CASH AND CASH EQUIVALENTS

SUMMARY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR CASH

Cash Items

Unrestricted and
For use other than for
immediately available for
current operations
use in the current
operations
-For payment of operating expense
-For payment of current liabilities
-For acquisition of current assets

“Cash” in the current Other Noncurrent

asset section Financial Assets

DEFINITION OF CASH
Cash includes money and other negotiable instrument that is payable in money and acceptable by
the bank for the deposit and immediate credit. It includes cash on hand, demand deposits and other
items that are unrestricted for use in the current operations.
1. Cash on Hand (CUTCMoBa)

C Customer’s check awaiting deposit

U Undeposited cash collections (currencies such as bills and coins)
T Traveler’s check
C Cashier’s/Official/Treasurer’s/Manager’s checks
Mo Postal money orders (a demand credit instrument issued and payable by a post office)
Ba Bank drafts (a written order addressed to the bank to pay an amount of money to the
order of the maker)

2. Cash in Bank

a. Demand deposit/Commercial deposit/current account/checking account

- Generally non-interest bearing
- Withdrawable by checks against bank
b. Savings deposit (Savings Account-SA)
- Generally non-interest bearing
- Depositor is issued an ATM card or passbook
- Withdrawable in ATM station or within the bank
3. Cash fund for current operations (CP2IntPeDiT2)

C Change Fund
P Payroll Fund
Purchasing Fund (for purchasing of inventories)
R Revolving Fund (fund that is used for limited or specific purpose set by management)
Int Interest Fund
Pe Petty Cash Fund
Di Dividend Fund
T Travel Fund
Tax Fund

Fund for Noncurrent Operations

Fund for noncurrent operations should not be included as part of Cash but as part of non-current
assets. Examples are as follows: (P2ACIS)

Generally noncurrent investment but

P Pension Fund If related liability is current, then pension fund is current, thus
part of CASH.
Preferred redemption fund Noncurrent investment (unless the preferred share capital has
a mandatory redemption and the redemption is already within
one year from the reporting period in which case this fund is
already part of Cash Equivalent)
A Acquisition of property, Always noncurrent even if expected to be disbursed next year
plant and equipment
C Contingent fund Noncurrent Investment
I Insurance fund Noncurrent Investment
S Sinking fund If the related bonds payable is current, thus part of cash.
Note: Classification of cash fund as current or noncurrent should parallel the classification applied to
the related liability. Thus, an entity should reclassify such noncurrent asset if the related liability
becomes current.
CASH EQUIVALENTS
Cash equivalents are short-term and highly liquid investments that are readily convertible into
cash and so near their maturity that they present insignificant risk of changes in value because of
charges in interest rates. [PAS 7.6] Only highly liquid investments that are acquired three months
before maturity can qualify as cash equivalents. Examples of cash equivalents are as follows:
1. Time Deposit
2. Money Market Instrument or Commercial Paper
3. Treasury Bills
4. Redeemable preference shares with mandatory redemption period and acquired three
months before maturity.
Time Deposit, Money Market Instrument, T-Bills Treatment
1) Originally invested/acquired for more than three
months before maturity date
 a) Remaining term is three months or less from the Short-term investments
reporting date
b) Remaining term is more than three months but Short-term investments
withing one year
c) Remaining term is more than one year Long-term investments
2) Originally invested/acquired for three months or less Cash equivalents
before maturity date

Comparison among T-Bills, T-notes and T-Bonds

Difference in maturity date Similarities

Treasury Bills 90 days to less than 1 year
All are issued by
Treasury Notes 1 year to less than 10 years
the government
Treasury Bonds 10 years or more
Note:
 If an item cannot be included as cash equivalent because it did not qualify the cut-off time
period (i.e. three months), it will always be classified as investments (short term or long term)
depending on period up to maturity.
 If the problem is silent with regard to:
1. Treasury Note – assumed investment
2. Cash in money market account – cash and cash equivalent
3. Time Deposit – cash and cash equivalent
Some Measurement Issues and Frequent Encountered Tricks in Cash and Cash Equivalent
Computation

