Cash and Cash

Equivalents
Intermediate Accounting I
 Outline

Cash
Cash Equivalents
Components of Cash and Cash Equivalents
Restrictions on the Use of Cash and Cash Equivalents
 Cash

Under PAS 7, cash comprises cash

on hand and demand deposits.
Cash includes money and any other negotiable
instrument that is payable in money and acceptable
by the bank for deposit and immediate credit.
 Demand Deposits

Commonly understood as amounts that can be

withdrawn on demand, without prior notice
being required or a penalty being charged.
 Cash items are
Measurement measured at their
face amount.

Measurement
(foreign currency-denominated)
If a cash item is
denominated in foreign
currency, it shall be
translated using the
exchange rate as of the
reporting date i.e., spot
rate).
q Coins
q Currency
q Money orders
Cash on Hand
q Checks

q Demand deposit
q Savings deposit
Cash in Bank

Cash Funds
q Payroll fund
q Tax fund
q Dividend fund
q Petty cash fund
 provides goods or services
MAKER PAYEE
pr gives check as payment
de ov ck
po id e h e
th sits r s s c ck
e p /m ep pe n t h e
a y ai o r r iod s e f c
m nt ts r e t o
en ain i c p n
ou
to s m
f c cas a
he h
ck for
BANK y s th e
s pa
 There is already an
economic transfer
whenever a maker
gives a check to the
Why are checks payee. The payee has
already obtained
already received “control” over the
considered part amount represented
of cash? by the check as it can
be deposited in the
drawee bank anytime
to obtain the actual
amount of cash.
 Special Cases on Checks

Despite the general rules mentioned regarding

checks in the previous section, adjustments shall be
made for the following checks:
Ø Post-dated checks
Ø Unreleased checks
Ø Stale checks
 Check dated after the
Post-dated Checks reporting date

Check not yet given to

Unreleased Checks the payee as of the
reporting date
 Check that is not encashed
within a reasonable time. Based
Staled Checks on banking practices, reasonable
time is within 180 days or 6
months from the date of the
check
Adjustments are made since the control over the
amount of cash represented by the check is not yet
transferred from the maker to the payee:

1. For postdated check, the control will be

transferred from the maker to the payee
only upon the date indicated on the check
(i.e., during the next period).
Adjustments are made since the control over the
amount of cash represented by the check is not yet
transferred from the maker to the payee:

2. For unreleased check, the control will be

transferred only when the maker has given
the physical possession of the check to the
payee.
Adjustments are made since the control over the
amount of cash represented by the check is not yet
transferred from the maker to the payee:

3. For stale check, the control is lost since the

right of the payee over the check has
already expired. Consequently, the control
has been transferred back to the maker.
JPIA Company reported unadjusted cash in bank balance of
P4,500,000 as of December 31, 2023. As the Company's
bookkeeper, you found out that the following checks from
customers were already included in the reported cash
balance:
a. Check amounting to P500,000 dated December 26, 2023.
b. Check amounting to P300,000 dated January 4, 2024.
c. Check amounting to P180,000 dated April 1, 2023.

How much is JPIA Company’s cash and cash equivalents as of

December 31, 2023.
On December 31, 2023, FAR Company reported cash in bank
balance amounting to P3,200,000. Upon inspection of journal
entries, the following supplier checks were already deducted to
arrive at the ending cash in bank balance:
a. Check amounting to P250,000 and dated January 10, 2024 was
already given to the payee last December 23, 2023.
b. Check amounting to P360,000 and dated December 20, 2023
was given to the payee only on January 12, 2024.
c. Check amounting to P150,000 and dated December 28, 2023
was given to the payee last December 15, 2023. This is yet to be
encashed by the payee.
d. Check amounting to P450,000 and dated May 1, 2023 was given
to the payee last May 15, 2023. This is yet to be encashed by the
payee.
How much is FAR Company’s cash and cash equivalents as of
December 31, 2023.
 Compensating
Balances

When an entity borrows funds, the lender may

require the entity to maintain a minimum
amount in its bank account.
GENERAL RULE: Compensating balance is
normally reported as part of cash and cash
equivalents despite the restriction.

EXCEPTION: If the cash balance is legally

restricted, the cash balance shall be
excluded from the cash and cash
equivalents balance.
 Bank
Overdrafts

Bank overdrafts happen when a particular bank

account results in a negative balance.
In other words, there is an overdraft if the total
amount of checks encashed by payees is higher than
the amount of cash that the entity maintains for that
bank account.

