Cash and Cash Equivalents
Unrestricted Cash
- No specific standard
- PAS 1, p36
o Cash or cash equivalent is classified as current,
o UNLESS, restricted to settle a liability for more than twelve months after the
reporting period
o Must be unrestricted in use to be reported as cash
Cash items included in cash
- Cash on hand
- Cash in bank
- Cash fund (eg. PCF, Payroll fund and Dividend fund)
Cash equivalents
- PAS 7, p6
o Short-term and highly liquid investments
o Readily convertible to cash
o So near maturity that presents insignificant risk in changes in value
o ONLY those that are acquired/purchased three months before maturity
 Three-month BSP treasury bill
 Three-year BSP treasury bill purchased three months before maturity
date
 Three-month time deposit
- Equity securities cannot qualify as they do not have a maturity date
o Preference shares can qualify if acquired three months before redemption date,
AND if it has a specified redemption date.
Classifications of investment of excess cash
- If term is three months or less, such is classified as CASH EQUIVALENTS
o Included under Cash and Cash Equivalents
- If term is more than three months but within one year, such is classified as SHORT-TERM
FINANCIAL ASSETS
o Included under Current Assets and a specific title
- If term is more than one year, such is classified as LONG-TERM FINANCIAL ASSETS
o Included under Non-Current Assets, BUT reclassified into Current Assets when it
becomes due within one year.
Measurement of cash
- Face value
- If at foreign currency, at current exchange rate
Deposits in foreign bank subject to foreign exchange restriction should be
classified separately among non-current assets
If bank or financial institution becomes bankrupt, should be written down to estimated
realizable value.
o
-
Financial Statement Presentation
- Under Cash and Cash Equivalents
o First line item
o Under current assets
o Details comprising the cash and cash equivalents should be disclosed in the
Notes to FS
Cash fund for a certain purpose
- If for use in current operation OR payment of current obligation, included in Cash and
Cash Equivalents
- If set aside for noncurrent purposes OR payment of noncurrent obligation, classified
under long-term investment
- Classification
o Should parallel the classification of the related liability
Bank overdraft
- Happens when cash in bank account has a credit balance
o Usually when checks issued are in excess of deposits
- Classified as current liability
- Should not be offset against other bank accounts with debit balances
o However, when one maintains two or more accounts in one bank, overdraft can
be offset against the other account.
o Can be offset if amount is not material
 Under IFRS, when payable on demand and often fluctuates from positive
to negative as an integral part of cash management.
- Not permitted in the Philippines
- Not necessary to open a bank overdraft account
- Illustration
o First bank, overdrawn by P10,000
o Second bank, debit balance of P100,000
o Net cash balance is P90,000
o Recorded as:
 Current Asset: Cash in bank – Second bank – P100,000
 Current Liability: Bank overdraft – First bank – P10,000
Compensating balance
- Usually takes the form of minimum checking or demand deposit account balance
- Results in the reduction of amount borrowed
-
Provides a source of fund as partial compensation for loan extended.
Classification:
o Part of cash IF NOT legally restricted, usually form an informal agreement
o IF legally restricted, classified separately as “cash held as compensating balance”
 Short-term/under current assets if related loan is short-term
 Long-term/noncurrent investment if related loan is long-term
Undelivered check
- Also known as unreleased check
- Drawn and recorded but not given to payee before end of reporting period.
- No payment when check is pending delivery to payee at the end of reporting period.
o Still subject to control of the entity
o Can be canceled anytime
- Adjusting entry to restore:
o Cash
xxx
AP or appropriate account
xxx
- In practice, adjustment can be ignored if not very substantial and no evidence of actual
cancellation of check.
Postdated check delivered
- Drawn, recorded, and already given to payee but bears a date subsequent to end of
reporting period.
- Should be reversed to restore cash balance.
- Entry to reverse:
o Cash
xxx
AP or appropriate account
xxx
- Reason is there is no payment until check is presented to bank for encashment or
deposit
Stale check
- Also known as check long outstanding
o Check not encashed by a payee within a relatively long period of time
o Presentment must be made within a reasonable time after issue.
o No specified definite period by law
- In banking practice, check becomes stale if not encashed within six months
- Entity may issue a stop payment order to bank for cancellation
- If amount is immaterial:
o Cash
xxx
Miscellaneous Income
xxx
- If amount is material:
o Cash
xxx
AP or appropriate account
xxx
Accounting for cash shortage
- Cash short or over account is a temporary or suspense account.
