CASH AND CASH EQUIVALENTS

TOPIC OVERVIEW:
This chapter discusses the concept of cash and cash equivalents, its characteristics and
components, and bank reconciliation and proof cash.

LEARNING OBJECTIVES:
After studying this chapter, you should be able to:
1. Identify what items are included as cash and cash equivalents.
2. Calculate the correct balance of petty cash fund.
3. Identify bank and book reconciling items.
4. Prepare bank reconciliation and proof of cash.

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 expenses

- For payment of current liabilities
- For acquisition of current assets

Other Noncurrent
“Cash” in the current asset
Financial assets
section

DEFINITION OF CASH

Cash includes and other negotiable instrument that is payaple in money and acceptable by the
bank for deposit and immediate credit. It includes cash on hand are unrestricted for the use in
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 check’s
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 (CP2RIntPeDiT2)

C Change Fund
P Payroll
Purchasing Fund (for purchasing of inventories)
R Revolving fund (fund that is used for limited or specific purpose by management.)
Int Interest fund
Pe Petty cash fund (for small and miscellaneous disbursements)
Di Divided Fund
T Travel Fund
Tax Fund

Fund for Noncurrent Operations

Fund for noncurrent operation 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 the
fund is reported as part of current investment)
A Acquisition of property, plant and Always noncurrent even if expected to be
equipment disbursed next year
C Contingent Fund Noncurrent investment
I Insurance fund Noncurrent investment
S Sinking Fund If the related bonds payable is current, then
sinking fund 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 the value
because of changes in interest rates.[PAS 7.6] Only high liquid investment that are acquired three
months before the maturity can qualify as cash equivalents. Examples of cash equivalents are as
follows:
1. Time Deposit
2. Money Market Instrument of 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
reporting date. investments
b) Remaining term is more than three months but within Short-term
one year investments
c) Remaining term is more than one year Long-term
investment

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 10 years the government
Treasury Bonds More than 10 years

Note:
 If an item cannot be included as cash equivalent because it did not qualify the cutoff time
period (i.e. three months), it always be classified as investment (short term or long term)
depending on the period up to maturity.
 If the problem 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
Equivalents Computation

Items Remarks
Cash Measured at face value
Cash in foreign currency Should be translated to the Philippine Peso using the closing
rate or sport rate at the reporting date.
Deposit in foreign bank a. Unrestricted – included cash
b. Restricted – if material, classified separately among
noncurrent assets as receivables
Cash in closed banks / Measured at estimated realizable value and be included among
Banks in bankruptcy noncurrent assets if the amount 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 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 compensating
balance” (current receivable)
2) Long-term – presented as “cash compensating balance”
(noncurrent receivable)
Note: if the problem is silent with regard to compensating
balance, it assumed not legally restricted.

Effect of compensating balance on:

a) Yield rate (lender) – increase
b) Effective rate – (borrower) – increase
(Effective rate) = Not interest expense
Net Proceeds
Undelivered/unreleased Reverted back to cash by a
check Dr Cash xx
Cr A/P xx
Stale checks / Checks Definition: Checks are enchased by the payee with relatively a
long outstanding long period of time (under normal banking practice, checks are
considered as stale if not enchased within 6 months from its
date.)

Treatment: Stale checks are reverted to cash by a

Dr Cash xx
Cr Accounts payable 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 by a
Dr Cash xx
Cr Accounts payable xx
b. Customer’s check – not yet cash (A/R)
IOUs (I owe you) Included as part 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 Preference shares with specified redemption date and acquired
share 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 unclear deposits
DAIF – drawn against insufficient funds
Treatment: Reverted back as part of receivables.
Expense Advance (e.g. Receivables or prepaid expense
travel advances, postage
stamps)
Temporary investment in Either FVTPL or FVTOCI but never be included as part of cash
share of stocks and cash equivalents
Unused credit line Definition: Difference between the amount of line of 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 another party, e.g., a
deposit required by a court of law for a pending case
Treatment: Part of other current / noncurrent asset and
reported as liability
Unrecorded cash Record the disbursements by debit to Accounts
disbursements Payable or other appropriate account and credit to cash
Unrecorded cash Record the collection by debit to cash and Credit to Accounts
collection/ receipts receivable or other appropriate account.
Certificate of Deposit Definition: A savings certificate entitling the bearer to receive
(CD) interest. A CD bears a maturity date, a specified fixed interest
rate and can be issued by commercial banks and insured the
PDIC. The term of a CD generally ranges from one month to
five years.
Treatment:
a. Invested three months before maturity
b. Invested for more than three months investment (short or
long-term)
Postage stamps on hand Should be reported as office supplies or as a prepaid expenses

