2
Cash
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BLUE NOTES
CHAPTER
Cash Equivalents
Definition
Definition
It includes money and any other
negotiable instrument that is payable in
money and acceptable by the bank for
deposit and immediate credit.
These 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 value because of changes in interest rates.
(PAS 7, par. 6)
Only highly liquid investments that are acquired three months before
maturity can qualify as cash equivalents.
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Checks
Bank Drafts
Money Orders
Petty Cash Fund
Payroll Fund
Travel Fund
Interest Fund
Dividend Fund
Tax Fund
Sinking Fund
Preferred Redemption Fund
Plant Expansion Fund
Insurance Fund
 3-month BSP Treasury Bill
 BSP Treasury Bill (more than 3 months) purchased 3 months before
maturity date
 3-month Time Deposit
 3-month Money Market Instrument
 Preference shares (with specified redemption date) purchased 3
months before redemption date
 Equity securities – no maturity date
Valuation
In Local Currency
= Face Value
Note:
In Foreign Currency
= Current Exchange Rate
If Recoverable Value < Face Value*
= Estimated Realizable Value
*Cash in bank or in financial institutions having financial difficulty or in bankruptcy should be shown at its recoverable value.
Financial Statement Presentation
Aggregate cash and cash equivalents should be shown as the 1st line item among the current assets.
Details comprising the cash and cash equivalents should be disclosed in the notes to financial statements.
Financial Statement Classification
Classified as Cash and Cash Equivalents
1. Unrestricted/Current Use
Note:
Classified as a separate line item
Restricted/Noncurrent Use → Long-term Investment
Classification of cash fund as current or noncurrent should parallel the classification of the related liability.
If material, foreign bank deposits subject to foreign exchange restriction shall be classified separately among noncurrent
assets and restriction clearly indicated.
2. Investment in Time Deposit, Money Market Instrument and Treasury Bills
If Term ≤ 3 months
3 months < Term ≤ 1 year → Short-term Investment
Term > 1 year → Long-term Investment
Note:
There is an assumption of 3 month-term when the problem does not specify.
Practical Accounting 1 Theory of Accounts
Chapter 2 – Cash and Cash Equivalents
USL Blue Notes
9
3. General Rule: Bank overdraft (Credit Balance Bank Account) → Current Liability
Exception: It can be an offset against other bank account if the amount is immaterial and/or when the
entity
maintains 2 or more accounts in 1 bank.
4. Informal Compensating Balance
─ not legally restricted
Formal Compensating Balance
─ legally restricted
If related loan is short-term → Cash held as compensating
balance
If related loan is long-term → Noncurrent Investment
Note:
In the absence of any information, compensating balance is always considered not available for an unrestricted use.
Restoration of Cash Balance from:
Check as payment
Check as receipt
Unreleased Check
Postdated Check
Stale Check*
↑Cash ↓Account Payable
↑Cash ↓Account Payable
↑Cash ↓Account Payable
↓Cash ↑Account Receivable
↓Cash ↑Account Receivable
↓Cash ↑Account Receivable
Note:
*A check becomes stale if not encashed within 6 months from the issuance date. However, the entity may issue a “stop payment order”
for cancelation of stale check even for less than 6 months.
Misstatement Practices Concerning Cash Balance:
1. Window Dressing is a practice of opening the books of accounts beyond the close of the accounting period for
the purpose of showing a better financial position and performance.
2. Lapping consists of misappropriating a collection from one customer and concealing this defalcation when
collection is made from another customer.
3. Kiting is a transfer of cash from one bank to another bank usually employed at the end of the month.
Petty Cash Fund
1. Imprest Fund System
Petty cash expenses are recorded upon replenishment.
Replenishment amount = Petty cash disbursements
2. Fluctuating Fund System
Petty cash expenses are immediately recorded.
Replenishment amount = or > or < Petty cash disbursements
Bank Reconciliation
Book reconciling items
1. Credit Memos
– deposits credited by the bank; not yet recorded as cash receipts in books
2. Debit Memos
– checks debited by the bank; not yet recorded as cash disbursements in books
Bank reconciling items
1. Deposits in transit – already recorded as cash receipts in books; not yet credited by the bank
2. Outstanding checks – already recorded as cash disbursements in books; not yet debited by the bank
Forms
1. Adjusted balance method – book balance and bank balance → correct cash balance
2. Book to bank method
3. Bank to book method
Proof of cash is an expanded reconciliation in that it includes proof of receipts and disbursements.
Theory of Accounts Practical Accounting 1
10
USL Blue Notes
Chapter 2 – Cash and Cash Equivalents
Illustrative Problem
1. On December 31, 2014, the cash account of Maktech Company showed the following details:
Undeposited collections
Cash in bank – PCIB checking account
Cash in bank – PNB (overdraft)
Undeposited NSF check received from the customer, dated Dec. 1, 2014
Undeposited check from a customer, dated Jan. 15, 2015
Cash in bank – PCIB (fund for payroll)
Cash in bank – PCIB (saving deposit)
Cash in bank – PCIB (money market instrument, 90 days)
Cash in foreign bank (restricted)
IOUs from officers
Sinking fund cash
Listed shares held as trading investment
Petty cash fund (all funds were reimbursed on 12/31/2014)
Time deposit (due February 1,2015)
Treasury bills
Traveler’s check
60,000
500,000
(50,000)
15,000
25,000
150,000
100,000
2,000,000
100,000
30,000
450,000
120,000
50,000
250,000
1,000,000
50,000
Solution:
Undeposited collections
PCIB checking account
PCIB payroll fund
PCIB saving deposit
Petty cash fund
Time deposit
Treasury bills
Traveler’s check
PCIB money market
Total cash and cash equivalents
Practical Accounting 1 Theory of Accounts
60,000
500,000
150,000
100,000
50,000
250,000
1,000,000
50,000
2,000,000
4,160,000