Cash and

Cash Equivalents

Dexter G. Alonzo
MBA 602-1 - FINANCIAL ACCOUNTING
Cash and
Cash Equivalents

Dexter G. Alonzo
MBA 602-1 - FINANCIAL ACCOUNTING
 1. Intro: General
Characteristics
2. “Cash”
3. “Cash Equivalents”
Report Outline 4. Importance
5. Managing and Accounting
6. Conclusions: Effective
Management
 1. Intro: General
Characteristics
2. “Cash”
Report Outline 3. “Cash Equivalents”
4. Importance
5. Managing and Accounting
6. Conclusions: Effective
Management
1. General Characteristics
High Readily Low Risk Immediate Unrestricted
Liquidity Convertible Availability Use
highly liquid can be readily they have minimal available for free from any
assets, meaning converted into a risk of value immediate use in significant
they can be easily known amount of fluctuation or meeting current restrictions on
and quickly cash; held in the default. They are obligations and their use. They
converted into form of currency, generally held in funding are meant to be
cash without bank deposits, or stable and secure day-to-day readily available
significant loss in short-term financial operations. for the
value. investments that institutions. organization's
have a maturity operational
period of three needs.
months or less.
 1. Intro: General Characteristics

2. “Cash”
3. “Cash Equivalents”
Report Outline 4. Importance
5. Managing and Accounting
6. Conclusions: Effective
Management
2. Definition of “Cash”
Money used as the standard medium of
exchange in business transactions.

Includes negotiable instruments

payable in money and accepted by the
bank for deposit and immediate credit
(e.g., checks, bank drafts, money orders).
2. Examples of “Cash”
○ Cash on hand
■ Undeposited cash collections and other cash items awaiting deposit.
■ Examples: customers' checks, cashier's or manager's checks, traveler's
checks, bank drafts, money orders.
○ Cash in bank
■ Demand deposit or checking account and saving deposit with
unrestricted withdrawal.
○ Cash fund
■ Petty cash fund, payroll fund, dividend fund.
 1. Intro: General Characteristics
2. “Cash”

3. “Cash
Report Outline Equivalents”
4. Importance
5. Managing and Accounting
6. Conclusions: Effective
Management
3. Definition of “Cash
Equivalents”
Short-term and highly liquid
investments readily convertible into
cash.

Highly liquid investments acquired

three months before maturity.
3. Examples of “Cash Equivalents”

● three-month BSP treasury bill, three-year BSP treasury bill (purchased

three months before maturity), three-month time deposit, three-month
money market instrument or commercial paper.
● Equity securities do not qualify as cash equivalents.
● Preference shares with specified redemption date acquired three months
before redemption may qualify as cash equivalents.
 1. Intro: General Characteristics
2. “Cash”
3. “Cash Equivalents”

Report Outline 4. Importance

5. Managing and Accounting
6. Conclusions: Effective Management
4. Importance of Cash and
Cash Equivalents
Liquidity and Financial Investment and
Operational Flexibility and Strategic
Stability Risk Mitigation Advantages
Day-to-day operational respond to emergencies, fund research, acquire
expense, utility bills handle unforeseen assets or other businesses,
expenses expand into new markets
In April 2012, Facebook
acquired Instagram, a
popular photo-sharing app,
for approximately $1
billion in cash and stock.

Did you know?

From a financial perspective, the acquisition of
Instagram represented an acquisition of valuable
intangible assets, including Instagram's brand,
user base, technology, and intellectual property.
These assets contributed to Facebook's overall
asset portfolio and added value to the company..
 1. Intro: General Characteristics
2. “Cash”
3. “Cash Equivalents”
4. Importance

Report Outline 5. Managing and

Accounting
6. Conclusions: Effective Management
 5. Managing & Accounting:
Cash and Cash-related transactions

Bank Overdraft
● classified as a current liability and
should not be offset against other
bank accounts with debit balances.
Definition ● Overdrafts are generally not
Bank account with a
credit balance resulting
permitted in the Philippines.
from checks issued ● Exception: Overdrafts in one
exceeding deposits is
considered an account can be offset against other
overdraft.
accounts in the same bank.
5. Managing & Accounting:
Cash and Cash-related transactions
● Compensating Balance
● Informal compensating balance: Part of Cash
■ If the deposit is not legally restricted as to withdrawal by the borrower due to an
informal compensating balance agreement, it is considered part of cash.
● Formal compensating balance related to short-term loan: Current Asset (Cash held as
compensating balance)
■ If the deposit is legally restricted due to a formal compensating balance agreement
and the related loan is short-term, the compensating balance is classified as a
current asset under "Cash held as compensating balance."
● Formal compensating balance related to long-term loan: Noncurrent Investment
■ If the related loan is long-term, the compensating balance is classified as a
noncurrent investment.
5. Managing & Accounting:
Cash and Cash-related transactions
● Undelivered check: Current Asset (Accounts Payable)
○ An undelivered check represents a liability until it is given to the payee. It is classified as a
current asset under accounts payable until it is delivered.
Opening Entry:

Purchases xxx
Accounts Payable xxx

Closing Entry:

Accounts Payable xxx

Cash xxx
5. Managing & Accounting:
Cash and Cash-related transactions
● Postdated check (Company’s check issued):
Current Asset (Prepaid Expenses)
○ A postdated check is a check that has been issued
and given but bears a date subsequent to the end of
the reporting period. It is classified as a current
asset under prepaid expenses since it represents a
payment made in advance.
Opening Entry:

Cash xxx
Prepaid Expense xxx

Closing Entry:

