CHAPTER 1 CASH AND CASH EQUIVALENTS TECHNICAL KNOWLEDGE To understand the concept of cash. To understand the concept of cash equivalents. To identify items considered cash. To identify items considered cash equivalents. To know the accounting for petty cash fund. All rights belongs to respective auttDefinition of cash From the point of view of a layman, “cash” simply meang money. Money is the standard medium of exchange in businegg transactions. Money refers to the currency and coins which are in circulation and legal tender. However, in the accounting parlance, the term an has a Special and broader meaning. It connotes more than money. As contemplated in accounting, cash includes money and any other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit, Accordingly, cash includes checks, bank drafts and money orders because these are acceptable by the bank for deposit or immediate encashment, For example, when checks are received in full settlement of an account receivable, cash is immediately debited. But postdated checks received cannot be considered as cash yet because these checks are unacceptable by the bank for deposit and immediate credit or outright encashment. Unrestricted cash There is no specific standard dealing with "cash", The only guidance is found in PAS 1, paragraph 66, which Provides that an entity shall classify an asset as current when the asset is cash or a cash equivalent unless it is restricted to settle a liability for more than twelve months after the end of the reporting period, Accordingly, to be reported as “cash”, i an item must be unrestricted in use. This means that the cash must be readily available in the be subject to any Payment of current obligations and not restrictions, contractual or otherwise.Cash items included in cash a. Cash on hand — This includes undeposi collections and other cash items awaiting as customers’ checks, cashier's or man traveler's checks, bank drafts and money orders. Cash in bani —This includes demand deposit checking count and saving deposit which are unrestricted as to account and saving deposit which are wnrestncted & petty c. Cash fund set aside for current purposes such as cash fund, payroll fund and dividend fund. Cash equivalents PAS 7, paragraph 6, defines cash equivalents as 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 only highly liquid investments that are acquired three months befare maturity can qualify as cash equivalents. Examples of cash equivalents are: a. Three-month BSP treasury bill b. Three-year BSP treasury bill pur before date of maturity ¢. Three-month time deposit a. Three-month money market instrument or comm paper chased three months ercial Equity securities cannot qualify as cash equivalents because shares do not have a maturity date. However, preference shares with specified redemption date and acquired three months before redemption date can qualify as cash equivalents. Note that what is important is the date of purchase which should be three months or less before maturity. Thus, a BSP treasury bill that was purchased one year ago cannot qué as cash equivalent even ifthe remaining maturity is three months or less.YAS 7, paragraph 6, detines cash equivalents as short-term and highly hquid 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 only highly liquid investments that are acquired three months before maturity can qualify as cash equivalents. Examples of cash equivalents are: 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 Equity securities cannot qualify as cash equivalents because shares do not have a maturity date. However, preference shares with specified redemption date and acquired three months before redemption date can qualify as cash equivalents. Note that what is important is the date of purchase which should be three months or less before maturity. Thus, 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. All rights belongs to respective authorsInvestment of excess cash The control and proper use of cash is an Jane ‘oe of cash management. Basically, the entity must maint nafficient cag}, for use in current operations. Any cash accumulated in excess of that needed for curren operations should be invested even temporarily in some type of revenue earning investment. Accordingly, excess cash may be invested in time deposits, money market instruments and treasury bills for the purpose of earning interest income. Classifications of investment of excess cash Tnvestments in time deposit, money market instruments and treasury bills should be classified as follows: a. Ifthe term is three months or less, such instruments are classified as cash equivalents and therefore included in the caption “cash and cash equivalents”. b. Ifthe 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, ¢. Ifthe