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Cash & Cash Equivalents

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11 views25 pages

Cash & Cash Equivalents

Uploaded by

alexandrakristinelazo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CASH & CASH EQUIVALENTS

DEFINITION (Excerpts from PAS7)


Cash - comprises cash on hand and cash in bank.

Cash equivalents - 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) – (PAS7.6)
Cash Inclusions
a. Cash on hand – This includes undeposited cash collections and
other cash items awaiting deposits such as customers checks,
cashier’s or manager’s checks, traveler’s checks, bank drafts and
money orders.
b. Cash in bank - This includes demand deposit or checking account
and saving deposit which are unrestricted as to withdrawal
c. Cash fund set aside from current purposes such as petty cash fund,
payroll fund and dividend fund.
GENERAL RULE FOR
RECOGNITION, MEASUREMENT, AND DISCLOSURE

• The item should be unrestricted for use.

• This means that the cash must be readily available for the payment of
current obligations and not be subject to any restrictions, contractual or
otherwise.

• Items of cash and cash equivalents are measured at their face values.

• Cash and Cash equivalents are disclosed as one- and first-line item in the
current asset section on the face of the balance sheet.
Cash Equivalents
• PAS 7, paragraph 6, defines cash equivalents 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.
• The standard further states that that only highly liquid investments
that are acquired three months before maturity are acquired three
months before maturity date can qualify as can equivalents.
Examples of cash equivalents are
A. Three-month BSP treasury bill
B. Three-year BSP treasury bill purchase three months before date of
maturi
C. Three month time deposit
D. Three month money market instrument or commercial paper.
Investment of excess cash
Investments in time deposit, money market instrutments and treasury
bills should be classified as follows:
a. If the term is three months or less, such instruments are classified
as cash equivalents and therefore included in the caption “cash and
cash equivalents”
b. If the term is more than three months but within one year, such
investments are classified as short-term financial assets or
temporary investments and presented separately as current assets.
c. If the term is more than one year, such investments as classified as
noncurrent or long-term investments.
Measurement of cash
• Cash in measured at face value

• Cash in foreign currency is measured at the current exchange rate.


Financial statement presentation
The caption cash and cash equivalents should be shown as the first
line item under current assets.

However, the details comprising the cash and cash equivalents should
be disclosed in the notes to financial statements.
Foreign currency
• Cash in foreign currency should be translated to Philippine pesos
using the current exchange rate.

• Deposits in foreign countries which are not subject to any foreign


exchange restrictions are included in “cash”

• Deposits in foreign bank which are subject to foreign exchange


restrictions should be classified separately among non current assets
and the restriction clearly indicated
Cash fund for a certain purpose
• If the cash fund is set aside for use in current operations or for the
payment of current obligations, it is a current asset.*

• The cash fund is included as part of cash and cash equivalents.


Bank Overdraft
• A bank overdraft is classified as a current liability and should not be
offset against other bank accounts with debit balances.

Exception to the rule on overdraft:


When an entity maintain two or more accounts in one bank and one
account results in an overdraft, such overdraft can be offset against the
other bank account with a debit balance in order to show cash, net of
bank overdraft.
Compensating Balance
• A compensating balance generally takes the form of minimum
checking or demand deposit account balance that must be
maintained in connection with a borrowing arrangement with a bank.
Classification

If the deposit is not legally restricted as to withdrawal by the borrower


because of an informal compensating balance agreement, the
compensating balance is part of cash .

If the deposit is legally restricted because of a formal compensating


balance agreement, the compensating balance is classified separately
as “cash held as compensating balance” under current assets if the
related loan is short-term.*
Undelivered or Unreleased check
• An undelivered or unreleased check is one that is merely drawn and
recorded but not given to the payee before the end of the reporting
period.

• There is no payment when the check is pending release to the payee


at the end of the period*

• Accordingly, an adjusting entry is required to restore the cash balance


and set up the liability.
Postdated check delivered
A postdated check delivered is a check drawn, recorded and already
given to the payee but it bears a date subsequent to the end of
reporting period.*

The original entry recording a delivered postdated check shall be


revered and therefore restored to the cash balance.

Cash xxx
Accounts Payable xxx
Stale check or check long outstanding
• A state check is a check not encashed by the payee within a relatively
long period of time.
Accounting for cash shortage
• When the cash count shows cash which is less than the balance per
book, a cash shortage is to be recorded.
Cash short or over * xxx
Cash xxx
Accounting for Cash Overage
When the cash count shows cash which is more than the balance per
book, a cash overage is to be recorded*
Cash xxx
Cash short or over xxx
Petty Cash Fund
• The petty cash fund is money set aside to pay small expenses which
cannot be paid conveniently by means of check.

• There are two methods of handling petty cash namely:


a. Imprest fund system
b. Fluctuating fund system
Imprest System
a. A check is drawn to establish the fund
Petty Cash Fund xxx
Cash in bank xxx

b. Payment of expenses out of fund


No formal journal entries are made*
c. Replenishment of petty cash payments
Expenses xxx
Cash in bank xxx

d. At the end of the accounting period, it is necessary to adjust the


unreplenished expenses in order to state the correct petty cash
balance.
Expenses xxx
Petty cash fund xxx
Fluctuating System
a. A check is drawn to establish the fund
Petty Cash Fund xxx
Cash in bank xxx
b. Payment of expenses out of fund
Expenses xxx
Petty Cash Fund xxx
c. Replenishment of petty cash payments
Petty Cash Fund xxx
Cash in bank xxx
Illustration
2021
Nov 10. The entity established an imprest fund of P10,000

Nov 29. Replenished the fund. The petty cash items include the
following:
Currency and coins P2,000
Supplies 5,000
Telephone 1,800
Postage 1,200.
Dec 31. The fund was not replenished. The fund was composed of the
following:
Currency and Coins P7,000
Supplies 1,500
Postage 500
Miscellaneous Expense 1,000

2022.
Feb 1. The fund is replenished and increased to P15,000. The composition of
the fund: Currency and coin, P1,000; Supplies, P4,500; Postage, P3,000;
Miscellaneous Expenses P1,500.

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