Cash and Cash

Equivalents
By: Dr. Angeles A. De Guzman
Dean, College of Business Education
Simply means money
Money and any other negotiable
instrument
Checks, bank drafts and money orders
Unrestricted Cash
◦ Cash on Hand
◦ Cash in Bank
◦ Cash Fund

Definition
 • Cash on Hand

• Cash in Bank

• Cash Fund

Unrestricted Cash
Three-month BSP treasury bill
Three-year BSP treasury bill purchased
three months before date of maturity
Three-month time deposit
Three-month money market instrument or
commercial paper

Cash Equivalents
Cash is measured at face value
Cash in foreign currency is measured at
the current exchange rate
Cash in Bankruptcy or financial difficulty
financial institution should be written
down to estimated realizable value
(amount recoverable is lower than the
face value)

Measurement of Cash
Cash and cash equivalents should be shown
as the first item among the current assets
Includes all cash items, such as cash on
hand, cash in bank, petty cash fund, and
cash equivalents which are unrestricted in
use for current operations
Details of “cash and cash equivalents”
should be disclosed in the notes to financial
statements

Financial Statement Presentation

If the term is three months or less, such
instruments are classified as cash equivalents
If the term is more than three months but
within one year, such investments are
classified as short term financial assets or
temporary investments
If the term is more than one year, such
investments are classified as noncurrent or
long-term investments

Investment of excess cash

Cash in foreign currency should be translated
to Philippine pesos using the current
exchange rate
Deposits in foreign countries which are not
subject to any foreign exchange restriction
are included in “cash”
Deposits in foreign bank which are subject to
foreign exchange restriction, if material
should be classified separately among
noncurrent assets

Foreign Currency
Cash fund for use in current operations or for
payment of current obligation is included as
part of cash and cash equivalents
◦ Petty Cash Fund, Payroll Fund, Travel Fund, Interest
Fund, Dividend Fund, Tax Fund
Cash fund for noncurrent purpose or payment
of noncurrent obligation shown as long-term
investment
◦ Sinking fund, Preference Share Redemption fund,
Contingent fund, Insurance fund and Fund for
acquisition or construction of PPE

Cash Fund for a Certain Purpose

Bank account with credit balance
Due to issuance of checks in excess of
deposits
Classified as a current liability
Should not be offset against other bank
accounts with debit balances
Except overdraft can be offset against the
other bank account with a debit balance
maintained in one bank

Bank Overdraft
Minimum checking or demand deposit
account balances that must be maintained in
connection with a borrowing arrangement
with a bank
Classification of compensating balance
◦ Not legally restricted as to withdrawal by the
borrower is part of cash
◦ Legally restricted classified separately as cash held
as compensating balance under current assets if
related loan is short term otherwise long-term

Compensating Balance
Merely drawn and recorded but not given
to the payee before the end of the
reporting period
No payment when the check is pending
delivery
Undelivered check is still subject to the
entity’s control
Adjusting entry to restore the cash
balance and set up the liability

Undelivered or Unreleased Check

Check drawn, recorded and already given to
the payee but it bears a date subsequent to
the end of the reporting period
Original entry recording a delivered
postdated check shall also be reversed to
restore the cash balance
No payment until the check can be
presented to the bank for encashment or
deposit

Postdated Check Delivered

Stale check is a check not encashed by the
payee within a relatively long period of time
Based on banking practice, check become
stale if not encashed within six months from
the time of issuance
If amount of stale check is immaterial, it is
accounted for as miscellaneous income
If amount of stale check is material, cash is
restored and the liability is again set up.

Stale Check or Check Long

Outstanding
Opening the books of accounts beyond the close
of the reporting period for the purpose of
showing a better financial position and
performance
◦ By recording as of the last day of the reporting period
collections made subsequent to the close of the period
◦ By recording as of the last day of the reporting period
payments of accounts made subsequent to the close
of the period
Such practices are unacceptable and
undesirable

Window Dressing
Is a practice used for concealing a cash
shortage
Consists of misappropriating a collection
from one customer and concealing this
defalcation by applying a subsequent
collection made from another customer
Involves a series of postponements of the
entries of collection of receivables

Lapping
Another device to conceal a cash shortage
Possible when an entity maintains current
accounts in different banks
Occurs when a check is drawn against a
first bank and depositing the same check
in a second bank to cover the shortage in
the latter bank.

Kiting
Useof Cash short or over account a
temporary or suspense account
◦ If cash custodian is held responsible it is closed
to due from Cashier (shortage) or payable to
Cashier (overage)
◦ If failed to disclose the cause of shortage is
closed to loss from cash shortage (shortage) or
miscellaneous income (overage)

Accounting for Cash

Shortage/Overage
Imprest System –cash receipts should be
deposited intact and all cash disbursements
should be made by means of check
Imprest Fund System
◦ Petty cash fund runs low, check is drawn to replenish
the fund
◦ Replenishment only by means of check and not from
undeposited collections
Fluctuating fund system
◦ Check drawn to replenish the fund do not necessarily
equal the petty cash disbursements

System of Internal Control of Cash