What is 

Cash and Cash

Equivalents?
Cash includes legal tender, bills,
coins, checks received but not
deposited, and checking and Cash on hand Treasury bills
savings accounts. Cash in bank Treasury notes
Cash fund Commercial paper
Cash equivalents are any short- Coin and currency Certificates of deposit
term investment securities with petty cash Money market funds
cash in bank Cash management pools
Example
negotiable of Cash such as
instruments Examples of cash equiva
ordinary checks
cashier's checks
certified checks
money orders.

List the items that are not included in Items not included to cash
cash. equivalents

- COD -Checks and bank drafts

- Legally restricted (not short term investment)
compensating balances When available for unrestricted and
- Restricted cash funds immediate use, they are included in
cash but not cash equivalent)
- Post-dated checks received
-Equity securities ( investment
- Checks written but not sent
in stocks)
- Advances to employees (IOU)
- Postage stamps
Cash fund not available for use
-sinking fund
-Plant expansion
-Contingency fund
-Insurance fund
-Preference share
-Redemption fund

Note:
× Not all qualifying short-term, highly liquid investments are treated as cash equivalents.

 Investments with original maturities of three months or less

Generally, only investments with original maturities of three months or less meet this definition.

An example of an investment with original maturities of three months or less is illustrated below:

 Both a three-month U.S Treasury bill (purchased 1/15/CY and matures 4/15/CY) and a three-year
 Treasury Note purchased three months from maturity qualify as cash equivalents.
× However, a Treasury note purchased three years ago does not become a cash equivalent when it has
three or less months to maturity.

Bank Overdraft

-negative cash balance

Compensating balance
resulting from over payment of
checks in the excess amount of
-demand deposit balance that must be maintained with the borrowing agreement in th
deposit
-only occur in checking
accounts not in depositing or
time deposit
-current liabilities except
offsetting is permitted when
two or more bank accounts are
maintained in the same bank,
 If deposit is NOT LEGALLY RESTRICTED AS TO WITHDRAWAL
- compensating balance is part of cash

Restricted notes in Foreign

banks

-That are not available for

immediate use are EXCLUDED
Items reverted back to cash balance at the end of the
FROM accounting period by means of an adjusting entry
CASH
-presented as RECIEVABLE
SUBJECT TO APPROPRIATE
Unreleased or undelivered check to the payee
-RECORDED but not yet given to the payee, there is NO PAYMENT YET

Delivered but POSTDATED CHECK to the payee

-already given to the payee but it has the date AFTER the reporting
period. (no payment made until presented to the bank for
encashment.

Stale check
-delivered to the payee but not yet presented to the bank for a long
period of time

Classification of Investments in
time deposit, money market
instruments and treasury bills
If the term is three months
-instruments are classified as cash equivalents
-included in the caption “cash and cash equivalents

If the term is more than three months but within one year
-investments are classified as short-term financial assets or temporary
investments.
-presented separately as non-current assets.

If the term is more than one year

-investments are classified as non-current or long-term investments.

Measurement of Cash
  Cash is measured at face
value.
 Denominated in foreign
currency is translated at
the current exchange rate

Realizable value

- amount expected to be recovered from the deposit and is

-determined usually by reference to the insured amount of the deposit.
-If the realization is deferred, the amount is discounted to its present value

*deffered - put off to the future time

Examples of internal controls

over cash

Segregation of incompatible duties

 The duties of authorization, execution, recording and custody over cash shou
segregated.
 The custody of cash should be given only to the treasurer. Neither the purcha
department, manager, nor the accountant should have access to cash.

Imprest system
Bank reconciliation
 requires that all cash receipts should be deposited intact

 all cashbe
should prepared immediately
disbursements should be upon
madethe receiptchecks.
through of the monthly bank statement .
 to reconcile on a timely basis of the differences between
 Disbursements for small amounts are made through the petty the cash
cashbalance
fund. per books and
the cash balance per bank statement.

Cash counts
Minimum cash balance
 Minimum
 performedcashto provide
balancereasonable
should be assurance
maintained, that actual cash
especially tallies
for cash with sufficient
funds, the balance perto
only
records.
defray specific business requirements.
 Maintaining
 Surprise cashexcessive
counts should also be performed
cash balances may increaseat irregular intervals
the risk of as part of the internal
embezzlement.
audit.
Cash Shortages and Overages
Lockbox accounts
cash shortage.  Entities often utilize lockbox accounts to expedite cash collections and to ensure that
cash collections are deposited intact.
 A lockbox is rented for a fee and customers are advised to remit payments directly to the
lockbox account.
 The bank empties the box at least once a day and immediately credits the entity’s
-When the cash count results to an amount less than the balance per records.
account for collections.
-initially recorded to a suspense account called “Cash shortage
or overage” pending proper investigation of the cause of shortage.
Voucher system
 an internal control may
the shortage measure
be: over all cash disbursements. Under this system, a voucher is
prepared for every cash disbursement
a. closed to a “ receivable” in order
account if theto ensure that
shortage eachtodisbursement
was due is
the fault of an
properly authorized,
employee made for a valid expenditure and properly recorded.
b. charged to a “loss” if the investigation was without merit.

Non-encashment of personal checks from the petty cash fund

 This is to discourage the concealment of a possible cash shortages.
 cash overage.

