[Conceptual Framework and Accounting Standards] 1

[Cash and Cash Equivalents; Receivables Part 1]

Module 09: Cash and Cash Equivalents;

Receivables Part 1
Course Learning Outcomes:
1. Cash and Cash Equivalents
2. Components of Cash and Cash Equivalents
3. Recognition and Measurements of Cash Receivables
4. Statement of Cash Flows
5. Receivables Classification: Trade and Non-Trade
6. Recognition of Account Receivables

What is cash?

From the point of view of layman cash simply means money. Money is the standard
medium of exchange in business transactions. It refers to the currency and coins which are
in circulation and legal tender.

However, in the accounting parlance, the term cash has a special and broader meaning. It
connotes more than money.

As contemplated in accounting cash includes money and any other negotiable

instrument that is payable in money and acceptable by the bank for deposit and
immediate credit.

Accordingly, cash includes checks, bank drafts and money orders because these are
acceptable by the bank for deposit or immediate encashment.

For instances, when checks are received in full settlement of an account receivable, cash is
immediately debited. But if the checks received are postdated, they cannot be considered
as cash yet because the checks are unacceptable by the bank for deposit and immediate
credit or outright encashment.

UNRESTRICTED CASH

There is no specific standard dealing with cash. The only guidance is found in PAS 1 which
provides that “an entity shall classify an asset as current when the asset is cash or a
cash equivalent unless it is restricted from being exchange or used to settle a liability
for at least twelve months after the end of the reporting period.”

Accordingly to be reported as cash, an item must be unrestricted in use. This means that
the cash must be readily available in the payment of current obligations and not be subject
to any restrictions, contractual or otherwise.
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The following cash items are included in cash:

 Cash on Hand: This includes undeposited cash collections and other cash items
awaiting deposit such as customers checks, cashier or managers check, traveler’s
check, bank drafts or money order.
 Cash in Bank: This includes demand deposit or checking account and saving deposit
which are unrestricted as to withdrawals.
 Cash fund set aside for current purpose such as petty cash, cash fund, payroll fund
and dividend fund.

Cash Equivalents

PAS 7 defines cash equivalents as short-term and highly liquid investment that are readily
convertible into cash and so near their maturity that they present significant risk of
changes in value because of changes in interest rates.

The standard further states that only highly liquid investments that are acquired three
months before maturity can qualify as cash equivalents. Examples of cash equivalents are:

1. Three-month BSP treasury bill

2. Three-year BSP treasury bill purchased three months before the date of maturity
3. Three-month time deposit
4. Three-month money market instrument

Equity securities cannot qualify as cash equivalents because shares do not have a maturity
rate.

However, preference shares with specified redemption date and acquired three months
before redemption date can quality as cash equivalents.

Note that what is important is the date of purchased which should be three months or less
before maturity. Thus, a BSP treasury bill that was purchased one year ago cannot qualify
as cash equivalents even if the remaining maturity is three months or less.

VALUATION OF CASH

Cash is valued at face value. Cash in foreign currency is valued at the current exchange
rate. If a bank or financial institution holding the funds of the company is in bankruptcy or
financial difficulty, cash should be written down to estimate realized value if the amount
recoverable is estimated lower than the face value.

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FINANCIAL STATEMENT PRESENTATION

The caption “cash and cash equivalents” should be shown as the first item among the
current assets.

This caption includes all cash items, such as cash on hand, cash in bank, petty cash fund and
cash equivalents which are restricted in use for current operations. However, the details
comprising the “cash and cash equivalents” should be disclosed in the notes to financial
statements.

INVESTMENT OF EXCESS CASH

The control and proper use of cash is an important aspects of cash management. Basically,
the entity must maintain sufficient cash for use in current operation. Any cash
accumulated in excess of that needed for current operations should be invested even
temporarily in some type of revenue earning investment.

Accordingly, excess cash may be invested in time deposits, money market instruments and
treasury bills for the purpose of earning interest income.

Such investment in time deposit, money market instruments and treasury bills should be
classified as follows:

 If the term is three months or less, such instrument are classified as cash
equivalents and therefore included in caption “cash and cash equivalents”.
 If term is more than three months but within one year, such investments are
classified as short-term financial assets or temporary investments and presented
separately as current assets.
 If the term is more than one year, such investment are classified as non current or
long term investment. However, if such investment become due within one year
from the end of reporting period, they are classified as current or temporary
investment.