- If cash count is less than book value
o Cash short or over
xxx
Cash
xxx
- If cashier or cash custodian is held responsible
o Due from cashier
xxx
Cash short or over
xxx
- If efforts fail to disclose cause of shortage
o Loss from cash shortage
xxx
Cash short or over
xxx
Accounting for cash overage
- If cash count shows cash more than the balance per book
o Cash
xxx
Cash short or over
xxx
- If cash overage is treated as miscellaneous income when there is no claim
o Cash short or over
xxx
Miscellaneous income
xxx
- If money is from the cashier
o Cash short or over
xxx
Payable to cashier
xxx
Imprest system
- A system of control of cash which requires all cash receipts be deposited intact and all
cash disbursements should be made by means of check.
Petty cash fund
- Money set aside to pay small expenses which cannot be paid conveniently by means of
check
- Two methods of handling the petty cash:
o Imprest fund system
o Fluctuating fund system
Imprest fund system
- Usually followed
- Accounting procedures:
o Check drawn to establish the fund
PCF
Cash in bank
o Payment of expenses out of fund (NJE)
o Replenishment of petty cash payments
Expenses
xxx
xxx
xxx
o
o
o
Cash in bank
xxx
At the end of accounting period, adjust the unreplenished expenses to correctly
state the petty cash balance (To be reversed at the beginning of the next
accounting period)
Expenses
xxx
PCF
xxx
An increase in the fund is recorded as:
PCF
xxx
Cash in bank
xxx
A decrease in the fund is recorded as:
Cash in bank
xxx
PCF
xxx
Fluctuating fund system
- Accounting procedures
o Establishment of the fund
PCF
xxx
Cash in bank
xxx
o Payment of expenses out of the PCF
Expenses
xxx
PCF
xxx
o Replenishment or increase of the fund
PCF
xxx
Cash in bank
xxx
o At the end of reporting period, no adjustment is necessary since petty cash
expenses are recorded outright.
o Decrease of fund is reverted to general cash
Cash in bank
xxx
PCF
xxx
Tranvia Company had the following balances on December 31, 2021:
Cash in checking account
Cash in money market account
Treasury bill, purchased November 1, 2021
maturing January 31, 2022
Time deposit purchased December 1, 2021
maturing March 31, 2022
P350,000
P750,000
P3,500,000
P4,000,000
What amount should be reported as cash and cash equivalents on December 31, 2021?
Pygmalion Company had the following balances on December 31, 2021:
Cash in bank – current account
Cash in bank – payroll account
Cash on hand
Cash in bank – restricted account for building
construction expected to be disbursed in 2022
Time deposit, purchased December 15, 2021 and
due March 15, 2022
P5,000,000
P1,000,000
P500,000
P3,000,000
P2,000,000
The cash on hand included a P200,000 check payable to Pygmalion, dated January 15, 2022.
What total amount should be reported as cash and cash equivalents on December 31,
2021?
Thor company provided the following data on December 31, 2021:
Checkbook balance
Bank statement balance
Check drawn on Thor’s account, payable to supplier,
dated and recorded on December 31, 2021 but
not mailed until January 15, 2022
Sinking fund cash
P4,000,000
P5,000,000
P500,000
P2,000,000
On December 31, 2021, what amount should be reported as “cash” under current assets?
Liwanag company reported an imprest petty cash fund of P50,000 with the following details:
Currencies
Coins
Petty cash vouchers:
Gasoline payments for delivery equipment
Medical supplies for employees
Repairs of office equipment
Loans to employees
A check drawn by the entity payable to the
order of Grace de la Cruz, petty cash
custodian, representing his salary
An employee check returned by the bank
for insufficiency of fund
A sheet of paper with names of several
employees together with contribution
for a birthday gift of a co-employee.
Attached to the sheet of paper is a currency of
P20,000
P2,000
P3,000
P1,000
P1,500
P3,500
P15,000
P3,000
P5,000
What amount of petty cash should be reported in the statement of financial position?
Timex Company reported petty cash fund which compromised:
Coins and currencies
Paid vouchers for expenses
Customer check returned by bank marked “NSF”
Check drawn to the other of petty cash custodian
What amount should be reported as petty cash fund?
P3,300
P3,000
P1,000
P2,700
Campbell Company had the following account balances on December 31, 2021:
Petty cash fund
Cash on hand
Cash in bank – current account
Cash in bank – payroll account
Cash in bank – sinking fund
Cash in bank – restricted account for plant addition
and expected to be disbursed in 2022
Treasury bills
P50,000
P500,000
P4,000,000
P1,200,000
P2,000,000
P1,500,000
P1,000,000
The petty cash fund included unreplenished December 2021 petty cash expenses vouchers
P5,000 and employee IOU P5,000.
The cash on hand included a P100,000 customer check payable to Campbell dated January 15,
2022.
In exchange for a guaranteed line of credit, the entity has agreed to maintain a minimum
balance of P200,000 in the unrestricted current bank account.
The bond sinking fund is set aside to settle bonds payable due on December 31, 2022.
What total amount should be reported as cash and cash equivalents on December 31,
2021?