Generally, overdrafts are not permitted

in the Philippines.
GENERAL RULE: Bank overdrafts are reported
as current liabilities.

EXCEPTIONS: 1. If other bank account is maintained in

the same bank.
2. Short-term overdrafts forms an
integral part of cash management
practices.
Is there any other bank account
with a positive balance
maintained in the same bank?
YES
Is the positive balance enough
to cover the overdraft amount?
YES
Present the whole overdraft as a
deduction from cash and cash
equivalent
Present the whole
overdraft as part of
NO current liabilities
Present the overdraft
deduction from cash
and cash equivalents to
NO
the extent of the
positive balance
Present the excess
overdraft as part of
current liabilities
 Ø Bank overdrafts are
repayable on
demand; and
ANOTHER
EXCEPTION Ø The use of short-
term overdrafts
forms an integral
part of an entity’s
cash management
practices.
SCM Company maintains bank accounts with three different banks.
As of December 31, 2023, the following information is relevant:
a. Account 000123 has P900,000 balance while Account 000124
has P350,000 overdraft balance, both maintained with ABC
Bank.
b. Account 800456 has P700,000 balance while Account 800457
has P800,000 overdraft balance, both maintained with XYZ
Bank.
c. Account 987654, which is maintained with QRST Bank, has
P50,000 overdraft balance. There were no other bank accounts
maintained with QRST Bank.
Determine the amount to be reported in cash and cash equivalents
and current liabilities as of December 31, 2023.
SCM Company maintains bank accounts with three different banks.
As of December 31, 2023, the following information is relevant:
a. Account 000123 has P900,000 balance while Account 000124
has P350,000 overdraft balance, both maintained with ABC
Bank.
b. Account 800456 has P700,000 balance while Account 800457
has P800,000 overdraft balance, both maintained with XYZ
Bank.
c. Account 987654, which is maintained with QRST Bank, has
P50,000 overdraft balance. There were no other bank accounts
maintained with QRST Bank.
Determine the amount to be reported in cash and cash equivalents and
current liabilities as of December 31, 2023 assuming that overdraft
amounts are an integral part of the company’s cash management.
 Cash Funds

Entities usually maintain cash funds for a wide range of purposes:

a. For use in the operations.
b. For use in the capital expenditures.
c. For the payment of long-term debts. These funds can either
be voluntarily or mandatorily (as part of a loan agreement)
established. Mandatorily established sinking funds are
usually in the custody of another entity (i.e. trustee) and its
use is highly restricted.
 Operating Funds Part of cash and cash
equivalents

Capital Expenditure Presented as long-

term investments
Funds
 If related liability is:
Ø Noncurrent – presented as
Bond Sinking Fund long-term investments
Ø Current - presented as part of
(voluntary establishment) cash and cash equivalents

If related liability is:

Ø Noncurrent – presented as
Bond Sinking Fund long-term investments
(mandatory establishment) Ø Current - presented as part of
short-term investments
At the end of 2023, COAB Company reported the following cash
funds:
Tax fund P 400,000
Payroll fund 3,200,000
Warehouse fund 5,500,000
Machinery fund 4,000,000
Bond sinking fund - voluntarily established; related bonds will
mature on December 31, 2026 1,500,000
Bond sinking fund - voluntarily established; related bonds will
mature on July 31, 2024 2,000,000
Bond sinking fund - mandatorily established; related bonds will
mature on March 31, 2024 4,400,000
Bond sinking fund - mandatorily established; related bonds will
mature on December 31, 2027 5,000,000
Pension fund 1,200,000
Cash held in a Foreign Currency

Cash held in a foreign currency or investments

acquired in foreign currency are not excluded from
qualifying as cash and cash equivalents merely
because they are denominated in a foreign
currency, provided they meet the other criteria
discussed above.
 Cash Equivalents

Under PAS 7, 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.
Equity investments are excluded from cash
equivalents.

EXCEPTION: Unless they are, in substance, cash

equivalents (ex. redeemable preference shares).
 Short-term
Investments

Cash equivalents are held for the purpose of

meeting short–term cash commitments rather
than for investment or other purposes.