Recognition and Measurements of Cash Receivables

Cash is generally measured at face value, which is its fair value. The caption “Cash and Cash
Equivalents” should be shown as the first item among the current assets.

CONSIDERATIONS IN REPORTING CASH BALANCE IN THE BALANCE SHEET:

 FOREIGN CURRENCY: If it is unrestricted, then it should be translated to Philippine

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

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 CASH IN CLOSED BANKS OR IN BANKS HAVING FINANCIAL DIFFICULTY OR IN

BANKRUPTCY: It should be reclassifies as receivable and should be written down to
its recoverable amount.

 CUSTOMER’S POST-DATED CHECKS, NSF (NO SUFFICIENT FUND CHECKS), IOU’s

(“I Owe You” notes): They should be reported as receivables rather than cash. NSF
checks in the Philippines are often described as DAIF (Drawn Against Insufficient
Funds) and DAUD (Drawn Against Unclear Deposits) checks.

Entry:
Receivables xxx
Cash in Bank xxx

 POSTAGE STAMPS AND EXPENSE ADVANCES: They are not cash, but they are
reported as prepaid expenses.

 BANK OVERDRAFT: When the Cash in Bank account has a credit balance, it is said to
be an overdraft. The credit balance in the cash in bank account results from the
issuance of checks in excess of deposits (deposits<disbursements).

Under PFRS overdraft should be reported as a liability and it may be offset

against a positive balance in another bank account with the same bank if a right of
offset exists between the bank and the depositor.

Moreover, an overdraft can also be offset against the other bank account if the
amount is not material. However, overdrafts are not permitted in the Philippines.

 UNDELIVERED OR UNRELEASED CHECKS: Are the company’s checks drawn and

recorded as disbursed but are not actually issued or delivered to the payees as of the
reporting date. These checks should not be deducted from the company’s cash
balance until they have been mailed or otherwise delivered.

Therefore, these checks 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.

Entry:
Cash in Bank xxx
Accounts Payable xxx

 COMPANY’S POSTDATED CHECK: Are company’s check which has been recorded
as issued and delivered to payee before or at the end of the reporting period should
be reverted to cash and the corresponding liability shall continue to be recognized,
because there is no actual payment yet, as of that date.

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Entry:
Cash in Bank xxx
Accounts Payable xxx

 COMPENSATING BALANCES: 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. The nature of
the arrangement is disclosed in the notes of the financial statements.

 Legally Restricted: The amount 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 (Bond Sinking Fund and Plant expansion Fund): Reported as
non-current asset.

 STALE CHECK OR CHECK LONG OUTSTANDING: Is a check not encashed by the

payee within six months from the time of issuance. Thus, even after three months
only, the entity may issue a “stop payment order” to the bank for the cancellation of
a previously issued check.

Entries:

 If the amount of stale check is immaterial:

Cash xxx
Miscellaneous Income xxx

 If the amount is material and liability is expected to continue:

Cash xxx
Accounts Payable xxx

Statement of Cash Flows

The cash flow statement should report cash flows during the period classified by
Operating, Investing and Financing activities. Sum of these three types of cash flow
reflect net increase or decrease of cash and cash equivalents.

 OPERATING ACTIVITIES: These are principal revenue producing activities of the

enterprise. Examples:

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 Cash receipts from sale of goods / rendering services;

 Cash receipts from royalties, fees, commissions and other revenue;
 Cash payments to suppliers of goods and service;
 Cash payments to and on behalf of employees.

Cash flow from operating activities: It can be derived either from direct method or
indirect method.

 Direct method: In this method, gross receipts and gross payments of cash
are disclosed.
 Indirect method: In this method, profit and loss account is adjusted for the
effects of transaction of non-cash nature.

