CASH AND CASH EQUIVALENTS

Intermediate Accounting 1 by Robles and Empleo

Financial Accounting 1 by Valix and Peralta

NO COPYRIGHT INFRINGEMENT INTENDED FOR REVIEW PURPOSES ONLY

CASH

Any item that is acceptable by bank or other financial institution for deposit at face value.

Cash Items:

Cash on Hand

- Includes undeposited collections such as bills and coins, customer's checks, manager's checks, traveler's checks,
cashier's checks, bank drafts and money order.

Cash in Bank

- Includes demand deposit or checking account and saving deposit which are unrestricted as to withdrawal.

Cash Fund

-working funds segregated for current purposes such as petty cash fund, change fund, payroll fund, dividend fund,
tax fund, and interest fund.

CASH ITEMS:

 Unrestricted and immediately available for use in current operations.

- Reported as cash in the current asset section.
 Restricted and for use other than for current operations.
- Reported under other non-current financial assets.

CASH EQUIVALENT

 Short term highly liquid financial instruments that are so near their maturity and that there is insignificant
risk of change in value due to fluctuation of interest rates.
 Only highly liquid investments that are acquired three months before maturity can qualify as cash
equivalents.

Examples: 3-month BSP Treasury Bill, 3-month Time deposit, 3-month money market instrument or commercial
paper.

CASH EQUIVALENT- matures 3 months or less from the date of acquisition.

SHORT TERM/TEMPORARY INVESTMENT- matures less than 1 year from the date of acquisition.

LONG TERM INVESTMENT- matures more than 1 year from the date of acquisition.

 “Temporary investments in equity shares are not included as part of cash equivalents because these
securities do not have maturity dates. Except for Redeemable Preference share (considered as debt
instrument), it can be reported as cash equivalent if purchased within 3 months or less before redemption
date.”
 PRESENTATION AND MEASUREMENT:

 Cash is generally measured at face value, which is its fair value.

 The caption “Cash and Cash Equivalents” should be shown as the first item among the current assets.
 Considerations in reporting cash balance in the balance sheet:
 Foreign Currency- If it is unrestricted, then it should be translated to Philippine currency using the
exchange rate at the end of the reporting period. However, if it is restricted as to withdrawal, then it
should be reported as non-current asset.
 Cash in closed banks or in banks having financial difficulty or in bankruptcy- it should be reclassifies as
receivable and should be written down to its recoverable amount.

Customer's Post-dated Checks, NSF (No Sufficient Fund checks), I0U's (1 Owe You" notes)- they should be
reported as receivables rather than cash. NSF checks in the Philippines are often described as DAIF (Drawn Against
Insufficient Funds) and DAUD (Drawn Against Unclear Deposits) checks.

Entry:

Receivables XXX

Cash in Bank XXX

Postage Stamps and expense advances- They are not cash, but they are reported as prepaid expenses.

Bank Overdraft- when the Cash in Bank account has a credit balance, it is said to be an overdraft. The credit
balance in the cash in bank account results from the issuance of checks in excess of deposits
(deposits<disbursements). Under PFRS overdraft should be reported as a liability and it may be offset against a
positive balance in another bank account with the same bank if a right of offset exists between the bank and the
depositor. Moreover, an overdraft can also be offset against the other bank account if the amount is not material.
However, overdrafts are not permitted in the Philippine.

Example:

WASHURPROBLEM Co. had the following cash balance items listed in its trial balance at 12/31/14:

BDO savings and loan P50,000

RCBC Bank (5,000)

Metrobank 10,000

 If WASHURPROBLEM Co. reports under PFRS, its 12/13/14 balance sheet would show that cash balance?

a. (5,000) c. P55,000

b. P60,000 d. None of the Above

o The credit balance of (P5000) should be recorded under liabilities.

Undelivered or Unreleased Checks- are the company's checks drawn and recorded as disbursed but are not
actually issued or delivered to the payees as of the reporting date. These checks should not be deducted from the
company’s cash balance until they have been mailed or otherwise delivered. Therefore, these checks should be
reverted to the cash balance. As a result, liabilities that the checks are intended to liquidate still exist and should
be reported as current payables.

Entry:

Cash in Bank XXX

Accounts Payable XXX

Company's Postdated Check- are company's check which has been recorded as issued and delivered to payee
before or at the end of the reporting period should be reverted to cash and the corresponding liability shall
continue to be recognized, because there is no actual payment yet, as of that date.

Entry:

Cash in Bank XXX

Accounts Payable XXX

Compensating Balances - are minimum amounts that a company agrees to maintain in a bank checking account as
support or collateral for a loan by the depositor.

 Not legally restricted- the amount is reported as part of Cash. The nature of the arrangement is disclosed
in the notes of the financial statements.
 Legally restricted- the amount should be classified separately either as current asset or non-current asset
depending on the nature of the loan.

