Accounting 102: Intermediate Accounting

CHAPTER 2 CASH AND CASH EQUIVALENTS

Learning Objectives:
• Define cash and identify the items that are included in the “Cash and Cash Equivalents” line
item.
• Account for petty cash funds and cash shortages/overages.

Definition of Cash
 Cash is money or any other negotiable instruments or its equivalent that is accepted by the
bank for deposit and immediate credit.
 Normal presentation is CURRENT ASSETS
 Measurement at FACE VALUE
 For foreign currency transaction, it is converted into current exchange rate/spot rate.

Examples of Cash Items:

a. Cash on hand – refers to undeposited collections (collections (cash, customer checks,
manager’s checks, money order, bank draft) awaiting for deposit or available cash being held
as of the reporting date.
b. Cash in bank- refers to deposits in bank either under Current/Checking or Savings account
c. Cash Fund – restricted in nature but intended for current operations thus presented as
current assets.

Excluded from Cash

• IOUs advances to employees
• Cash fund not available for use in current operations such as sinking fund
plant expansion fund, depreciation fund, Preference share redemption fund, contingency
fund, and insurance fund.
• Postage stamps –
• Post Dated Checks
• Unused Credit Lines

WHAT ARE POST DATED CHECKS (COLLECTIONS)

• Postdated checks received from customers are not qualify as cash because PDC are not
presently available for immediate use.

Example: Received check on 9/1 dated January 5, 2023.

September 1, 2022 December 31, 2022

Cash 10,000 A/R. 10,000

A/R 10,000 Cash. 10,000

WHAT IS UNUSED CREDIT LINE?

• Not part of cash but only disclosed in the notes to FS.
WHAT IS UNUSED/UNDELIVERED CHECK /PDC DRAWN FOR PAYMENTS?

• Unreleased Check or undelivered checks to the payee where no actual payment has been
made.
• Post dated check payment to clients/suppliers
Example:
Checks issued Entry at date of Reversing Entry as
issuance of Reporting date

Check #1 drawn for 10,000 and AP. 10,000 Cash 10,000

dated today but to be delivered Cash 10,000 Ap 10,000
to payee next year

Check 2 drawn for 15,000 was AP. 15,000 Cash 15,000

delivered to payee today but Cash. 15,000 AP. 15, 000
check is dated 1000 years

WHAT IS A STALE CHECK?

 Issued checks however, were not encashed within 6 months or more from date of issuance
then it become income if not requested by the customer/client.

WHAT IS BANK OVERDRAFT?

 Check drawn more than what is inside the bank account which caused negative balance to
your account.
 A bank overdraft is presented as a current liability, unless it qualifies to be offset against
cash.
 Offsetting assets and liabilities is appropriately only if permitted by PFRS. It may be offset if
the entity has both: a) Legal right to offset ; b) Intention to settle the account on a net
amount basis or simultaneously

General Rule in offsetting: Not allowed not unless same BANK and IMMATERIAL and account is
UNRESTRICTED.
COMPENSATING BALANCE
• Compensating balances that are legally or formally restricted as to withdrawal by the
borrower are excluded from cash.
• Compensating balances that are not legally restricted or informal restriction as to
withdrawal are included in cash.
• Whether restricted or not, compensating balances are disclosed in the notes.
• To increase the yield on loan to lender

CASH EQUIVALENTS
• 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.”
(PAS 7 Statement of Cash Flows)
• Conditions: Short term AND highly liquid (non-risky)
• Only highly liquid investments that are acquired 3 months or less before maturity or
investment which maturity is only 3 months can qualify as cash equivalents.

Sample Cash Equivalents

 3-month BSP Treasury Bills, notes or bonds
 3-month Money market instruments or commercial paper

TYPE REMARKS

1 yr T-Bills acquired in July 1, 2022 Not Cash Equivalent at December 31,

which will mature in March 31, 2023 2022
1 Yr T-Bills acquired December 15, Cash Equivalent
2022 and will mature in March 15,
2023

Notes:
Checks and bank drafts are not considered as Cash Equivalent but form part of cash.
Equity Securities – not part of Cash and Cash Equivalent because shares of stocks has no maturity
date

Financial statement presentation

• Items of cash and cash equivalents are aggregated and presented in the statement of
financial position under a single line item described as “Cash and cash equivalents.”
• Recognized as Current Assets

EXERCISES:

PROBLEM 2

Bills and coins P400,000

Cash In bank – demand deposit P5,000,000
Cash In bank – savings deposit P1,000,000
Certificate of time deposit 2 yrs P1,500,000
Postage and unused stamps P5,000
Money order P50,000
Manager’s check P100,000
Traveller’s check P1,000,000
Bank Drafts P60,000
Post dated customer’s check P500,000
Change Fund P22,000
PCF P50,000
Emergency Fund P175,000

How much is INCLUDED in Cash?

