shares, purchased 12/15/20x1, to be reissued on 90,000
3/5/20x2
Sinking Fund 5,000,000

Additional information:
 Cash on hand includes a Php 60,000 customer check dated January
10, 20x2.
 During December 20x1, checks amounting to Php 50,000 and Php
20,000 were drawn against the Cash in bank- current account. The
Php 50,000 check is dated January 15, 20x2. The Php 20,000
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 amounting to Php 340,000 and a compensating balance of
Php 250,000 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 Php 52.

Required: Compute the amount of cash and cash equivalents to be

reported in the 20x1 financial statements.

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Cash
The records of Parokya Co. on December 31, 20x1 show the
following:
Checks drawn but not yet issued to payees 100,000
Customers’ checks dated January 15, 20x2 35,000
Customers’ checks dated December 31, 20x1 46,000
Parokya’s check dated January 5, 20x2 already mailed to 26,000
payee
Cash on hand 130,000
Employees’ checks representing unclaimed salaries, held 34,000
by treasurer
Petty cash fund (fully replenished) 20,000

Requirement: How much is included as cash on December 31, 20x1?

Cash Equivalents
Baguio Co. holds the following securities on December 31, 20x1:
Treasury bill acquired on Nov. 10, 20x1, maturing on Feb. 200,000
28, 20x2
Money market placements to RCBC trust, made on Dec. 900,000
15, 20x1, maturing on Aug. 31, 20x2
Redeemable preference shares acquired on Dec. 31, 20x1 850,000
and redeemable on Mar. 31, 20x2
Three-month time deposit with UCPB 1,000,000
Investment in stocks acquired on Dec. 31, 20x1 to be sold 560,000
in Jan. 20x2

Requirement: How much is presented as cash equivalents?

FS Presentation, Measurement and Deposit in Foreign Bank

Luffy Co. has the following items on Dec. 31, 20x1:
Cash on hand 1,200,000
Cash on hand (USD, translated at Php 50: $1) 1,800,000

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Revolving Fund 300,000
Contingency Fund 90,000
Cash in bank- BPI 3,000,000
Cash in bank- Swiss Savings Account (translated at Php 1,400,000
51: CHF1)
Treasury Bill acquired September 28, 20x1, maturing Jan. 600,000
28, 20x2

Additional Information:
The current exchange rates on December 31, 20x1 are as follows:
Php 52:1 and P49:CHF1
The Swiss Savings Account is restricted as to withdrawal.

Requirement: How much is presented as cash and cash equivalents in

Luffy Co.’s Dec. 31, 20x1 statement of financial position?

Compensating Balance and Bank Overdraft

Cloudy Co.’s cash in bank consists of the following:
Piggy Bank Savings Account 400,000
Piggy Bank checking account (30,000)
Oink Bank checking account 500,000
Porky Bank savings account #51003400010 300,000
Porky Bank checking account #6968420070 (65,000)
Unused Credit Line- Indian Bank 260,000

Additional Information:
The Piggy Bank savings account includes Php 50,000 compensating
balance that is not legally restricted.
The Oink Bank checking account includes Php 95,000 compensating
balance that is legally restricted.

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The Porky Bank savings account #51003400010 represents a cash
bond that is mandated by a law court to be held pending the final
settlement of an on-going litigation.

Requirement: What amount of cash in bank is presented in the

financial statements?

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