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Lecture Notes On Cash and Cash Equivalents

Here are the steps to solve this problem: 1. Cash on hand = P200,000 2. Cash in bank - savings at BPI = P400,000 3. Add compensating balance not restricted = P100,000 Total cash in bank - savings at BPI = P500,000 4. Cash in bank - deposit in escrow at Metrobank = P200,000 5. Undeposited collections = P40,000 6. Total cash and cash equivalents = P200,000 + P500,000 + P200,000 + P40,000 = P940,000 7. Deduct bank overdrafts: - BPI current

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Keann Briones
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604 views

Lecture Notes On Cash and Cash Equivalents

Here are the steps to solve this problem: 1. Cash on hand = P200,000 2. Cash in bank - savings at BPI = P400,000 3. Add compensating balance not restricted = P100,000 Total cash in bank - savings at BPI = P500,000 4. Cash in bank - deposit in escrow at Metrobank = P200,000 5. Undeposited collections = P40,000 6. Total cash and cash equivalents = P200,000 + P500,000 + P200,000 + P40,000 = P940,000 7. Deduct bank overdrafts: - BPI current

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Keann Briones
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© © All Rights Reserved
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LECTURE NOTES ON CASH AND CASH EQUIVALENTS

Conceptual Framework for Financial Reporting


2nd Semester 2018-2019

Cash includes money or its equivalent that is readily available for unrestricted use. Money is the
standard medium of exchange and the basis of accounting measurements.

Cash includes
1. Cash on Hand
2. Cash in bank

Examples of items included as cash


1. Coins and currencies
2. Demand Deposits (Checking or Current accounts) and Savings Deposit
3. Bank drafts – guarantees by bank to advance funds on the demand by the party to whom the
draft was directed
4. Money Orders- similar to bank drafts but are drawn from post offices or other financial
institution
5. Checks- such as Cashier’s Checks, Personal checks, Manager’s check, Travellers check, Certified
checks received from customers
6. Cash Funds set aside for use in current operations such as
a. Petty cash fund
b. Revolving fund
c. Payroll fund
d. Change fund
e. Dividend fund
f. Tax fund – is set aside to be used in paying taxes
g. Travel fund
h. Interest fund
i. Other types of imprest bank accounts used in current operations
Revolving fund is a fund similar to the petty cash fund but is used for a limited or specific purpose set by
management.

Examples of items NOT included as CASH:


1. Postdated checks – checks dated at a future date. (treated as receivables)
2. IOUs or advances to employees (treated as receivables)
3. Cash funds not available for use in current operations- such as
a. Sinking fund
b. Plant expansion fund
c. Depreciation fund
d. Preference share redemption fund
e. Contingency fund
f. Insurance fund
4. Postage stamps – are treated as prepaid supplies

POSTDATED CHECKS RECEIVED:


Postdated checks (PDC) received by an entity do not qualify as cash because postdated checks are not
presently available for immediate use. They will only be available for use at a future date.

Entities normally record check collections on accounts by debiting “Cash” and crediting “Accounts
Receivable” regardless of whether the checks received are postdated or not. Thus, at reporting date, an
adjustment is necessary to revert back postdated checks to Accounts Receivable.

UNUSED CREDIT LINE


Unused credit line is NOT included as cash but rather disclosed only in the notes. Unused credit line is
the difference between the amount of LINE OF CREDIT and the amount that was actually borrowed.

For example, you applied for a line of credit of P100M in a bank. During the year you borrowed P70M.
The bank automatically credits your account for the P70 M borrowed. This will be included in your cash.
The unused credit line of P30M (P100-P70M) is disclosed only in the notes because you have not
received it in cash.

UNRELEASED CHECKS DRAWN and POSTDATED CHECKS DRAWN


Entities normally record checks drawn by debiting “Äccounts Payable” and crediting “Cash”. However,
when the checks drawn are either (a) unreleased or undelivered to the payee or (b) postdated, no
payment has actually been made. Therefore, an adjusting entry is needed to revert the unreleased
check or postdated check back to cash and accounts payable.

STALE CHECKS
When checks delivered to payees are not encashed within relatively long period of time, normally 6
months or more, the checks are referred to as STALE. It should be noted though that the period of time
before checks become stale is a matter of company policy. Stale checks are reverted back to cash.

Case Accounting treatment


Postdated check received from customer Exclude from Cash
Undelivered check drawn Include in cash
Postdated check drawn Include in cash
Stale checks Include in cash
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
CASH EQUIVALENTS
PAS 7 Statement of Cash Flows defines cash equivalents as short term, highly liquid investments that are
readily convertible to known amounts of cash and which are subjects to an insignificant risk of changes
in value. Cash equivalents are held for the purpose of meeting short term cash commitments rather
than for investment or other purposes.
PAS7 provides that only highly liquid investments that are acquired 3 months or less before maturity can
qualify as cash equivalents.

Examples of Cash Equivalents


a. 3 month Treasury Bill
b. 90 day money market instrument or commercial paper
Money Market instruments are investments in portfolios of short term securities.

Commercial papers consist of short-term unsecured, notes payable issued in large


denominations by large companies with high credit ratings to other companies and institutional
investors. The maturity date of commercial paper is normally less than 270 days and is trade in
money markets and thus, is highly liquid. A commercial paper acquired 3 months or less before
its maturity date may qualify as cash equivalent.
c. 3 month time deposit
d. 1 year Treasury bill acquired 3 months before maturity date
Treasury bill is a short term obligation issued by the government at a discount. Treasury bills
normally have a maturity of 90 days to less than a year.

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

COMPENSATING BALANCE:
Compensating balance is a minimum amount that must be maintained in an entity’s bank account as
support for funds borrowed from the bank. The compensating balance can be used by the bank as
cushion for the days when cash demands are greatest and deposits fail to materialize.

Compensating balances that are legally restricted as to withdrawal by the borrower are excluded from
cash and shown as part of other current assets or other noncurrent assets depending on the nature of
the restriction.

Compensating balances that are not legally restricted as to withdrawals are included in cash.

Whether restricted or not, compensating balances are disclosed in the notes.

BANK OVERDRAFT:
Bank overdraft (Cash Overdraft) is a negative (credit) balance in the cash in bank account resulting from
overpayment of checks in excess of the amount of deposit. Overdrafts occur only in checking accounts,
they should not occur in savings and time deposits.

Overdrafts are payable on demand, thus they are presented as CURRENT LIABILITIES. Overdrafts are not
offset to cash, except in cases where offsetting is permitted.

Some banks offer overdraft privileges on their checking accounts. This means that if a depositor writes a
check in excess of the checking account balance, the bank will advance the required funds to cover the
check, rather than have the check bounce. Such advances are considered as CURRENT LIABILITES.
ASSIGNMENT: BANK OVERDRAFT (to be submitted) TUESDAY March 5, 2019

AKHOMABANTHOT Company shows the following cash balances as of December 31, 2018

Account Amount
Cash on Hand 200,000
Cash in Bank-Savings - BPI 400,000
Cash in Bank-Current- BPI (160,00)
Cash in Bank-deposit in escrow -Metrobank 200,000
Cash in Bank –Current -Metrobank (40,000)
Cash in Bank –Current- BDO (60,000)
Total 540,000

Additional Information:
1. In the vault is undeposited collections amounting to P40,000.
2. Cash in Bank savings maintained at BPI includes a P100,000 compensating balance which is not
restricted.
Required: Compute for the amount of cash to be reported in the financial sttatements.

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