Bank Overdraft That was Netted or Deducted from Cash in Bank

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

Exercise 1: Cash Composition

On December 31, 2016, Huwag Kang Aayaw Co’s “cash and cash equivalents account” balance
per ledger of ₱5,700,000 includes:

Manager’s checks ₱ 70,000

Traveler’s checks 100,000
Treasury note 50,000
Treasury shares purchased on 12/1/2016, to be reissued on 3/1/2017 150,000
Escrow deposit 200,000
Bank drafts 20,000
Postal money orders 20,000
Demand deposit 100,000
Treasury bills, purchased December 16, 2016 due March 15,2017 50,000
160-day treasury bill 30,000
 Time deposit – PCIB, one-year, due March 31, 2017 180,000
Time deposit – PNB – 90 days 170.000
Time deposit – BPI – 120 days 45,000
Money market instrument-due date 2/28/2017 40,000
Money market instrument-due date 6/1/2017 70,000
Cash in bank- Metrobank, which includes a compensating balance of
₱50,000. 1,050,000
Cash in bank – Metrobank (100,000)
Cash in bank – Firstbank,which includes a compensating balance of
₱50,000 for long term borrowing arrangement.
4,50,000
The compensating balance is legally restricted as to withdrawal.
Cash in bank – Secondbank (60,000)
Cash in bank – Seatacbank, which includes a compensating balance of
₱40,000 for short-term borrowing arrangement. 150,000
The compensating balance is legally restricted as to withdrawal.
Cash in bank – Seabank, which includes a compensating balance of ₱40,000
250,000
for short-term borrowing arrangement
Petty cash fund, which includes an unreplenished voucher for ₱4,000. 10,000
Payroll fund 100,000
Travel fund 20,000
Interest fund 40,000
Tax fund 30,000
Sinking fund 420,000
Preferred redemption fund 100,000
Contingent fund 200,000
Insurance fund 500,000
Fund for acquisition of Property, Plant & Equipment expected to be
800,000
disturbed in 2017
IOU from officers 20,000
Customer’s post-dated checks 70,000
Customer’s checks returned by bank marked “NSF” 20,000
Redeemable preferred shares – acquired 3 months to maturity date 15,000
Unused credit line 200,000
Revolving fund 100,000
Visa Card – credit limit 20,000
Total ₱ 5,700,000

Required: Compute the cash and cash equivalents that should be shown in the statement of
financial position.

Illustration 2: Cash Composition

On December 31, 2016, GAME K N BA? Co’s cash and cash equivalents account balance per
ledger of ₱ 4,000,000 includes:

Demand deposit ₱ 2,200,000

Undeposited collection 300,000
Time deposit – 30 days 500,000
NSF check of customer 20,000
35 day money market placement due 1/28/2017 300,000
45-day commercial papers due 2/4/2017 80,000
Savings deposit in closed bank 50,000
IOU from an employee 150,000
Preferred redemption fund 400,000
 Total ₱ 4,000,000

Additional information:

a) Included in the demand deposit of P2, 200,000 was a customer check amounting to ₱ 50, 000
dated January 25, 2017.

b) Also included in the demand deposit is a customer check amounting to ₱ 90, 000 dated
December 31, 2014. GAME K N BA? Neglected to encash the check. On December 31,
2016, the customer was informed and he was willing to replace this with a new one. New
check is yet to be received from the customer.

c) Check of ₱ 60, 000 dated January 31, 2017 in payment of accounts payable was recorded and
mailed December 31, 2016.

d) Check of ₱ 70, 000 in payment of accounts payable was recorded on December 31, 2016 but
mailed to creditors on January 15, 2017.

e) The company uses the calendar year. The cash receipts journal was held open until January
15, 2017, during which time ₱ 80, 000 was collected and recorded on December31, 2016.

Required:

1. Prepare adjusting entries to correct the cash account.

2. Compute the cash and cash equivalents to be shown on December 31, 2016 statement of
financial position.