PROBLEM 2:
Solaire Company had the following account balances on December 31, 2021:
Cash In Bank P2,500,000
Cash on hand P125,000
Cash restricted in addition to plant in 2022 P1,600,000

Cash in bank included P600,000 of compensating balance against short term borrowing arrangement.
The compensating balance is not legally restricted as to withdrawal.

How much is the CASH to be included in the report ending December 31, 2021?

PROBLEM 3
Luke’s Company reported the following on its cash and cash equivalents on December 31, 2021:

Cash on Hand P200,000

Petty Cash P70,000
Good Bank Current Account P5,000,000
Morning Bank Current account 1 P4,000,000
Morning Bank Current account 2 (P100,000)
Afternoon Bank Savings accountP250,000
Afternoon Bank time deposit 90 days P2,000,000

Cash on hand included the following:

  Customer check of P35,000 returned by the Bank on December 21, 2021 due to insufficient
fund but subsequently redeposited and cleared by the Bank on January 10, 2022.
 Customer check of P15,000 dated January 10, 2022 received December 23, 2021.

The petty cash fund consisted of the following items:

 Currency and coins P5,000
 IOUs from officers P2,000
 Unreplenished PCF vouchers P12,000

Included among the checks drawn by Luke Company against the Goodbank current account and
recorded in December 2021 were the following:
 Check written and dated December 23, 2021 and delivered to payee on January 31, 2022,
P25,000
 Check written December 26, 2021 dated January 30, 2022, delivered to payee on December
28, 2021- P45,000

PROBLEM 4:
Chelsea Company recorded the following information of the current year:

 Investment securities of P1,000,000. These securities are share investments in entities that
are traded in the Philippine stock exchange. As a result the shares are very actively traded in
the market.
 Investment securities of P2,000,000. These securities are government treasury bills. The T-
bills have a 10-year term and purchased on November 30 at which time they had 2 months
to go until they mature.
 Investment securities P1,500,000. These securities are commercial papers or money market
placements. The term of these papers is 3 months and the instrument were purchased on
December 31, at which at that time they had one and a half month until they mature.

What total amounts should be reported as cash equivalents at the end of the current year.

INTERNAL CONTROLS OVER CASH

 Any action or process effected by management that is designed to help an entity achieve its
objectives (reliability of reporting, effectiveness and efficiency of operations, compliance
with laws and regulations, and safeguarding of assets).

 Inherent risk is normally higher for cash compared to other assets because cash is more
exposed to risk of theft and other types of fraud.

Sample Internal Controls

1. Segregation of Incompatible duties – Authorization, execution, recording, custody
2. Imprest System – all cash receipts must be deposited intact and all disbursements must be
made through check and not from cash collections. Disbursement of small amounts are
made through PCF.
3. Bank Reconciliation – upon receipt of bank statement, cash books must be reconciled and
investigated any discrepancy.
4. Cash Counts
5. Minimum Cash Balance – should be maintained for cash funds sufficiently only to defray
specific business requirements. Excessive cash balance may increase the risk of
embezzlement.
6. Lockbox Accounts- lockbox accounts to expedite collections for a rented box, all collections
will be credited to a designated bank account.
7. Non-encashment of personal checks from PCF
 8. Voucher System – a voucher is prepared for every disbursement to ensure that it is
authorized and made for valid and legal expenditures.

Accounting for Cash Shortages and Overages

Cash shortages is initially debited to a suspense account called cash shortage but this account should
not be seen in the FS, after investigation, this account must be closed to either Receivables or loss
depending in the result of the investigation. Whereas, Cash Overage – closed to either Payable or
Gain depending on the investigation

Cash Shortage XX. AR from Cashier/Loss on Cash Shortage XX

Cash XX Cash Shortage XX

Cash XX. Cash Overage

Cash Overage. XX Payable to Employee/ Gain

Concealment of Cash Shortage

 LAPPING-Occurs when collection of AR from one customer is misappropriated and then
concealed by applying another collection from a client.
 KITING - Occurs when the cash shortage is concealed by overstating the balance of cash.
 WINDOW DRESSING - Fraudulent financial reporting and not primarily method of concealing
cash. It’s usually called cooking the books
PETTY CASH FUND
 It is money set aside to defray relatively small amounts of cash disbursements
 It is an example of working fund
 PCF is an exception to the rule of THE IMPREST FUND SYSTEM.

ACCOUNTING FOR PETTY CASH FUND

 Establishment of PCF
 Disbursement out of the PCF
 Replenishment of PCF
 Increase/Decrease in the balance of PCF
 Recording of unreplenished expense vouchers
 Recording of cash shortage or overage

Journal entries to each accounting steps:

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