term is more than one Year, such investments are classified as noncurrent or long-term investments. However, if such investments become due within one year from the end of the reporting period, they are reclassified a8 current or temporary investments,Measurement of cash Cash is measured at face value. cea in foreign currency is measured at the current exchange Ifa hadi or financial institution holding the funds of an entity isin ankruptey or financial difficulty, cash should be written down to estimated realizable value if the amount recoverable is estimated to be lower than the face value. Financial statement presentation The caption cash and cash equivalents should be shown as the first line item under current assets. This caption includes all cash items, such as cash on hand, cash in bank, petty cash fund and cash equivalents which are unrestricted in use for current operations. 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 eny foreign exchange restriction are inclnded in “cash”. Deposits in foreign bank which are subject to foreign exchange testriction should be classified separately among noncurrent 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 obligation, it is a current asset. The cash fund is included as part of cash and cash equivalents. his fund are petty cash fund, payroll fund, travel Examples of tl fund, dividend fund and tax fund. fund, interest On the other hand, if the cash fund is set aside for noncurrent purpose or payment of noncurrent obligation, it is shown as long-term investment. of this fund are sinking fund, preference share fund, contingent fund, insurance fund and fund for plant and equipment. Examples redemption acquisition or construction of property, 5eos d Classification of cash fun Sa The classification of a cach ot qhe related liabilige’ should parallel the classifi : ¢ set aside to pay a bong For example, a sinking fund that 1s See eben the hon payable shall be classified as curren! ®t = bond payable is already due within one $ 4 reporting period. k However, a cash fund set aside 10 noncurrent asset should be classified 35 of the year of disbursement. Bank overdraft it balance, it is said When the cash in bank account has a cred! 00/0 - d to be an overdraft. The credit balance in the cash in benk account results from the issuance of checks in excess of the deposits. A bank overdraft is classified as a current liability and should not be offset against other bank accounts with debit balances. For example, an entity maintains two bank accounts: a. Cash in bank— First Bank, which is overdrawn by P10,000. b. Cash in bank — Second Bank, with a debit balance of P100,000. The net cash balance is P90,000. x the acq' oncurren The proper statement classification of the two accounts is as follows: Current asset: Cash in bank -Second Bank 100,000 Current liabilit Bank overdraft First Bank oe Note that it is not necessary to a overdraft account in the ledger” “St @nd open a bank In other words, the Cash in Bank — F; = maintained in the ledger with a cred oot Bank nepount 5 nce. It is to be stated aos in the Philp thet senerally overdrafts are not permitiedException to the rule on overdraft When an entity maintains 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 or bank overdraft, net of other bank account. An overdraft can also be offset against the other bank account if the amount is not material. Under IFRS, bank overdraft can be offset against other bank account when payable on demand and often fluctuates from positive to negative as an integral part of cash management. Compensating balance s the form of minimum hat must be ment with a A compensating balance generally take: checking or demand deposit account balance t maintained in connection with a borrowing arrange! bank. For example, an entity borrows P5,000,000 from a bank and agrees to maintain a 10% or P500,000 minimum compensating balance in a demand deposit account. results in the reduction of the amount cating balance provides a source of in extended. In effect, this arrangement borrowed because the compen: fund to the bank as partial compensation for the Joa Classification of compensating balance restricted as to withdrawal by the formal compensating balance balance is part of cash. If the deposit is not legally borrower because of an in! agreement, the compensating 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. If the related loan is long-term, the compensating balance is classified as noncurrent investment.eck Undelivered or unreleased ch An undelivered or unreleased an drawn and recorded but not 6! end of reporting period. ck is one that is mere to the payee before thy ‘There is no payment, when the check is pending delivery to the payee at the end of reporting period. . is still subject to the entity, ‘The reason is that undelivered check is : control and may thus be canceled anytime before delivery at the discretion of the entity. Accordingly, an adjusting entry is required to restore the cash balance and set up the liability. xx Cash | ‘Accounts payable or appropriate account ™ In practice, the foregoing adjustment is sometimes ignored because the amount is not very substantial and there is no evidence of actual cancelation of the check in the subsequent period. 