 INVESTMENT ACTIVITIES: The activities of acquisition and disposal of long term

assets and other investments not included in cash equivalent are investing activities.
It includes making and collecting loans, acquiring and disposal of debt and equity
instruments, property and fixed assets etc. Examples of cash flows arising from
investing activities are as follows:

 Cash payments to acquire fixed assets

 Cash receipts from disposal of fixed assets
 Cash payments to acquire shares, warrants or debt instruments of other
enterprises and interest in joint ventures
 Cash receipt from disposal of above investments

 FINANCING ACTIVITIES: Those activities that result in changes in size and

composition of owners capital and borrowing of the organization. It includes
receipts from issuing shares, debentures, bonds, borrowing and payment of
borrowed amount, loan etc. Examples:

 Sale of share
 Buy back of shares
 Redemption of preference shares
 Issue / redemption of debentures
 Long term loan / payment thereof
 Dividend / interest paid

BENEFITS OF CASH FLOW INFORMATION

 Cash flow information is useful in assessing the ability of the entity to generate cash
and cash equivalents.
 Enables users to develop models to assess and compare the present value of the
future cash flows of different entities .

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 It provides information that enables users to evaluate the changes in net assets of an
entity.
 Its financial structure (including its liquidity and solvency).
 Its ability to affect the amounts and timing of cash flows in order to adapt to
changing circumstances and opportunities.
 Enhances the comparability of the reporting of operating performance by different
entities.

TRADING SECURITIES

PAS 7, paragraph 15, provides that cash flows arising from the purchase and sale of dealing
or trading securities are classified as operating activities.

Similarly, cash advances and loans made by financial institution are usually classified as
operating activities since they relate to the main revenue producing activity of that entity.

NONCASH TRANSACTIONS

PAS 7, paragraph 43, provides that investing and financing transactions that do not require
use of cash or cash equivalents shall be excluded from the statement of cash flows.

Noncash investing and financing transactions shall be disclosed elsewhere in the financial
statement either in the notes of financial statements or in a separate schedule or in a way
that provides all relevant information about these transactions

The statement of cash flows is strictly a cash concept.

Accordingly, the following noncash transactions are disclosed separately:

1. Acquisition of assets by assuming directly related liability.

2. Acquisition of assets by issuing share capital.
3. Acquisition of assets by issuing bonds payable.
4. Conversion of bonds payable into share capital.
5. Conversion of preference shares into ordinary shares.

INTEREST

PAS 7, paragraph 33, provides that interest paid and interest received shall be classified as
operating cash flows because such items enter into the determination of net or loss.

Alternatively, interest paid may be classified as financing cash flow because is a cost of
obtaining financial resources. Alternatively, interest received may be classified as
investing cash flow it because it is a return on investment.

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For financial institution, interest paid and interest received are classified as operating cash
flows.

DIVIDENDS

PAS 7, paragraph 22, provides that dividend received shall be classified as operating cash
flow because it enters into the determination of net income. Alternatively, dividend
received may be classified as investing cash flow because it is a return on investment.

PAS 7, paragraph 34, provides that dividend paid shall be classified as financial cash flow
because it is a cost of obtaining financial resources. Alternatively, dividend paid may be
classified as operating cash flow in order to assist users to determine the ability of the
entity to pay dividends out of operating cash flows.

INCOME TAXES

PAS 7, paragraph 35, provides that cash flows arising from income taxes shall be separately
disclosed as cash flows from operating activities unless they cam specifically identified
with investing and financing activities.

Tax cash flows are often difficult to match to the originating underlying transaction, so
most of the time all tax cash flows are classified as arising from operating activities.

Receivables
The term receivables refers to amounts due from individuals and companies. It claims that
are expected to be collected in cash. Receivables represent one of a company’s most
liquid assets. Receivables are recorded if conditions for revenue recognition are met but
cash inflow has not yet occurred

CLASSIFICATION OF RECEIVABLES

 TRADE RECEIVABLES: Amounts owed by customers for goods sold and services
rendered. Are amounts owed by customers for goods and services sold in the course of a
firm’s ordinary business (trading) activities, including all accounts receivable and all
notes receivable resulting from trade activities. Trade Receivables which are expected to
be realized in cash within the normal operating cycle or one year, whichever is longer,
are classified as current asset.

