1 CASH AND

CASH EQUIVALENTS

FRANCIS H.VILLAMIN
2 CASH AND CASH
EQUIVALENTS
Learning Objectives:
1. Understand the financial nature of cash and cash
equivalents
2. Differentiate between cash and cash equivalents.
3. Know the recognition, measurement and disclosure of
cash and cash equivalents
4. Understand the basic internal controls implemented
5. Prepare a bank reconciliation
3
DEFINITION OF CASH

• 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
measurement.
• Cash includes cash on hand and in banks.
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DEFINITION OF CASH

• Cash on Hand – includes undeposited

collections awaiting deposit and other
current funds held as of the reporting
date.
• Cash in bank – includes deposits in banks
that is available for immediate withdrawal
and unrestricted use.
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EXAMPLES OF CASH
1. Coins and currencies
2. Demand deposits (checking or current accounts) and
savings accounts
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 institutions.
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EXAMPLES OF CASH
5. Checks – such as cashier’s checks, personal checks,
manager’s checks, traveller’s checks and certified
checks received from customers or other external
parties.
6. Cash funds set aside for use in current operations
a. Petty cash fund
b. Revolving fund
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EXAMPLES OF CASH
5. Cash funds set aside for use in current operations
c. Payroll fund
d. Change fund
e. Dividend fund
f. Tax fund
g. Travel fund
h. Interest fund
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EXAMPLES OF CASH
 Revolving fund is a fund similar to petty cash
fund but is used for a limited or a specific
purpose set by management (e.g. revolving funds
held by sales representatives and revolving funds
held by field engineers in a construction firm).
 Tax fund is a fund set aside to be used in paying
taxes.
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NOT INCLUDED AS CASH
• Post dated checks – checks dated as a future date.
These are treated receivables.
• IOUs or advances to employees
• Cash funds not available for use in current
operations – such as Sinking Fund, Plant Expansion
Fund, Contingency Fund, Insurance Fund
• Postage stamps – these are treated as prepaid
supplies
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CASH EQUIVALENTS

• These are short-term, highly liquid investments that

are readily convertible to known amounts of cash
and which are subject to an insignificant risk of
changes in value.
• Only financial instruments acquired 3 months
before maturity date can qualify as cash equivalents.
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FINANCIAL INSTRUMENTS

• Financial instrument – is “any contract that

gives rise to a financial asset of one entity
and a financial liability or equity
instrument of another entity.” (PAS 32.11)
12 EXAMPLES OF CASH
EQUIVALENTS

a. Treasury bills, notes or bonds acquired 3 months before

maturity date
 Treasury bill is a short-term obligation issued by the
government at a discount. It normally has a maturity of
90 days to less than a year.
 Treasury note and treasury bonds are long-term
obligations issued also by the government. Treasury
notes have a maturity of 1 year to less than 10 years.
Treasury bonds have a maturity of 10 years or more.
13 EXAMPLES OF CASH
EQUIVALENTS

b. Money market instrument or commercial paper

acquired 3 months before maturity date.
 Money market instruments are investments in portfolios
or short term securities
 Commercial papers consist of short-term, unsecured
noes payable issued in large denominations by large
companies with high credit ratings to other companies
and institutional investors.
14 EXAMPLES OF CASH
EQUIVALENTS

c. 3-month Time Deposit

 Time deposit is a form of bank deposit normally made
in fixed denomination, bears interest higher than that of
regular deposits, and has a pre-agreed maturity. A time
deposit is evidenced by a certificate of deposit.
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ILLUSTRATIVE EXAMPLE
ABC Co. holds the following short-term
investments as of December 31, 2019:
1) 1 – year Treasury bill maturing March 30, 2020
acquired on July 1, 2019.
2) 1 – year Treasury bill maturing March 30, 2020
acquired on December 31, 2019
Which of the investments may qualify as cash
equivalent?
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APPLICATION OF
CONCEPTS
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CASH AND CASH EQUIVALENTS

Problem 1
Electron Company had the following balances on December 31, 2020:

• Cash in checking account P 350,000

• Cash in money market account 750,000
• Treasury bill, purchased November 1, 2020

maturing January 31, 2021 3,500,000

• Time deposit purchased December 1, 2020
maturing March 31, 2021 4,000,000
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CASH AND CASH EQUIVALENTS

Problem 2
Vanguard Company provided the following data on December 31, 2020:

• Checkbook balance p 4,000,000

• Bank statement balance 5,000,000
• Check drawn on Vanguard’s account, payable to
supplier, dated and recorded December 31, 2020
but not mailed until January 15, 2021 500,000
• Cash in sinking fund 2,000,000
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COMPENSATING BALANCE
• This is a minimum amount that must be
maintained in an entity’s bank account as support
for funds borrowed from the bank.
• Compensating balances that are legally restricted
as to withdrawal by the borrower are excluded
from cash and shown as part of the current
assets or other non current assets depending on
the nature of the restriction.
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COMPENSATING BALANCE
• Compensating balances that are not legally
restricted as to withdrawal by the borrower are
included in cash.
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BANK OVERDRAFT
• This 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.
• Overdrafts are payable on demand, thus, they are
presented as current liabilities.
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INTERNAL CONTOLS OVER CASH

1. Segregation of incompatible duties. The

duties of authorization, execution, recording
and custody over cash should be segregated.
2. Imprest system – requires that all cash
receipts should be deposited intact and cash
disbursements should be made through checks.
Petty cash fund is money set aside to defray
relatively small amount of cash disbursements.
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INTERNAL CONTOLS OVER CASH

3. Bank reconciliation – should be prepared

regularly, immediately upon receipt of the
monthly bank statement , to reconcile on a
timely basis the differences between the cash
balance per books and cash balance per bank
statement. The differences should be duly
investigated and accounted for.
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INTERNAL CONTOLS OVER CASH

4. Cash counts – provide reasonable assurance

that actual cash tallies with the balance per
records.
5. Minimum cash balance – should be
maintained especially for cash funds sufficient
only to defray specific business requirements.
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INTERNAL CONTOLS OVER CASH

6. Lockbox accounts – Entities often utilize

lockbox accounts to expedite cash collections and
to ensure that cash collections are deposited
intact.
7. Voucher system – This is an internal control
over all cash disbursements. Under this
system , a voucher is prepared for every cash
disbursement in order to ensure that each
disbursement is properly authorized , made for a
valid expenditure and properly recorded.
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BANK RECONCILIATION

• A bank reconciliation statement is a

report that is prepared for the purpose of
bringing the balances of cash (a) per
records and (b) per bank statement into
agreement.
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BANK RECONCILIATION
• Pro forma bank reconciliation
Balance per books, end P xxx Balance per bank, end Pxxx
Add: CM xxx Add: DIT xxx
Less: DM (xxx) Less: OC (xxx)
+/- Book errors xxx +/- Bank errors xxx
_____ ____
Adjusted Balance P xxx Adjusted Balance P xxx
===== =====
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BANK RECONCILIATION
• Credit Memos (CM) – are additions (bank
credits) made by bank to the depositor’s bank
account but not yet recorded by the depositor.
• Debit memos (DM) – are deductions (bank
debits) made by the bank to the depositor’s bank
account but not yet recorded by the depositor.
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EXAMPLES OF CREDIT MEMOS
• Collections made by the bank on behalf of the
depositor
• Proceeds from loan directly credited or added by
the bank to the depositor’s account.
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EXAMPLES OF DEBIT MEMOS
• Bank Service Charges
• No Sufficient Funds Checks (NSF Checks) or Drawn
Against Insufficient Funds (DAIF). – These are checks
deposited and already recorded by the bank but
subsequently returned to depositor because the
drawer’s fund is insufficient to pay for the check.
• Payments of Loans – This represents payment of loan
which the depositor agreed to be made out directly
from its bank account.
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BANK RECONCILIATION
• Deposits in Transit (DIT) – are deposits made
but not yet credited by the bank to the
depositor’s bank account.
• Outstanding Checks (OC) – are checks
drawn and released but are not yet encashed
with the bank.
32 EXCLUSIONS FROM
OUTSTANDING CHECKS
• Certified checks – The bank when certifying
checks automatically debits (reduces) the
depositor’s account and assumes direct liability
on paying the certified checks.
• Certified checks are already deducted from the
account, thus, they are no longer outstanding.
33 EXCLUSIONS FROM
OUTSTANDING CHECKS

• Stale checks – are checks that remain

outstanding for a long period of time. These are
reverted back to cash, meaning they are added
back to cash balance per books and are excluded
from outstanding checks.
34 PRESENTATION IN THE SFP OF
CASH AND CASH EQUIVALENTS

Cash and cash equivalents are presented in

the Statement of Financial Position under
the Current Assets section.
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