Prepaid Expense xxx

Cash xxx
5. Managing & Accounting:
Cash and Cash-related transactions
● Postdated check (Customer’s check received - not
yet cash): Current Asset (Accounts Receivable)
○ This shall be treated and recorded as part of the
accounts receivables, presented under current
assets of the statement of financial positions.
Opening Entry:

Account Receivable xxx

Sales xxx

Closing Entry:

Cash xxx
Account Receivable xxx
5. Managing & Accounting:
Cash and Cash-related transactions
● Stale check: A stale check is a check that has not been encashed
by the payee within a relatively long period of time.
● NO TRANSACTIONS made. DO NOT ACCEPT STALE CHECKS.
5. Managing & Accounting:
Cash and Cash-related transactions
● Cash shortage: Current Liability (Accounts Payable)
○ Cash shortage represents a discrepancy or
deficiency in the amount of cash available compared
to the recorded amount. It is treated as a current
liability under accounts payable until the shortage is
resolved.
Opening Entry:

Employee Receivable - (Name) xxx

Cash xxx

Closing Entry:

Cash xxx
Employee Receivable - (Name) xxx
5. Managing & Accounting:
Cash and Cash-related transactions
● Cash overage:
○ Cash overage represents an excess amount of cash
compared to the recorded amount. It is classified as
a current asset under Miscellaneous income if
cannot be traced, or Employee Payable - (name) if
overage belongs to employee.
 If cannot be traced:

Cash xxx
Miscellaneous income xxx

If payable to employee:

Employee Payable - (Name) xxx

Cash xxx
5. Managing & Accounting:
Other General Principles
● Investment of excess cash
○ Cash accumulated beyond current operational needs should be
invested temporarily in revenue-earning investments.
○ Classification of investment:
■ Term of three months or less: Cash equivalents.
■ Term more than three months but within one year: Current
assets.
■ Term more than one year: Noncurrent or long-term investments.
■ Investments due within one year from the reporting period are
reclassified as current or temporary investments.
5. Managing & Accounting:
Other General Principles
● Measurement of Cash
○ Cash is measured at face value.
○ Cash in foreign currency is measured at the current
exchange rate.
○ Cash value is written down to estimated realizable value
if held by a bankrupt or financially troubled bank or
financial institution.
5. Managing & Accounting:
Other General Principles
● Financial Statement Presentation
○ "Cash and cash equivalents" should be the first
line item among current assets.
○ Details of cash and cash equivalents should be
disclosed in the notes to financial statements.
5. Managing & Accounting:
Other General Principles
● Foreign Currency
○ Cash in foreign currency should be translated into Philippine
pesos using the current exchange rate.
○ Deposits in foreign countries without foreign exchange
restrictions are included in "cash."
○ Deposits in foreign banks with foreign exchange restrictions,
if material, are classified separately among noncurrent
assets.
5. Managing & Accounting:
Other General Principles
● Cash Fund for a Certain Purpose
○ Cash fund for current operations is a current asset
and included in cash and cash equivalents.
○ Cash fund for noncurrent purposes is shown as a
long-term investment.
5. Managing & Accounting:
Other General Principles

● Classification of Cash Fund

○ Classification of cash fund parallels the
classification of the related liability.
5. Managing & Accounting:
Other General Principles
● Imprest system
○ A system of control of cash which requires that all
cash receipts should be deposited intact and all
cash disbursements should be made by means of
check.
5. Managing & Accounting:
Other General Principles
● Petty Cash fund
● It is money set aside to pay small expenses which cannot be paid conveniently by
means of check.
● Two methods of handling:
○ Imprest fund system
■ The replenishment check is usually equal to the petty cash
disbursements.
○ Fluctuating Fund system
■ The system is called “Fluctuating fund system” because the checks drawn
to replenish the fund do not necessarily equal the petty cash
disbursements
 1. Intro: General Characteristics
2. “Cash”
3. “Cash Equivalents”
4. Importance
5. Managing and Accounting

Report Outline 6. Conclusions:

Effective
Management
6. Conclusion: Effective
Management
Effective management and control of cash and cash
equivalents are vital for optimizing financial resources.
Businesses must establish strong internal controls to
safeguard cash, prevent fraud, and ensure accurate
recording and reporting. Cash management techniques,
such as cash flow forecasting and cash concentration,
assist in monitoring and maximizing cash availability.
6. Conclusion: Cash Flow vs. Profit
While profit is important for businesses, it's not the only
factor that determines financial health. Cash flow, or the
amount of cash coming in and going out of a business, is also
critical.

A business can be profitable but still experience cash flow

problems if it has significant outstanding debts or
slow-paying customers. It's important for businesses to
manage their cash flow effectively to ensure they have
enough liquidity to cover expenses and investments
Elon Musk
The ambitious Elon Musk
and Tesla, Inc.
1. Tesla, led by visionary Elon Musk, embarked on a mission to revolutionize
the automotive industry with sustainable electric vehicles.
2. Despite achieving profitability, Tesla faced cash flow challenges as its
ambitious growth plans required significant capital investments. Tesla, Inc. is an American
multinational automotive and
3. Striking a balance between profitability and cash flow, Tesla sought energy company
additional financing to support its expansion and innovation. headquartered in Austin,
Texas. Tesla designs and
4. Through equity offerings and debt issuances, Tesla secured the necessary manufactures electric
capital to fuel its growth and maintain its momentum. vehicles, stationary battery
energy storage devices from
5. Overcoming cash flow hurdles, Tesla continues to inspire a greener home to grid-scale, solar
future by accelerating the world's transition to sustainable energy. panels and solar roof tiles,
and related products and
services.
General Conclusion.
Effective management of cash and cash
equivalents involves balancing liquidity
and return on investment, and
understanding the difference between Tip

cash flow and profit. By following these

principles, individuals
and businesses can
better manage their
finances and achieve
their financial goals.