KIESO – WEYGANDT – WARFIELD – YOUNG – WIECEK - MCCONOMY

INTERMEDIATE
ACCOUNTING
VOLUME 1
ELEVENTH CANADIAN EDITION

Prepared by:
Darrin Ambrose CPA, CMA, MBA
University of Calgary
CHAPTER 7:
CASH
 Chapter 7: Cash and Receivables

After studying this chapter, you should be able to:

1. Understand cash and accounts receivable from a business
perspective.
2. Define financial assets, and identify items that are considered cash
and cash equivalents and how they are reported.

After studying Appendix 7A, you should be able to:

3. (Appendix A) Explain common techniques for controlling cash.

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Cash and Receivables

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 Understanding Cash and Accounts Receivable

• Managing and controlling cash and accounts

receivable are critical objectives for many
companies
• Key concerns relating to management and
control of cash include
– Implementing appropriate internal controls,
including regular bank reconciliations
– Minimizing “idle” cash

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 Financial Asset

“Any asset that is:

(i) cash;
(ii) a contractual right to receive cash or
another financial asset from another party;
(iii) a contractual right to exchange
financial instruments with another party
under conditions that are potentially
favourable to the entity; or
(iv) an equity instrument of another entity”
CICA Handbook, Part II, Section 3856

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 What is Cash?

• Cash is reported as a current asset if it is readily

available to pay current obligations and is free of
restrictions
• Cash consists of coins, currency, available funds
on deposit at the bank, and petty cash
• Also includes money orders, certified cheques,
cashier’s cheques, personal cheques, bank
drafts, and usually savings accounts
• Post-dated cheques, travel advances, and
stamps on hand are not classified as cash

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 Reporting of Cash

• Reporting cash needs special attention in

the case of the following:

1. Restricted cash
2. Cash in foreign currencies
3. Bank overdrafts
4. Cash equivalents

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 Restricted Cash

• Compensating balances: minimum cash

balances maintained by a corporation in
support of existing borrowings
• These funds are not available for use by
the corporation, but the bank can use the
restricted cash
• Petty cash, special payroll, and dividend
accounts are examples of cash set aside
for a special purpose (usually not material)

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 Restricted Cash

• If the restricted cash balance is material,

must be segregated from regular cash for
reporting purposes
• Classified as current or non-current assets
depending on date of availability or
expected disbursement
• Note disclosure of restricted cash is
required

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 Foreign Currencies

• Amount held in foreign currencies is

reported in Canadian dollars on the date of
the statement of financial position (i.e.
balance sheet date)
• The exchange rate on the date of the
statement of financial position is used to
translate foreign currencies into Canadian
dollars
• If restrictions exist on the foreign funds,
those funds are reported as restricted

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 Bank Overdrafts

• Overdrafts represent cheques written in excess

of the cash account balance
• Overdrafts are reported as current liabilities
(often reported as accounts payable)
• In general, bank overdrafts should not be offset
against the Cash account
• However, bank overdrafts may be offset against
available cash in another account if both
accounts are at the same bank

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 Cash Equivalents

• Defined as “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.”
• Original maturity is generally three months or less
• Typical examples: treasury bills, money-market funds,
commercial paper
• ASPE excludes equity securities
• Under IFRS, some equity instruments can be classified
as cash equivalents (for example, preferred shares
acquired within a short time of their maturity date)
• Cash equivalents are reported at fair value

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CHAPTER 7:
APPENDIX

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 Using Bank Accounts

• Using different bank accounts for different

purposes
– General chequing account
• Used for day-to-day activities
– Imprest bank accounts
• Used for specific purposes
– Lockbox accounts
• Used for collections in subsidiary locations
• Arrangements made with a local bank to pick-up
and deposit funds received
• Allows for quicker collection and availability of cash

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 Imprest Petty Cash System

• Designed for disbursements where payment by

cheque is impractical
• Control processes/procedures include the
following:
– Designate a petty cash custodian
– Custodian is responsible for getting a receipt
for each authorized disbursement
– Custodian prepares a summary of petty cash
receipts and disbursements each time the
fund requires reimbursement
– Cheque is prepared and transactions recorded
by someone other than the custodian
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 Imprest Petty Cash System

• Cash Over and Short account used when the

cash in the fund plus dollar amount of receipts
does not equal the balance of the petty cash
fund
• Additional control procedures include:
• Unscheduled fund counts to ensure fund
balance is maintained
• Receipts are marked (after being
submitted for reimbursement) in some
way to ensure they cannot be used again

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 Imprest Petty Cash System: Example

A petty cash fund is established for $300. A

cheque is issued (for cash), with the following
entry made:

Petty Cash 300

Cash (Bank) 300

No entries are required when petty cash

disbursements are made
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 Imprest Petty Cash System: Example

Petty cash is reconciled and replenished when the fund is

low enough to warrant a cheque being issued or at the
end of an accounting period
The following disbursements were made:
Office Supplies $42
Postage 53
Entertainment 76
Total $171
The custodian counts the cash and finds there is $127 cash.
The fund is $2 short ($300 – $171 = $129).
Once the custodian has ensured that all receipts and cash have
been accounted for, the $2 difference is considered Cash
Over and Short.
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 Imprest Petty Cash System: Example

A cheque is written for the required amount of $173

($171 + $2). The entry to record the cheque is:

Office Supplies Expense 42

Postage Expense 53
Entertainment Expense 76
Cash Over and Short 2
Cash (Bank) 173

What would the entry have been if it was decided to

decrease the fund to $250?

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 Reconciliation of Bank Balances

• Ensures there are no errors

• Ensures no omissions have occurred during
the month
• Ensures unusual transactions are properly
recorded
• Should not be completed by the same person
who writes cheques or completes the
deposits

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 Bank Reconciliation:
Reconciling Items

1.Deposits in Transit: deposits that have been recorded

in the books of account, but not yet by the bank
2.Outstanding Cheques: cheques that have been
recorded in the books of account, but have not yet
cleared the bank
3.Bank Charges: service, and other charges, made by
the bank, but not yet recorded in the books of account
4.Bank Credits: collections or deposits made by the
bank, but not yet recorded in the books of account
5.Bank or Depositor Errors: any unrecorded errors by
either the bank or the company
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 Bank Reconciliation:
Form and Content

Balance per bank statement (end of period) $$$

Add: Deposits in transit $$
Undeposited receipts $$
Bank errors $$ $$
$$$
Deduct: Outstanding cheques $$
Bank errors $$ $$
Correct cash balance $$$
Balance per depositor’s books $$$
Add: Unrecorded bank credits $$
Book errors $$ $$
$$$
Deduct: Unrecorded bank charges $$
Book errors $$ $$
Correct book balance $$$
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