Cash set aside for long-term specific purpose or acquisition of a non-current asset (Bond Sinking Fund and Plant
expansion Fund) - reported as non-current asset.

Stale Check or Check Long Outstanding – is a check not encashed by the payee within six months from the time of
issuance. Thus, even after three months only , the entity may issue a “stop payment order” to the bank for the
cancellation of previously issued check.

Entries:

If the amount of stale check is immaterial

Cash XXX

Miscellaneous Income XXX

If the amount is material and liability is expected to continue

Cash XXX

Accounts Payable XXX

CASH MANAGEMENT:

Effective cash management requires controls to protect cash from loss through theft or fraud. The following are
some characteristics of a system of cash control:

 Segregation of duties for handling cash and recording cash transactions

 Imprest System- characterized by daily deposit of all cash receipt intact to the bank and making
disbursements through issuance of checks. Expenditures involving small amounts are made from Petty
Cash Fund.
 Voucher System- all disbursements must be supported by properly approved vouchers, which must be
recorded in the voucher register.
 Internal Audits at irregular intervals
 Periodic Bank Reconciliation
Window Dressing

 Is a practice of opening the books of accounts beyond the close of the reporting period for the purpose of
showing a better financial position and performance.
 Window dressing is usually accomplished as follows:

a. By recording as of the last day of the reporting period collections made subsequent to the close of the period.

b. By recording as of the last day of the reporting period payments of accounts made subsequent to the close
period.

 Such practices are unacceptable and undesirable. The entries made to window dress must be reversed to
correct the statements.
 In a very broad sense, window dressing is any deliberate misstatement of the assets, liabilities, equity,
income, and expenses.
 When the statements contain any untruth or falsity, the statements are said to be window dressed.

Lapping

 Is a practice used for concealing 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 for the collection of receivables.

Kiting

 Is another device used to conceal a cash shortage.

 It is possible when an entity maintains current accounts in different banks. Kiting is usually employed at
the end of the month.
 It 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. No entry is made for both the drawing and deposit of the check.

Accounting for Cash Shortage

 Entry when cash count shows cash is less than the balance per book:

Cash short or over XXX

Cash XXX

(The Cash short or over account is only a temporary or suspense account. It means that when financial statements
are prepared the same should be adjusted.)

 Adjustment entry if the cashier or cash custodian is held responsible for cash shortage:

Due from cashier XXX

Cash short or over XXX

 Adjustment entry if reasonable efforts fail to disclose the cause of the shortage:

Loss from cash shortage XXX

Cash short or over XXX

(If the cash shortage is not material, it can be debited to miscellaneous expense.)

Accounting for Cash Overage:

  Entry when cash count shows cash which is more than the balance per book:

Cash XXX

Cash short or over XXX

 Adjusted entry if the cash overage is found to be the money of the cashier:

Cash short or over XXX

Payable to cashier XXX

 Adjusted entry if the cash overage has no claim:

Cash short or over XXX

Miscellaneous expense XXX

Imprest System

 A system of cash control which requires all cash receipts should be deposited intact and all cash
disbursements should be made by means of check
 However, an enterprise considers it impractical to write checks for small items such as taxi fares, postage,
express charges, and minor supplies. A company usually pays for these kind of items from a petty cash
fund.
 It provides simple but effective control over small amounts of expenditure.

Petty Cash Fund

 Is money set aside to pay small expenses which cannot be paid conveniently by means of check.
 Two methods of handling the petty cash:

a. Imprest Fund System- is the one usually followed by many.

b. Fluctuating Fund System

PCF- Imprest Fund System:

 Entry for establishment of PCF:

Petty Cash Fund XXX

Cash In Bank XXX

 Entry for payment of expenses out of the fund:

NO ENTRY

 Entry for replenishment of petty cash payments:

Various Expenses XXX

Cash In Bank XXX

 Adjusting entry for the unreplenished expenses at the end of the accounting period:

Various Expenses XXX

Petty Cash Fund XXX

  Entry for increase in fund:

Petty Cash Fund XXX

Cash in Bank XXX

 Entry for decrease in fund:

Cash In Bank XXX

Petty Cash Fund XXX

PCF- Fluctuating Fund System:

 Entry for establishment of PCF:

Petty Cash Fund XXX

Cash In Bank XXX

 Entry for payment of expenses out of the fund:

Various Expenses XXX

Petty Cash Fund XXX

 Entry for replenishment of petty cash payments:

Petty Cash Fund XXX

Cash In Bank XXX

 Adjusting entry for the unreplenished expenses at the end of the accounting period:

NO ENTRY

(No adjustment necessary because the petty cash expenses are recorded outright.)

 Entry for increase in fund:

Petty Cash Fund XXX

Cash in Bank XXX

 Entry for decrease in fund:

Cash In Bank XXX

Petty Cash Fund XXX