 NON-TRADE RECEIVABLES: Arise from a variety of transactions. which are the total
claims resulting from transactions or events that are not a firm’s ordinary business
activity, such as dividends or interest receivable, advances to employees and claims for
losses or damages. Non-trade receivable which are expected to be realized within one
year, the length of the operating cycle notwithstanding are classified as current asset. If
collectible beyond one year, non-trade receivable are classified as noncurrent assets.
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Receivables are frequently classified as:

 ACCOUNTS RECEIVABLE
 Amounts owed by customers on account.
 Result from the sale of goods and services (often called trade receivables).
 Expected to be collected within 30 to 60 days.
 Usually the most significant type of claim held by a company.

 NOTES RECEIVABLE
 Represent claims for which formal instruments of credit are issued as evidence
of debt.
 Credit instrument normally requires payment of interest and extends for time
periods of 60-90 days or longer.
 May result from sale of goods and services (often called trade receivables).

 OTHER RECEIVABLES
 Nontrade receivables including interest receivable, loans to company officers,
advances to employees, and income taxes refundable.
 Generally classified and reported as separate items in the balance sheet.

Recognition of Accounts Receivable

 For a service organization, a receivable is recorded when service is provided on

account.
 Merchandisers record accounts receivable at the point of sale of merchandise on
account.
 Entry is recorded to increase both Sales and Accounts Receivable.
 Receivable may be reduced by sales discount and/or sales return.

Illustration:

 Assume that Orange Company on July 1, 2017, sells merchandise on account to

Citrus Company for $1,000 terms 2/10, n/30. Prepare the journal entry to record
this transaction on the books of Orange Company.

Jul. 1 Account Receivable $1,000

Sales Revenue $1,000

 On July 5, Citrus Company returns merchandise worth $100 to Orange Company.

Jul. 5 Sales Returns and Allowances $100

Accounts Receivable $100

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 On July 11, Orange Company receives payment from Citrus Company for the balance
due.

Jul. 11 Cash ($900 - $18) $882

Sales Discounts ($900 x .02) $18
Accounts Receivable $900

References and Supplementary Materials

Books and Journals

1. Mr. Conrado T. Valix, Mr. ; 2015 Edition; 2015 Edition Financial Accounting Volume 1;
C.M. Recto Avenue Manila; GIC ENTERPRISES AND CO., INC
2. Mr. Conrado T. Valix, Jose F. Peralta, Christian Aris Valix. ; 2020 Edition; Conceptual
Framework and Accounting Standards ; C.M. Recto Avenue Manila; GIC ENTERPRISES
AND CO., INC

Online Supplementary Reading Materials

1. Cash and Cash Equivalents; https://www.slideshare.net/kversustheworld/cash-and-

cash-equivalent; June 18, 2020
2. Receivables;
http://www.bwl1.ovgu.de/bwl1_media/pdf/financial_accounting/WS+15_16/FinAcc_10
-p-1580.pdf; June 20, 2020
3. Recognition of Financial Asset and Liabilities; http://www.avnt.lt/assets/Veiklos-
sritys/Apskaita/VAS/VAS-angl-kalba/18-BAS-FINANCIAL-ASSETS-AND-FINANCIAL-
LIABILITIES.pdf; June 17, 2020
4. Conceptual Framework; https://www.efes.group/wp-
content/uploads/2018/11/framework.pdf; June 15, 2020
5. Nonfinancial assets; https://stats.oecd.org/glossary/detail.asp?ID=1804; June 17,
2020
6. Receivables;
http://staffnew.uny.ac.id/upload/132309995/pendidikan/Introduction+to+Accounting
+2+Accounting+for+Receivables.pdf; June 20, 2020
7. Accounting Standards; https://www.slideshare.net/abhishek20091817/accounting-
standard-13994589?qid=80f84fef-f6eb-421c-9d1a-
b25b0a7a065b&v=&b=&from_search=15; June 20, 2020
8. Classification; https://www.nexia-sabt.co.za/sabtips/2015/ifrs-9-financial-
instruments-classification-and-measurement/; June 17, 2020

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9. Receivables;http://www.csun.edu/~nrd36607/files/chap08.htm; June 20, 2020

Online Instructional Videos

1. Recognizing Accounts Receivables; https://youtu.be/Y3jjPjjQIPA; June 20, 2020

2. Recognizing Accounts Receivables; https://bit.ly/313BAwH; June 20, 2020

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