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 also be reversed and therefore restored to the cash balance. Cash XX Accounts payable or appropriate account x The reason is that there is no payment until th ck can be presented to the bank for encashment or dee eeStale check or check long outstanding A stale check is a check not encashed by the payee within a relatively long period of time . The question is how long a time must the check remain outstanding? The Negotiable Instruments Law provides that where the instrument is payable on demand, presentment must be made within a reasonable time after issue In determining what is a reasonable tinte, consideration should be made regarding the nature of the instrument, the usage of trade or business, if any, with respect to such instrument and the facts of the particular case. Clearly, the law does not specify a definite period within which checks must be presented for encashment. Reference is made to usage of trade or business practice In banking practice, a check becomes stale if not encashed within six months from the time of issuance. Of course, this is a matter of entity policy. Thus, even after three months only, the entity may issue a stop payment order to the bank for the cancelation of a previously issued check If the amount of stale check is immaterial, it is simply accounted for as miscellaneous income. Cash Miscellaneous income xx However, if the amount is material and liability is expected to continue, the cash is restored and the liability is again set up. Cash Accounts payable or appropriate accountAccounting for cash shortage where the cash count shows cash which Js Less then g, balance per book, a cash shortage is . Cash short or over G x ash x The cash short or over account is only a temporary or s USPeng, account. When financial statements are prepared the same shoul be adjusted, Hence, ifthe cashier or cash custodian is held responsible fo, the cash shortage, the adjustment should be: Due from cashier ax Cash short or over x However, if reasonable efforts fail to disclose the Cause of the shortage, the adjustment is ‘Loss from cash shortage =x Cash short or over % Accounting for cash overage Where the cash co balance per book, a Cash Cash short or over x Note that whether itis a cash shortage or cash overage, the offsetting accountis cash short or over account. Such account should be adjusted when Statements are made, ‘The cash overage is treated as miscellaneous income if there is no claim on the same, Cash short or over iscellaneoug income unt shows c ash which is more than the cash overage is to be recorded, xx XxX xx But where the cash overage is Properly found to be the money of the cashier, the journal entry is: Cash short or over Payable to cashierImprest system 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 While interna] control ideally requires that all payments should be made by means of check, this is sometimes impossible. There are occasions when the issuance of checks becomes impractical or inconvenient such as when small amounts are paid or things are hurriedly bought or customers are entertained. Consequently, in such instances, it may be more economical and convenient to pay in cash rather than issue checks. Petty cash fund The petty cash fund is money set aside to pay which cannot be paid conveniently by means of ‘There are two methods of handling the petty cash, namely: mall expenses f check. a. Imprest fund system b. Fluctuating fund system Imprest fund system ‘The imprest fund system is the one usually followed in handling petty cash transactions. Accounting procedures a. A check is drawn to establish the fund. Petty cash fund Cash in bank b. Payment of expenses out of the fund. No formal journal entries are made. The petty cashier generally requires a signed petty cash voucher for such payments and simply prepares memorandum entries in the petty cash journal. 