Review Module 1
Cash and Cash Equivalents
P.M.G. Clamor
August 24, 2011
Cash – includes money and any other negotiable instrument that is
payable in money and acceptable by the bank for deposit and
immediate credit.
to settle a liability for at least twelve months after the end of the
reporting period.”
Included in cash:
 Coins and bills in legal tender by BSP
 Checks (subject to certain conditions)
 Bank drafts
 Money orders
The following cash items are included in “cash.”
 Cash on hand – cash collections and cash items (checks,
bank drafts and money orders) awaiting bank deposit
 Cash in bank – demand or savings deposit, or checking
account which are unrestricted as to withdrawal
 Cash fund – cash set aside for current purposes (petty
cash fund, payroll fund, dividend fund)
Types of checks:
 Post-dated checks (checks dated on future date) – not part
of cash and cash equivalents because they are not yet
accepted by the bank for deposit and immediate
encashment.
 Not sufficient fund (NSF) checks – not part of cash and
cash equivalents because the check has insufficient
balance not enough for the amount written in the check.
 Certified checks – part of cash and cash equivalents
because it is certified and insured by the bank to have
sufficiency of fund backed in the check. Examples of
certified checks include:
o Manager’s check – certified by the manager of
the bank
o Cashier’s check – certified by the teller or cashier
of the bank
o Traveler’s check – certified for travel purposes of
the depositor
 Antedated checks (checks dated on past date) – part of
cash and cash equivalents provided that they are to be
encashed or deposited to the bank six months following
the date of the check.
 Stale checks (checks long outstanding) – not part of cash
and cash equivalents because it is deemed to be expired.
Checks must be deposited or encashed six months
following the date of the check.
Example Analysis of a Check
The date of the check is on October 15, 2011 and has an amount of
P15,000. The check is not certified by the bank. Therefore:
 Before October 15, 2011, the check is post-dated and the
maker should have at least P15,000 in his account.
 On October 15, 2011, if the maker has failed to have at
least P15,000 in his account, the check would bounce or
marked as NSF check. Once the check is deposited to the
bank, the drawer will receive a notice of DAIF (drawn
against insufficient funds)
 After October 15, 2011, assuming the check has sufficient
funds, it will be an antedated check.
 On April 15, 2012 (six months after the check date),
assuming the check has not been deposited nor encashed,
it is deemed as expired and it will become a stale check.
Unrestricted cash
PAS 1 (Presentation of Financial Statements) provides that “an
entity shall classify an asset as current when the asset is cash or a
cash equivalent unless it is restricted from being exchanged or used
Cash equivalents – short and highly liquid instruments (three
months before maturity) that are readily convertible to cash and so
near their maturity that they present insignificant risk of change in
value because of changes in interest rates [PAS 7 (Statement of
Cash Flows) definition]
Included in cash equivalents:
 Three-month BSP treasury bill
 Three-year BSP treasury bill purchased three months
before maturity date
 Three-month bank deposit
 Three-month money market instrument
 Preference shares with specified redemption date and
acquired three months before redemption date
Measurement
 Cash is measured at face value.
 Cash in foreign currency is measured at current exchange
date (balance sheet date)
 Cash is measured at estimated realizable value if bank is in
financial difficulty or bankruptcy and if recoverable
amount is lower than face value (currently, cash account is
insured up to P500,000)
Classification for investments
 If term is three months or less, classified as cash
equivalents
 If term is more than three months but within one year,
classified as marketable securities, or short-term
investments, and are separate current assets in the financial
statements
 If term is more than one year, classified as long-term
investments which are non-current assets.
Cash in a foreign bank
 If not subject to foreign exchange restriction, they are
included as cash.
 If subject to foreign exchange restriction and material,
they are reclassified as cash restricted in foreign bank
which are non-current assets.
Cash fund set for a purpose
 For use in current operations – classified as current asset.
Examples include: petty cash fund, payroll fund, travel
fund, interest fund, dividend fund, and tax fund.
 For use in non-current operations – classified as long-term
investment. Examples include sinking fund, contingent
fund, fund for acquisition of PPE, etc. If the fund is set
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Review Module 1
Cash and Cash Equivalents
P.M.G. Clamor
August 24, 2011
aside for use within one year after the reporting period, it
will be reclassified as current asset.
Bank overdraft – happens when there is a credit balance in the
cash in bank account.
 Bank overdrafts should not be offset against other bank
accounts with debit balances, except:
o The entity maintains two or more accounts in one
bank (account title: cash, net of bank overdraft)
o The entity maintains accounts in other banks if
the amount is immaterial
Compensating balance – minimum account balance that must be
maintained in connection with borrowing arrangement with bank
 If not legally restricted, compensating balance is part of
cash
 If legally restricted, compensating balance is reclassified
as cash held as compensating balance. It can be current or
non-current depending on the term of the loan
Undelivered checks – checks that is drawn and recorded but is not
given to payees; it is still cash of the company.
Pro-forma Entry
Cash
Accounts payable
xxx
xxx
Post-dated checks delivered – checks that is sent to payees but has
a date subsequent in the reporting period; it is still cash of the
company.
Stale checks – checks released by the company that has been
expired
Pro-forma Entry
Cash
Miscellaneous income
#
Cash
Accounts payable
xxx
xxx (if immaterial)
Loss from cash shortage
xxx
Cash short or over
xxx
Assuming investigation is unsuccessful
Pro-forma entries for overage
Cash
xxx
Cash short or over
xxx
Discovery of shortage
#
Cash short or over
xxx
Payable to cashier
xxx
Assuming the money is from cashier
#
Cash short or over
xxx
Miscellaneous income
xxx
Assuming there is no claim on overage
Accounting for petty cash
1. Establishment of fund
Imprest & Fluctating:
Petty cash fund
Cash in bank
2. Payment of expenses in PCF
Imprest:
No entry
Fluctating:
Expenses
Petty cash fund
3. Replenishment of PCF
Imprest:
Expenses
Cash in bank
Fluctating:
Petty cash fund
Cash in bank
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx (if material)
Issues in cash:
Window dressing – opening the accounts even after the reporting
period
Lapping – practice used for concealing cash shortage, where it
consists of misappropriating collections in customers.
Kitting – practice used for concealing cash shortage through bank
reconciliation.
Accounting for cash shortage/overage
Pro-forma entries for shortage:
Cash short or over
xxx
Cash
xxx
Discovery of shortage
#
Due from cashier
xxx
Cash short or over
xxx
Assuming cashier is responsible for shortage
#
4. Adjustment of expenses at the end of accounting period
Imprest:
Expenses
xxx
Petty cash fund
xxx
Fluctating:
No entry
5. Increase (decrease) of PCF
Imprest & Fluctating
Petty cash fund
Cash in bank
#
Cash in bank
Petty cash fund
xxx
xxx (increase)
xxx
xxx (decrease)
THE END
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