CASH AND CASH

EQUIVALENTS(ABM_FABM12)

Prepared by: Jean Yves R. Bravo

Senior High School, ABM
CASH (DEFINITION AND VALUATION)

Cash – includes money and any other negotiable instrument that is payable in money
and acceptable by the bank for deposit and immediate credit.

*Cash includes checks, bank drafts and money orders because these are acceptable
by the bank for deposit and immediate encashment.

Unrestricted Cash
- means that cash must be readily available in the payment of current obligations
and not be subject to any restrictions, contractual or otherwise.

Examples: cash on hand, cash in bank and cash fund for current purposes.
CASH EQUIVALENTS (PAS NO. 7)

Cash Equivalents – short-term and highly liquid investments that are readily convertible
into cash and so near their maturity that they represent insignificant
risk of changes in interest rates.
*only highly liquid investments that are acquired or purchased three (3) months before
maturity can qualify as cash equivalents.

Examples of Cash Equivalents:

1. three – month BSP treasury bill
2. three – year BSP treasury bill purchased three months before date of maturity
3. three – month time deposit
4 three – month money market instruments
VALUATION AND PRESENTATION OF CASH

Cash is valued
- at face value. However, 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 estimated realizable value if the
amount recoverable is estimated to be lower than the face value.

Cash and Cash Equivalents

- should be presented as the first item among the current assets. However,
details comprising “cash and cash equivalents” should be disclosed in the
notes to financial statements.
SHORT – TERM INVESTMENTS AND FUNDS
Investments in time deposits, money market placements and treasury bills should be
classified as:

a. If the term is three months or less, such instruments are classified as cash
equivalents.
b. if the term is more than three months but within one year, such investments are
classified as short – term or temporary investments and presented separately as
current assets.
c. if the term is more than one year, such investments are classified as long term
investments. However, if such investments become due within one year from the
balance sheet date, they are reclassified as current assets.

Cash fund is set aside for use in current operations, it is a current assets.
Examples: petty cash fund, payroll fund, travel fund, dividend fund and tax fund.
SHORT – TERM INVESTMENTS AND FUNDS
However, if the cash fund is set aside for non – current purposes, it is shown as long –
term investments.
Examples: sinking fund, preferred redemption fund, contingent fund, insurance
fund and fund for acquisition or construction of property, plant and
equipment.

Bank Overdraft – when the cash in bank account has a credit balance, it is said to be
an overdraft. The credit balances in the cash in bank account results
from the issuance of checks in excess of the deposits. It is classified as
current liability.

Compensating Balance – is the minimum checking or demand deposit account

balance that must be maintained in connection with a
borrowing arrangement with a bank.
SHORT – TERM INVESTMENTS AND FUNDS
The compensating balance is classified as follows:

1. if the deposit is not legally restricted as to withdrawal, the compensating

balance is part of “cash” account.
2. if the deposit is legally restricted, the compensating balance is shown separately
as “cash held as compensating balance” under the current assets if the related
loan is short – term. If the loan is long – term, it is shown as long – term
investments.

Undelivered or Unreleased checks – checks which are merely drawn and recorded
but not given to payees. Restored back to cash.
Postdated checks delivered – checks are drawn, recorded and given to payees but
they bear a date subsequent to the balance sheet date.
Stale checks – when checks are not encashed within a relatively long period of time. Thus
in bank practice, checks become stale if not encashed within six months
from the date of issuance.
BALANCE SHEET PRESENTATION ON CASH
Note
Current Assets:
Cash and cash equivalents (1) 500,000
Trading securities, at market value (2) 200,000
Trade and other receivables (3) 700,000
Inventories (4) 900,000
Prepaid expenses 50,000
Total Current Assets: 2,350,000

Note 1 – Cash and cash equivalents

Cash on hand 40,000
Cash in bank 300,000
Petty cash fund 10,000
BSP Treasury bill 100,000
Total cash and cash equivalents: 500,000
END OF LESSON