CHAPTER 7:
CASH AND CASH EQUIVALENTS
Money – standard medium of exchange;
currency and coins in circulation and legal
tender.
Cash – money and other negotiable
instruments payable in money and acceptable
by the bank for deposit; checks, bank drafts,
and money orders.
Postdated checks – received but not
considered as cash yet because they are
unacceptable by the bank.
“Cash” must be an item unrestricted in use.
CASH ITEMS INCLUDED IN CASH
1. Cash on hand – undeposited cash
collections and other cash items awaiting
deposit
2. Cash in bank – demand deposit or checking
account and saving deposit which are
unrestricted as to withdrawal.
3. Cash fund – set aside for current purposes
such as petty cash fund, payroll fund and
dividend fund.
CASH EQUIVALENTS
Short-term and highly liquid investments
readily convertible into cash; insignificant risk
of changes in value because of changes in
interest rates
“Only highly liquid investments that are
acquired three months before maturity
can qualify as cash equivalents”
MEASUREMENT OF CASH
a) Cash is measured at face value.
b) Cash in foreign currency at current
exchange rate.
c) A bank/financial institution in bankruptcy
or financial difficulty, should write down
cash to estimated realizable value
INVESTMENT OF EXCESS CASH
Investments in time deposit, money market
instruments, and treasury bills should be
classified as follows:
Three months or less – cash and cash
equivalents
More than three months but within one
year – short-term financial assets/temporary
investments and classified as current assets
More than one year – non-current or long-
term investments.
CASH FUND FOR A CERTAIN
PURPOSE
Current asset (cash and cash equivalents)
– for use in current operations/ payment of
current obligation
Long-term investment – for noncurrent
purpose/payment of non-current obligation
“The classification of cash fund as current or
non-current should parallel the classification of
the related liability”
BANK OVERDRAFT – Credit balance of
cash in bank account; current liability and can
be offset against other bank accounts with
debit balances.
COMPENSATING BALANCE
Minimum checking or demand deposit account
balance that must be maintained in a borrowing
arrangement.
Classification of compensating balance:
a) Part of cash if deposit is not legally
restricted because of an informal
compensating balance agreement
b) Classified separately as “cash held as
compensating balance” if deposit is
legally restricted because of formal
compensating balance agreement;
current assets if the related loan is short
term.
UNDELIVERED/UNRELEASED
CHECK
Drawn and recorded but not given to the payee
before the end of reporting period.
POSTDATED CHECK DELIVERED
Drawn, recorded and already given to payee
but bears a date subsequent to the end of
reporting period.
PETTY CASH FUND
Money set aside for small expenses
a) Imprest fund system – system control
of cash which wherein all cash receipts
should be deposited intact and all cash
disbursements should be made by
means of check
b) Fluctuating fund system – the checks
drawn to replenish the fund do not
necessarily equal the petty cash
disbursements.

STALE CHECK/CHECK LONG

OUSTANDING Not encashed by payee
within a relatively long period of time;
presentment must be made within a
“reasonable time” after its issue to remain
outstanding.

WINDOW DRESSING
Deliberate misstatement of assets,
liabilities, equity, income and expenses.
Opening the book of accounts beyond the close
of reporting period for the purpose of showing a
better financial position and performance.

LAPPING
Conceal cash shortage; series of
postponements of entries for the collection
made from another customer.

KITTING
Conceal cash shortage; possible when the
entity maintains current accounts in different
banks; no entry is made for drawing and
deposit of check
Cash short or over account – a temporary or
suspense account; offsetting account in cash
shortage or cash overage