-When the cash count results to

an amount more than the
balance per records,
-initially credited to the “Cash
the ”overage” may be closed to a “payable” account if the overage was due to cash belonging
to an employee that was commingled with the entity’s cash or “gain” if the investigation was
without merit.

Concealment of cash shortages

1. Lapping
occurs when collection of receivable from one customer is misappropriated
and then concealed by applying a subsequent collection from another customer.

2.Kiting - occurs when cash shortages is concealed by overstating the balance of

cash. Kiting is made possible by exploiting the “float” period. Kiting normally occurs
at month-end when a check is written to transfer funds from one bank account to
another bank account where the misappropriation was made.

3.Window
dressing occurs when books are not closed at year-end and transactions in the
subsequent period are deliberately recorded in the current period in order to improve
the entity’s financial performance or financial ratios. Window dressing can also be
used to conceal cash shortages as of the reporting date by including collections in
the subsequent period to the current period or by deferring the recording of current
year’s disbursements to the subsequent period.

Petty Cash Fund

-is a type of imprest fund providing ready currency for routine disbursements.
The balance of the petty cash account, which is part of the total cash balance, changes only when the
fund is established, changed in amount, or discontinued.

Bank Reconciliation
 - is a schedule that a company
prepares to analyze the
difference between the ending
cash balance in its accounting
records and the ending cash
balance reported by its bank in
a bank statement to determine The causes of difference between the cash ba
the correct ending balance. Outstanding checks and the balance shown in the company’s cash

-as checks drawn and released to the payees but are not yet en
-certified checks and stale checks are excluded from outstandi

Deposits in transit
-collections already recorded by the depositor as cash receipts but not yet reflected on the
bank statement.

-collections already forwarded to the bank for deposit but too late to appear in the bank
statement or undeposited collections or those still in the hands of the depositor

Debit memos

are deductions (bank debits) made by bank to the depositor’s account but not yet recorded
by the depositor.

Examples of debit me

Bank service charges

– bank charges for fees, interest, penalties and surcharges

NSF/DAIF checks
- checks deposited and already recorded by the bank but subsequently returned to
the depositor because the drawer’s fund is insufficient to pay for the check

Automatic debits
- such as when the depositor and the bank agree that the bank will make automatic
payments of bills on behalf of the depositor

Payment of loans
– which the entity (depositor) agreed to be made out directly from its bank
account

Credit memos

-refer to items not representing deposits credited by the bank to the account of the
depositor but not yet recorded by the depositor as cash receipts.
-The credit memos have the effect of increasing the bank balance.

Typical examples of credit memos

notes receivable collected by the bank in favor of the depositor

proceeds of bank loan credited to the account of the depositor
matured time deposits transferred by the bank to the current account of the
depositor
 Errors
The company may discover
errors in either the bank’s
General procedures in
records or its recordspreparing
when it the reconciliation
prepares the bank
1. Determine the balance per
book and the balance per bank.
2. Trace the cash receipts to
the bank statement to
ascertain whether there are
deposits not
yet acknowledged by the bank.
3. Trace the checks issued to
the bank statement to
ascertain whether there are
checks
PROFORMA not
RECONCILATION
yet presented for payment.
4. The bank statement should Under the adjusted balance
be examined to determine method,
book balance and the bank balance are brought to a correct cash balance that
whether there are bank credits
must appear on the balance sheet.
and bank debits not yet
recorded by the depositor.
5. Watch out for errors. Errors Credit memos are always added to the book balance
are reconciling items of the
party which committed them.
Debit memos are always
deducted from the book
balance.
Deposits in transit are always added to the bank balance

Outstanding checks are always

deducted from the bank
balance.
Errors will have to be analyzed for proper treatment.

Preparation of adjusting
entries
Adjusting or reconciling entries
Proof ofareCash
made only for book
reconciling items, that
In the preparation is, credit
of adjustments, an item added to the book balance is debited to
memos, debit memos and
cash and an item deducted from the book balance is credited to cash
expanded reconciliation in that it includes proof of receipts and disbursements.
errors
nd
and the bank useful in discovering possible discrepancies in handling
cash particularly when cash receipts have been recorded but have not been deposited.

a reconciliation of the receipts and disbursements for the current period

following the adjusted balance

method
 EXAMPLE COMPUTATIONS

AMOUNT OF CASH COMPUTATION

CORRECT CASH BALANCE OF THE COMPANY

CORRECT CASH BALANCE

PETTY CASH SHORTAGE

CORRECT BALANCE OF PETTY CASH

AMOUNT OF CASH SHORTAGE
CASH AND CASH EQUIVALENT
Cash appear on the December
31, 2006 balance sheet
BANK RECONCILATION
 .

Receivables

-Amounts owed to the company by customer and other parties arising from the company’s operations.

Most receivables are canceled through the receipt of cash, although others may be canceled through
receivables arising from the sale of goods or services in the ordinary course of business
the receipt of other assets or services.
They include trade accounts receivable and trade notes receivable.
financial assets that representTrade
a contractual right to receive cash or another financial asset from
receivables
another entity. are classified as current assets
when they are expected to be
retailers orNontrade
manufacturers, receivables are classified into trade receivables and non -trade receivables
realized in cash within the
receivables normal operating cycle or one
Tradearereceivables year, whichever is longer. receivables
arising from other sources. They are
classified as current assets only when they are expected to be realized in cash within one year