Cash and Cash Equivalents

Unrestricted Cash
- No specific standard
- PAS 1, p36
o Cash or cash equivalent is classified as current,
o UNLESS, restricted to settle a liability for more than twelve months after the
reporting period
o Must be unrestricted in use to be reported as cash

Cash items included in cash

- Cash on hand
- Cash in bank
- Cash fund (eg. PCF, Payroll fund and Dividend fund)

Cash equivalents
- PAS 7, p6
o Short-term and highly liquid investments
o Readily convertible to cash
o So near maturity that presents insignificant risk in changes in value
o ONLY those that are acquired/purchased three months before maturity
 Three-month BSP treasury bill
 Three-year BSP treasury bill purchased three months before maturity
date
 Three-month time deposit
- Equity securities cannot qualify as they do not have a maturity date
o Preference shares can qualify if acquired three months before redemption date,
AND if it has a specified redemption date.

Classifications of investment of excess cash

- If term is three months or less, such is classified as CASH EQUIVALENTS
o Included under Cash and Cash Equivalents
- If term is more than three months but within one year, such is classified as SHORT-TERM
FINANCIAL ASSETS
o Included under Current Assets and a specific title
- If term is more than one year, such is classified as LONG-TERM FINANCIAL ASSETS
o Included under Non-Current Assets, BUT reclassified into Current Assets when it
becomes due within one year.

Measurement of cash
- Face value
- If at foreign currency, at current exchange rate
 o Deposits in foreign bank subject to foreign exchange restriction should be
classified separately among non-current assets
- If bank or financial institution becomes bankrupt, should be written down to estimated
realizable value.

Financial Statement Presentation

- Under Cash and Cash Equivalents
o First line item
o Under current assets
o Details comprising the cash and cash equivalents should be disclosed in the
Notes to FS

Cash fund for a certain purpose

- If for use in current operation OR payment of current obligation, included in Cash and
Cash Equivalents
- If set aside for noncurrent purposes OR payment of noncurrent obligation, classified
under long-term investment
- Classification
o Should parallel the classification of the related liability

Bank overdraft
- Happens when cash in bank account has a credit balance
o Usually when checks issued are in excess of deposits
- Classified as current liability
- Should not be offset against other bank accounts with debit balances
o However, when one maintains two or more accounts in one bank, overdraft can
be offset against the other account.
o Can be offset if amount is not material
 Under IFRS, when payable on demand and often fluctuates from positive
to negative as an integral part of cash management.
- Not permitted in the Philippines
- Not necessary to open a bank overdraft account
- Illustration
o First bank, overdrawn by P10,000
o Second bank, debit balance of P100,000
o Net cash balance is P90,000
o Recorded as:
 Current Asset: Cash in bank – Second bank – P100,000
 Current Liability: Bank overdraft – First bank – P10,000

Compensating balance
- Usually takes the form of minimum checking or demand deposit account balance
- Results in the reduction of amount borrowed
 - Provides a source of fund as partial compensation for loan extended.
- Classification:
o Part of cash IF NOT legally restricted, usually form an informal agreement
o IF legally restricted, classified separately as “cash held as compensating balance”
 Short-term/under current assets if related loan is short-term
 Long-term/noncurrent investment if related loan is long-term

Undelivered check
- Also known as unreleased check
- Drawn and recorded but not given to payee before end of reporting period.
- No payment when check is pending delivery to payee at the end of reporting period.
o Still subject to control of the entity
o Can be canceled anytime
- Adjusting entry to restore:
o Cash xxx
AP or appropriate account xxx
- In practice, adjustment can be ignored if not very substantial and no evidence of actual
cancellation of check.

Postdated check delivered

- Drawn, recorded, and already given to payee but bears a date subsequent to end of
reporting period.
- Should be reversed to restore cash balance.
- Entry to reverse:
o Cash xxx
AP or appropriate account xxx
- Reason is there is no payment until check is presented to bank for encashment or
deposit

Stale check
- Also known as check long outstanding
o Check not encashed by a payee within a relatively long period of time
o Presentment must be made within a reasonable time after issue.
o No specified definite period by law
- In banking practice, check becomes stale if not encashed within six months
- Entity may issue a stop payment order to bank for cancellation
- If amount is immaterial:
o Cash xxx
Miscellaneous Income xxx
- If amount is material:
o Cash xxx
AP or appropriate account xxx
Accounting for cash shortage
- Cash short or over account is a temporary or suspense account.
- If cash count is less than book value
o Cash short or over xxx
Cash xxx
- If cashier or cash custodian is held responsible
o Due from cashier xxx
Cash short or over xxx
- If efforts fail to disclose cause of shortage
o Loss from cash shortage xxx
Cash short or over xxx

Accounting for cash overage

- If cash count shows cash more than the balance per book
o Cash xxx
Cash short or over xxx
- If cash overage is treated as miscellaneous income when there is no claim
o Cash short or over xxx
Miscellaneous income xxx
- If money is from the cashier
o Cash short or over xxx
Payable to cashier xxx

Imprest system
- A system of control of cash which requires all cash receipts be deposited intact and all
cash disbursements should be made by means of check.