Items Remarks
Cash Measured at face value
Cash in foreign currency Should be translated to Philippine Peso using the closing
rate or sport rate at the reporting date.
Deposit in foreign bank a. Unrestricted – included as cash
b. Restricted – if material, classified separately among
noncurrent assets as receivables
Cash in closed bank / Banks in Measured at estimated realizable value and be included
bankruptcy among noncurrent assets if the among recoverable is lower
than face value.
Bank overdraft Definition: Negative balance in the cash in bank account.
Treatment: If the company is maintaining two accounts in
a. Different banks – current liabilities or may be netted
against other bank if immaterial.
b. Same bank – maybe netted against the account with
positive amount but cannot be offset against restricted
account.
Note: An overdraft may also be netted against other account
with positive balance if it is part of cash management. [PAS
7.8]
Compensating balance Definition: Compensating balance is minimum is minimum
checking or demand deposit account balance that must be
 maintained in connection with a borrowing agreement
with a bank
Treatment:
a. Not legally restricted – part of cash
b. Legally restricted – if the account is legally restricted as
to withdrawal, check the related loan:
1) Short-term – presented as “cash held as a
compensating balance” (current receivable)
2) Long-term – presented as “cash held as a
compensating balance” (noncurrent receivable)
Note: if the problem is silent with regard to compensating
balance, it is assumed not legally restricted.

Effect of compensating balance as:

a. Yield rate (lender) – increase
b. Effective rate (borrower) – increase
Net interest expense
(Effective rate)=
Net proceeds
Undelivered/unreleased check Reverted back to cash by a
Dr Cash xx
Cr A/P xx
Stale checks/checks long Definition: Checks not encashed by the payee with a
outstanding relatively long period of time (under normal banking
practice, checks are considered stale if not encashed within
6 months from its date.)
Treatment: Stale checks are reverted to cash by a
Dr Cash xx
Cr A/P xx (if material)
Misc. income xx (if not material)
Postdated checks Definition: Checks dated after the reporting date
Treatment:
a. For company own PDC – reverted to cash
Dr Cash xx
Cr A/P xx
b. Customer’s check – not yet cash (A/R)
IOUs (I owe you) Included as part of receivable, not cash and cash
equivalents
Equity securities Cannot be classified as cash equivalents because shares do
not have maturity date (with the exception of redeemable
preference shares)
Redeemable Preference shares Preference shares with specified redemption date and
acquired three months before redemption date are
classified as cash equivalents
Callable preference shares Not classified as cash equivalents. It is part of shareholder’s
equity on the part of issuer and part of long-term
investment of the holder.
NSF/DAUD/DAIF Definition:
 NSF – no sufficient funds
DAUD – drawn against uncleared deposits
DAIF – drawn against insufficient funds
Treatment: Reverted back as part of receivables
Expense Advances (e.g. travel Receivables or prepaid expenses
advances, postage stamps)
Temporary Investments in Shares Either FVTPL or FVTOCI but never to be included as part of
of stocks cash & cash equivalents
Unused Credit Line Definition: Difference between the amount of link credit
applied for and approved by a bank and the amount
actually borrowed
Treatment: Disclosed in the notes
Treasury Warrants Definition: A warrant for the payment of money into or
from public treasury
Treatment: Included as part of cash
Escrow Deposit Definition: Restricted amount held in trust for another
party, e.g., a deposit required by a count of law for a
pending case.
Treatment: Part of the other current/noncurrent asset
and reported as liability
Unrecorded cash disbursements Record the disbursements by debit to Accounts payable or
other appropriate account and credit to Cash.
Unrecorded cash Record the collection by debit to Cash and Credit to
collections/receipts Accounts receivable or other appropriate account.
Certificate of Deposit (CD) Definition: A savings certificate entitling the bearer to
receive interest. A CD bears a maturity date, a specified
fixed interest rate and can be issued in any denomination.
CDs are generally issued by commercial banks and are
insured by the PDIC. The term of a CD generally ranges
from one month to five years.
Treatment:
a. Invested three months before maturity – cash
equivalents
b. Invested for more than three months – investment
(short or long-term)
Postage stamps on hand Should be reported ad office supplies or as a prepaid
expenses

Bank Overdraft That Was Netted or Deduced From Cash In Bank

Bank overdraft that was netted or deduced from cash in bank should be added back to compute for
the correct balance of cash in bank and should be presented as current liability.