Cash and Receivables

March 7, 2023 8:46 PM

Cash

Definition:
- Under PAS 1, an entity shall classify an asset as current when the asset is cash or a cash
equivalent unless it is restricted to settle a liability for more than 12 months after the
reporting period.
- Under PAS 7, cash comprises cash on hand and demand deposits.
- Cash equivalent 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.
- Under PAS 7, 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.
- Unrestricted in use, must be readily available in the payment of current obligation

3 items are included in cash account:

1. Cash on hand – examples: customer’s checks, cashier’s or manager’s checks, traveler’s checks,
bank drafts, money orders
2. Cash in bank – examples: demand deposit, savings deposit (all should be unrestricted as to
withdrawal)
3. Cash fund – examples: petty cash fund, payroll fund, dividend fund, travel fund, interest fund,
tax fund (fund for short term purposes)

Cash equivalents:
- Are short term and highly liquid investments that are readily convertible into cash and so near
their maturity that they present insignificant risk of changes in value because of interest rate
changes.
- Examples of CE are:
○ BSP treasury bill
○ Time deposit
○ Money market fund/instrument or commercial paper
○ Preference shares specified with redemption date
- Note:
○ All of these investments must be purchased three months (or 90 days) before maturity
date.
○ Equity securities cannot qualify as cash equivalents because it does not have maturity
value
○ PS with Specified Redemption - must be acquired three months before redemption date

Measurement of cash
- Cash is measured at face value.
- Cash in foreign currency is measured at current exchange rate.
- Cash is measured at lower of estimated realizable value and face value if the bank that holds
the funds of an entity is in bankruptcy or financial difficulty.

Presentation of Cash and Cash Equivalents

- Aggregated amount of cash and cash equivalents is reported as the first line item under
current assets of the statement of financial position.
- Disaggregated amount of cash and cash equivalents should be disclosed in the notes to
financial statements.

Classification of Investment in Time Deposit, Money Market Instrument and Treasury Bills
a. If purchase three months or less before its maturity, it's a cash equivalent

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 a. If purchase three months or less before its maturity, it's a cash equivalent
b. If more than three months but within one year, a short term investment and current asset
c. More than one year, classified as long term investment

Cash fund for a certain purpose

- Cash fund set aside for use in current operations is a current asset
○ Thus included in cash and cash equivalents
• Cash fund for current operations – current asset (cash)
○ Examples: petty cash fund, payroll fund, dividend fund, travel fund, interest fund, tax
fund
• Cash fund set aside to acquire long term asset or to pay noncurrent obligations – noncurrent
asset (long term investment)
○ Examples: bond sinking fund, preference share redemption fund, contingency fund,
insurance fund, fund set aside to purchase/construct PPE.
• NOTE: Classification of the bond is parallel to the classification of its relate liability

Bank Overdraft
- There is an overdraft when the cash in bank account has a credit balance.
- Classified as current liability
- Shall not be offset against other bank accounts with debit balances, except, when an entity
maintains two or more account in one bank (an account with credit balance can be offset
against other account/s with positive balance) or when the amount is immaterial.
- In Philippines, bank overdrafts are, generally, not allowed.

Compensating Balance
- In relation to borrowing arrangement with a bank, compensating balance is the minimum
checking or demand deposit account balance that must be maintained.
- Not Legally Restricted
○ Cash
- Legally Restricted
○ Related to Current Liability - Current Asset
○ Related to Non-current Liability - Noncurrent Asset

Accounting for Issues about checks

• Undelivered/unreleased checks – drawn and recorded by the maker but not given to the
payee before the end of reporting period.
○ Treatment: Maker (debtor) – added back as part of cash
• Postdated checks – drawn, recorded and delivered to payee but has a date subsequent to end
of reporting period.
○ Treatment: Maker (debtor) – added back as part of cash
• Stale check/check long outstanding – check not converted to actual cash by payee within a
long period of time.
○ Treatment: Maker (debtor) – added back to cash

Imprest System
- This system requires that all cash receipts should be deposited intact and all cash
disbursements should be made by means of check.
- An internal cash control device

Two Systems of Handling Petty Cash Fund

1. Imprest Fund System
- Petty cash expense is recorded at the date of replenishment
- The amount of replenishment is normally equal to the petty cash disbursement
2. Fluctuating Fund System
- Petty cash expense are expensed immediately
- Replenishment may or may not be equal to the petty cash disbursement

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 - Replenishment may or may not be equal to the petty cash disbursement

Receivables
Trade and Nontrade Receivables
1. Trade Receivables
- Claims arising from sale of merchandise or services in the ordinary course of business
- Includes
 Accounts Receivables - customer's account, trade debtors and trade account
receivables
2. Non-trade Receivables
- Represents claims other than from sale of merchandise or service
- Examples
a. Advances to or receivables from shareholders, directors, officers, or employees
b. Advance to affiliates - noncurrent asset
c. Advance to supplier - current asset
d. Subscription Receivable
- More than 1 year - deduction in SHE (if silent treatment)
- Within 1 year - current
e. Creditors account with debit balance
f. Special Deposits - normally classified as noncurrent asset
g. Accruals - current
h. Claims receivable - current asset

Initial Measurement:
- Short term Receivables: Face Value
- 5Long Term Receivables:
- Noninterest bearing - Present Value
- Interest bearing: Face Value, but Present Value if market rate is unrealistic

Subsequent Measurement
- Net Realizable Value/Amortized Cost

NRV of Accounts Receivables:

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