CASH AND CASH EQUIVALENTS

Financial Acccounting and Reporting

1. Cash
a) Cash comprises cash on hand and demand deposits (deposit of money that may be withdrawn
at any time without prior notice, in contrast to term deposits, include checking and saving
accounts). (IAS 7 par 6)
i. Cash on hand includes undeposited
1. cash,
2. customers' checks,
3. cashier's or manager's checks (a cheque guaranteed by a bank, drawn on the
bank's own funds and signed by a cashier. Cashier's checks are treated as
guaranteed funds because the bank, rather than the purchaser, is responsible
for paying the amount. They are commonly required for real estate and
brokerage transactions),
4. traveler's checks (a medium of exchange utilized as an alternative to hard
currency. The product typically is used by people on vacation in foreign
countries. They offer a safe way to travel overseas without cash. The issuing
party, usually a bank, provides security against lost or stolen checks),
5. bank drafts (a check drawn by a bank on its own funds in another bank) and
6. money orders (a printed order for payment of a specified sum, issued by a
bank or post office)
ii. Cash in bank includes demand deposit or checking account and saving deposit.
iii. Cash fund set aside for current purposes such as petty cash fund, payroll fund,
dividend fund, travel fund, interest fund, and tax fund.
b) Money which refers to the currency and coins which are in circulation and legal tender.
c) In accounting, includes negotiable instrument (a document guaranteeing the payment of a
specific amount of money, either on demand, or at a set time, with the payer usually named
on the document, e.g., dated checks, bank drafts, money orders) that is payable in money
and acceptable by the bank for deposit and immediate credit.

2. Cash equivalents
a) 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. (IAS 7 par 6)

3. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes. For an investment to qualify as a cash equivalent it must be
readily convertible to a known amount of cash and be subject to an insignificant risk of changes in
value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short
maturity of, say, three months or less from the date of acquisition. Equity investments are
excluded from cash equivalents unless they are, in substance, cash equivalents, for example in the
case of preferred shares acquired within a short period of their maturity and with a specified
redemption date. (IAS 7 par 6)

4. Examples of cash equivalents:

a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before date of maturity
c. Three-month time deposit
d. Three-month money market instrument or commercial paper (short-term unsecured
promissory notes issued bycompanies)

5. Note that what is important is the date of purchase which should be three months or less before
maturity. A BSP treasury bill that was purchased one year ago cannot qualify as cash equivalent
even if the remaining maturity is three months or less.

6. Investments in time deposit, money market instruments and treasury bills should be classified as
follows:
 a) If the term is three months or less, “cash and cash equivalents”.
b) If the remaining term is more than three months but within one year, “short-term
financial assets” or “temporary investments” (current asset).
c) If the remaining term is more than one year, “long-term investments” (noncurrent
assets).

7. Cash, measurement
a) Measured at face value.
b) Cash in foreign currency
i. measured at the current exchange rate.
ii. when subject to foreign exchange restriction, classified separately among
noncurrent assets and the restriction clearly indicated.

8. Cash fund set aside for noncurrent purpose or payment of noncurrent obligation, it is reported
as “long-term investment” (e.g., sinking fund, preference share redemption fund, contingency
fund for pending lawsuits or tax disputes, insurance fund for uninsured risks, fund for acquisition
or construction of PPE).

9. The classification of cash fund as current or noncurrent should parallel the classification of the
related liability. However, a cash fund set aside for the acquisition of a noncurrent asset should be
classified as noncurrent regardless of the year of disbursement.

10. When the cash in bank account has a credit balance it is said to be a (bank) overdraft. A bank
overdraft is classified as a current liability and should not be offset against other bank
accounts with debit balances (EXCEPT when an entity maintains two or more accounts in one bank
and one account has a debit balance e.g., “cash, net of bank overdraft” or “bank overdraft, net of
other bank account”, OR can be offset against other bank accounts if the amount is not material).

11. 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. In effect, this arrangement results in the reduction of the amount borrowed.
a) If the deposit is NOT legally restricted as to withdrawal, the compensating balance is part
of cash.
b) If the deposit is legally restricted as to withdrawal, the compensating balance is classified
separately as “cash held as compensating balance” under current assets if the
related loan is short-term. If the related loan is long-term, the compensating balance is
classified as noncurrent investment.

12. An undelivered (or unreleased) check is one that is drawn and recorded but not given to the
payee before the end of reporting period. An adjusting entry is required to restore the cash
balance and set up the liability. In practice, the foregoing adjustment is sometimes ignored
because the amount is not very substantial and there is no evidence of actual cancellation of the
check in the subsequent period.

13. 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 reversed and therefore restore the cash balance. A postdated check
cannot be presented to a bank for encashment or deposit.

14. A stale check (or check long outstanding) is a check not encashed by the payee within a
relatively long period of time. In banking practice, a check becomes stale if not encashed within
six months from the date of issuance. This is a matter of entity policy. An entity may issue a “stop
payment order” to the bank for the cancellation of a previously issued check. If the amount of
stale check is immaterial, it is simply accounted for as miscellaneous income. If the amount is
material, the cash is restored and the liability is again set up.

15. When the cash count shows cash which is less than the balance per book, there is a cash
shortage to be recorded as “cash short or over” (a temporary account).
 a) If the cashier or cash custodian is held responsible for the cash shortage, record the cash
shortage as “due fromcashier”.
b) If reasonable efforts fail to disclose the cause of the shortage, record cash shortage as
“loss from cash shortage”.

16. When the cash count shows cash which is more than the balance per book, there is a cash
overage to be recorded as “cash short or over”.
a) The cash overage is treated as miscellaneous income if there is no claim on the same.
b) When the cash overage is properly found to be the money of the cashier, record as
“payable to cashier”.

17. The imprest system is a system of control of cash which requires that all cash receipts should be
deposited intact and all cash disbursements should be made by means of check.

18. The petty cash fund is money set aside to pay small expenses which cannot be paid
conveniently by means of check.

19. Two methods of handling the petty cash:

a) Imprest fund system
i. Journal entries
1. Establishment of fund
a) debit petty cash fund
b) credit cash in bank
2. Payment of expenses out of the fund
a) no formal journal entries are made
b) the petty cash custodian uses a petty cash voucher for such payments and
simply prepares memorandum entries in the petty cash journal
3. Replenishment of petty cash payments
a) debit expense
b) credit cash in bank
4. End of accounting period adjustment for unreplenished expenses
a) debit expense
b) credit petty cash fund
b) Fluctuating fund system
i. Checks drawn to replenish the fund do not necessarily equal the petty cash
disbursements.
ii. Petty cash disbursements are immediately recorded.