11The reversal is made in order that the norms! replenishment procedures may be Slowed by sixy: debiting expenses and crediting cash in bank with: distinguishing whether the expenses pertain wo curreat period or prior period. - An increase in the fund is recorded as: Petry cesh fund es Cash in bank = A decrease in the fund is recorded as: Cashin bank Petey cash fund - 12 All rights belongs to respective authorsIllustration 2020 Nov. 10 2 S Nov. 29 Dec. 31 2021 Jan. 1 The entity established an imprest fund of P10,000. Petty cash fund 10,000 Cash in bank 10,000 Replenished the fund. The petty cash items include the following: Currency and coin 2,000 Supplies 5,000 Telephone 1,00 Postage 1,200 The journal entry to record the replenishment is: Supplies 5,000 Telephone 1,800 Postage 1,200 Cash in bank 8,000 ‘The fund was not replenished. ‘The fund is composed of the following: currency and coin P7,000, supplies P1,500, postage P500. miscellaneous expense P1,000. Supplies 1,500 | Postage 500 Miscellaneous expense 1,000 Petty cash fund 3,000 The adjustment made on December 31, 2020 is reversed. Petty cash fund 3,000 Supplies 1,500 Postage 500 Miscellaneous expense 1,000 132021 Feb, 1. The fund is replenished and increased to P15,099_ ‘The composition of the fund 1,009 Currency and coin r Supplies 4500 Postage 3,000 Miscellaneous expense 1.509 Total 1600 Journal entry Petty cash fund 5,000 Supplies 4,500 Postage 3.000 Miscellaneous expense 1,500 Cash in bank janog The total amount of the check drawn is P 14,009 representing the petty cash disbursements of P9,000 and the fund increase of P5,000.-Fluctuating fund system The system is called “fluctuating fund system’ checks drawn to replenish the fund do not necessarily equal the petty cash disbursements. e replenishment checks are simply drawn upon the request of the petty cashier. Moreover, petty cash disbursements are immediately recorded thus resulting in a fluctuating petty cash balance per book from time to time: a. Establishment of the fund: Petty cash fund xx Cash in bank ko b. Payment of expenses out of the petty cash fund: mses xx _ Petty cash fund xx Under this system, the disbursements from the petty cash fund are immediately recorded in contradistinction with the imprest fund system where the disbursements are recorded upon the replenishment of the fund. ¢. Replenishment or increase of the fund: Petty cash fund Cash in bank xX The replenishment check may or may not be the same as the petty cash disbursements. d. At the end of the reporting period, no adjustment is necessary because the petty cash expenses are recorded outright. Decrease of the fund is reverted to the general cash. Cash in bank xx Petty cash fund 15Illustration Nov. 10 The entity astablished 4 petty cash fund of P 10,000. 10,000 Petty cash fund 10500 Cash in bank Nov, 11-28 Petty cash disbursements amounted to P8,0n0, Expenses: 8,000 Petty cash fund 8.000 Nov. 26 Issued a check for P10,000 to replenish the fund, 10,000 Petty cash fund - Cash in bank 10,000 At this point, the petty cash balance per book is P12,000. Dec. 1-30 Petty cash expenses amounted to P9,000. Expenses 9,000 Petty cash fund 9,000 81 Issued a check for P15,000 to replenish the fund, Petty cash fund 15,000 Cash in bank 15,000 At this point, the petty cash balance is P18,000.QUESTIONS 1. Define cash. 2.Explain the meaning of unrestricted cash 3.Define cash equivalents 4.Explain the measurement of cash. 5. Explain the financial statement presentation of cash and cash equivalents. 6.Explain the classification of investments of excess cash in time deposits, money market instruments and treasury bills 7.Explain the treatment of foreign currency. 8.Explain the classification of a cash fund, 9.Explain a bank overdrait. 10.Explain a compensating balance. 11.3xplain undelivered check, postdated check delivered and stale check. 12 3xplain the accounting for cash shortage or cash overage. 13 Explain the imprest system of internal control. 14. What is a petty cash fund? 15. ixplain the two methods of accounting for petty cash ‘und. 17PROBLEMS Problem 1-1 (IAA) On December 31, 2020, Albania Company provided t he following data Cash in bank 3,000 000 Time deposit ~ 90 days 1,000,000 Money market placement due on dune 30, 2021 2,000,000 Saving deposit in closed bank 100,000 ‘inking fund for bond payable due June 30, 2022 1,500, in ° 20.0€ 0 Petty cash fund * The cash in bank included customer check of P200,0 00 outstanding for 18 months * Check of P250,000 in payment of accounts payable w as dated and recorded on December 31, 2020 but mailed to creditors on January 15, 2021 * Check of P100,000 dated January 31, 2021 in payment of accounts payable was recorded and mailed December ¢i1, 2020. * ‘The reporting period is the calendar year. ‘The cash receipts journal was held open until January 15, 2021 during which time an amount of P450,000 was collected and recorded on December 31, 2020. Required: L. Prepare adjusting entries on December 31, 2020. 