Petty cash fund

- Money set aside to pay small expenses which cannot be paid conveniently by means of
check
- Two methods of handling the petty cash:
o Imprest fund system
o Fluctuating fund system

Imprest fund system

- Usually followed
- Accounting procedures:
o Check drawn to establish the fund
PCF xxx
Cash in bank xxx
o Payment of expenses out of fund (NJE)
o Replenishment of petty cash payments
Expenses xxx
 Cash in bank xxx
o At the end of accounting period, adjust the unreplenished expenses to correctly
state the petty cash balance (To be reversed at the beginning of the next
accounting period)
Expenses xxx
PCF xxx
o An increase in the fund is recorded as:
PCF xxx
Cash in bank xxx
o A decrease in the fund is recorded as:
Cash in bank xxx
PCF xxx

Fluctuating fund system

- Accounting procedures
o Establishment of the fund
PCF xxx
Cash in bank xxx
o Payment of expenses out of the PCF
Expenses xxx
PCF xxx
o Replenishment or increase of the fund
PCF xxx
Cash in bank xxx
o At the end of reporting period, no adjustment is necessary since petty cash
expenses are recorded outright.
o Decrease of fund is reverted to general cash
Cash in bank xxx
PCF xxx
Tranvia Company had the following balances on December 31, 2021:

Cash in checking account P350,000

Cash in money market account P750,000
Treasury bill, purchased November 1, 2021
maturing January 31, 2022 P3,500,000
Time deposit purchased December 1, 2021
maturing March 31, 2022 P4,000,000

What amount should be reported as cash and cash equivalents on December 31, 2021?

Pygmalion Company had the following balances on December 31, 2021:

Cash in bank – current account P5,000,000

Cash in bank – payroll account P1,000,000
Cash on hand P500,000
Cash in bank – restricted account for building
construction expected to be disbursed in 2022 P3,000,000
Time deposit, purchased December 15, 2021 and
due March 15, 2022 P2,000,000

The cash on hand included a P200,000 check payable to Pygmalion, dated January 15, 2022.

What total amount should be reported as cash and cash equivalents on December 31,
2021?

Thor company provided the following data on December 31, 2021:

Checkbook balance P4,000,000

Bank statement balance P5,000,000
Check drawn on Thor’s account, payable to supplier,
dated and recorded on December 31, 2021 but
not mailed until January 15, 2022 P500,000
Sinking fund cash P2,000,000

On December 31, 2021, what amount should be reported as “cash” under current assets?
Liwanag company reported an imprest petty cash fund of P50,000 with the following details:

Currencies P20,000
Coins P2,000
Petty cash vouchers:
Gasoline payments for delivery equipment P3,000
Medical supplies for employees P1,000
Repairs of office equipment P1,500
Loans to employees P3,500
A check drawn by the entity payable to the
order of Grace de la Cruz, petty cash
custodian, representing his salary P15,000
An employee check returned by the bank
for insufficiency of fund P3,000
A sheet of paper with names of several
employees together with contribution
for a birthday gift of a co-employee.
Attached to the sheet of paper is a currency of P5,000

What amount of petty cash should be reported in the statement of financial position?

Timex Company reported petty cash fund which compromised:

Coins and currencies P3,300

Paid vouchers for expenses P3,000
Customer check returned by bank marked “NSF” P1,000
Check drawn to the other of petty cash custodian P2,700

What amount should be reported as petty cash fund?

Campbell Company had the following account balances on December 31, 2021:

Petty cash fund P50,000

Cash on hand P500,000
Cash in bank – current account P4,000,000
Cash in bank – payroll account P1,200,000
Cash in bank – sinking fund P2,000,000
Cash in bank – restricted account for plant addition
and expected to be disbursed in 2022 P1,500,000
Treasury bills P1,000,000

The petty cash fund included unreplenished December 2021 petty cash expenses vouchers
P5,000 and employee IOU P5,000.

The cash on hand included a P100,000 customer check payable to Campbell dated January 15,
2022.

In exchange for a guaranteed line of credit, the entity has agreed to maintain a minimum
balance of P200,000 in the unrestricted current bank account.

The bond sinking fund is set aside to settle bonds payable due on December 31, 2022.

What total amount should be reported as cash and cash equivalents on December 31,
2021?