CHAPTER 1: Cash and Cash Equivalent
Cash
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According to layman, cash means money.
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According to accounting, cash includes money and any other
negotiable instrument that is payable in money and
acceptable by the bank for deposit and immediate credit.
Noncurrent:
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pension fund, except related liability is current
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acquisition of PPE
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contingent fund
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insurance fund
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sinking fund, except related liability is current
Cash equivalents
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It is a 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
changes in interest rate. (PAS 7, paragraph 6)
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acquired three months before maturity can quality as cash
equivalents
Money
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standard medium of exchange in business transactions
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refers to the currency and coins which are in circulation and
legal tender
Examples of cash equivalent
Unrestricted cash
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An entity shall classify an asset as current when the asset is
cash or cash equivalent unless it is restricted to settle a liability
for more than twelve months after the end of the reporting
period. (PAS 1, paragraph 66)
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to be recorded as cash, if the item is unrestricted in use
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cash must be readily available in the payment of current
obligations and not be subject to any restrictions
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three – month treasury bill
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three – month treasury bill purchased three months before
maturity date
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three – month time deposit
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three – month money market instrument or commercial paper
Date of purchase
Cash items included in cash
a.
customer’s check
cashier’s or manager’s check
traveler’s check
bank drafts
money order
Cash in bank – unrestricted as to withdrawal
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c.
important in cash equivalent
Cash on hand – undeposited cash collections and other cash
items awaiting deposit
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b.
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demand deposit
checking account
saving deposit
Investment of excess cash
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Cash equivalents – three months or less
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Current assets – more than three months but within one year
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Noncurrent assets – more than one year
If the problem is silent
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Noncurrent assets – treasury notes and bonds
Cash fund – set aside for current purposes
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Cash and cash equivalents – cash in money market account
Current:
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Cash and cash equivalents – time deposit
petty cash fund
payroll fund
dividend fund
tax fund
change fund
purchasing fund
revolving fund
travel fund
interest fund
Cash measurement
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Cash measured at face value (original cost stated).
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In bankruptcy or financial difficulty, cash measured at
estimated realizable value.
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Cash in foreign currency must translated using current
exchange rate.
Example: dollar to peso
Note: If foreign bank is subject to restriction it is classified as noncurrent
asset.
Bank overdraft
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credit balance in the cash in bank account results from the
issuance of checks in excess of the deposits
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classified as current liability and should not be offset against
other bank accounts with debit balances
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generally not permitted
Exception to the rule on overdraft
•
entity maintain two or more accounts in one bank, overdraft
can be offset against other bank account
•
overdraft can be offset against other bank account if the
amount is not material
•
overdraft can be offset against other bank account when
payable on demand and often fluctuates from positive to
negative as an integral part of cash management
Compensating balance
•
form of minimum checking or demand deposit account
balance that must be maintained in connection with a
borrowing arrangement with a bank
Classification of compensating balance
•
Not legally restricted or informal – cash
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Legally restricted or formal – current or noncurrent asset
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If silent – cash
Undelivered or unreleased cash
•
merely drawn and recorded but not given to the payee before
the end of reporting period