2. Compute the total amount of cash and cash equivalents that should be reported on December 31, 2020. 3. Explain the presentation of the items excluded from ciash and cash equivalents. 18Problem 1-2 (IAA) Argen December 31, 2021 Cash on ha: Petty cash Security Bank current acco PNB current acco BDO current ac: BSP treasury BPIt * The cash on hand of P150,000 and p 1 money * The petty cash fund included unrep. vouchers for P10,000 and an employ dated January 31, 2021. * The BPI time deposit is set to be made in early January 2021. * ‘The bond sinking fund is set aside for paymen payable due December 31, 2021. Required: 1. Prepare adjusting entries on December 31, 2020. 2. Compute the total amount of cash and cash equivalents. 3. Explain the presentation of the items excluded from cash and cash equivalents. 19 Nae alc eel to respective authorsProblem 1-3 (IAA) Armenia Company reported the following information en December 31, 2020: Cash on hand 1,000. 06 Petty cash fund hi IK Cash in bank AMA, Saving deposit ID * Cash on hand included the following: a, Customer check of P100,000 returned by bank Decernber 26, 2020 due to insufficient fund but subsequently redeposited and cleared by bank January 5, 2021 b. Customer check for P150,000 dated January 15, 202] received December 22, 2020. ¢. Postal money orders received from customers, 200,000 ‘The petty cash fund consisted of the following items: Currency and coins 2,006 Employees’ 10Us 10,000 Currency in envelope marked collections for Christmas party 5,006 Check drawn by Armenia payable to petty cashier 33, 50,000 Check written and dated December 22, 2020 and delivered to payee on January 5, 2021, P200,000. Check written December 26, 2020 and dated January 31, 2021 delivered to payee on December 26, 2020, P300,000. Required: J. Prepare adjusting entries on December 31, 2020, 2. Compute the total cash on December 31, 2020, 20Problem 1-4 (PHILCPA Adapted) Callous Compan 'Y reported thi Devember 81saiag, ee "hs SoHowiag|ateointa: 6a Cash on hand Petty cash fund Philippine Bank current account City Bank current account No. 1 City Bank current account No. 2 (overdraft) Asia Bank saving account Asia Bank time deposit, 90 days 2,000,000 * Cash on hand included the following items: Customer check for P35,000 returned by bank December 26, 2020 due to insufficient fund but subsequently redeposited and cleared by the bank on January 10, 2021. Customer check for P15,000 dated January 10, 2021, received December 23, 2020. * The petty cash fund consisted of the following items: Curreney and coins 5,000 10Us from officers 2,000 Unreplenished petty cash vouchers 12,000 * Included among the checks drawn by Callous Company against the Philippine Bank current account and recorded in December 2020 were the following: Check written and dated December 23, 2020 and delivered to payee on January 31, 2021, P25,000. Check written December 26, 2020, dated. January 30, 2021, delivered to payee on December 28, 2020, P45,000, Required: 1. Compute the total cash and cash equivalents. 2. Prepare adjusting entries on December 31, 2020. 21Problem 1-5 (ACP) jh fund. Zealous Company established a petty °° danuary 9 1. Established a petty cash fund of P10,000 on ary 2. 2 Petty cash expenses - January 2°31 are: 1 Postage Be Supplies 1200 ‘Transportation "500 Miscellaneous expense 3. The fund is replenished on February 1 and increased by P5,000, Required: Prepare journal entries to record the transactions under the fluctuating fund system and imprest fund system. Problem 1-6 (ACP) Zenith Company provided the following chronological transactions in relation to petty cash: 1. The entity established a petty cash fund of P10,000. 2. Petty cash disbursements were: Postage 1,500 Supplies 3,000 3. Petty cash disbursements were: ‘Transportation 1,000 Accounts payable 3,500 4, Issued check for an amount to replenish the furid and bring the balance of the petty cash to P20,000, Required: Prepare journal entries to record the transactions unde? fluctuating fund system and imprest fund system.Problem 1-7 (IAA) Laborious Company closed the accounts on June 30. The entity provided the following transactions: May 2 The entity established an imprest fund of P10,000 29 The fund is replenished. The petty cash items include: Currency and coin 2,000 Postage 1,000 Supplies 3,000 ‘Transportation 2,500 Miscellaneous expense 1,500 June 30 The fund was not replenished. The fund is composed of the following: Currency and coin on Supplies nf Post 1,000 mi 1,000 Transportation July 15 The fund is replenished and increased to P15,000. * Currency and coin 3,000 Supplies 3,500 Postage 1,500 ‘Transportation 1,500 Miscellaneous expense 500 Required: Prepare journal entries to record the transactions under imprest fund system and fluctuating fund system.