For investments to qualify
as a cash equivalent, they
must be:
ØShort term;
ØHighly liquid;
ØReadily convertible into
known amounts of cash;
and
ØSubject to insignificant
risk of changes in value.
Where investments
meet the four
criteria but are not
held by the entity to
meet short term
cash commitments,
they should not be
classified as cash
equivalents.
 “known amount
of cash”

The amount of cash that will be

received must be known at the time
of the initial investment.
 Usually, a cash equivalent has a short
maturity of not more than three months.

≤ 3 months = cash equivalent

Date of Maturity
Purchase > 3 months = not cash equivalent
Date

The original issue date nor the original term of an investment

is not relevant in applying the three-month rule.
In addition, an investment is not automatically classified as
cash equivalent even if there is less than three months from
the reporting date up to the maturity date.
During 2023, QRS Company invested its excess cash in the
following investments:

Term Date Acquired Maturity Date

a. Commercial Paper 3 months Nov. 23, 2023 Feb. 3, 2024
b. Treasury Bill 9 months Apr. 16, 2023 Jan. 16, 2024
c. Time Deposit 2 months Dec. 5, 2023 Feb. 5, 2024
d. Redeemable
5 years Oct. 26, 2023 Jan. 7, 2024
Preference Shares
e. Treasury Bond 10 years Jun. 26, 2023 June 26, 2025
f. Treasury bill 11 months Dec. 27, 2023 Mar. 3, 2024

Determine whether the above investments are cash equivalents or

not.
 Money Market Funds

A money market fund is a type of mutual fund

that has relatively low risks compared to other
mutual funds and most other investments and
historically has had lower returns.
 Typically, investments
in money market
qCertificates of deposit funds are redeemed
qCommercial paper directly with the fund,
qTreasury bills therefore in assessing
qBankers’ acceptances liquidity of the
qRepurchase agreements investment, focus
should be on the
liquidity of the fund
itself.
The entity must conclude
that the range of possible Money market fund
returns is very small. This is subject to an
evaluation is first made at the insignificant risk of
time of acquiring the change in value.
investment and reassessment
is required if the facts and
circumstances change.
Investments with maturities
greater than three months

The longer the term of the investment, the greater

the risk that a change in market conditions (such
as interest rates) can significantly affect its value.
 Investments with maturities
greater than three months

For this reason, PAS 7 excludes most equity

investments from cash equivalents and restricts
the inclusion of other investments to those with a
short maturity of, say, three months or less from
the date of their acquisition by the entity.
Similarly, an investment
with a term on acquisition
of, say, nine months is not
reclassified as a cash
equivalent from the date
on which there is less than
three months remaining to
its maturity.
Restrictions on the Use of
Cash and Cash Equivalents

The nature of the restriction must be assessed to

determine if the balance is ineligible for inclusion in
cash and cash equivalents because of the restriction.
 Restrictions on the Use of
Cash and Cash Equivalents

The amount of significant cash and cash equivalent

balances that is not available for use by an entity
should be disclosed, together with a disclosure by
management to explain the circumstances of the
restriction.
 Restrictions on the Use of
Cash and Cash Equivalents

In contrast, an entity may be required formally to set

aside cash. In such circumstances, it is necessary to
consider the terms and conditions relating to the account
and the conditions relating to both the entity’s and the
counterparty’s access to the funds within it to determine
whether it is appropriate for the deposit to be classified
in cash equivalents.
 Items not Considered as
Cash and Cash Equivalents
Non-Cash Items Accounting Treatment and Remarks
Unused postage stamps prepaid expense (noncash item due to
limited use related to sending of mails only)
Gift certificates on hand prepaid expense (noncash item due to the
fact that it can only be used on the
merchant who issued the certificate)
 Items not Considered as
Cash and Cash Equivalents

Non-Cash Items Accounting Treatment and Remarks

IOUs from employees advances from employees (literally means
"I Owe You”)
Advances to suppliers trade and other receivables
Keeping up with
Technological Trends
During the past few years, technological advances
have introduced new circumstances resulting to
new accounting issues. As for cash and cash
equivalents, the relevant technological advances
relate to electronic and digital payments.
Electronic Wallet

Electronic wallet (such as Gcash) can be considered

as cash item since it is considered good as cash. In
addition, almost everyone accepts this as a form of
payment (i.e., wide acceptability).
 Prepaid Cards

Prepaid cards (such as Happy Plus Cards) shall be

considered as prepaid expenses (i.e., not cash
item) since only limited number of entities accept
this as a form of payment (i.e., limited use).
By analogy, this is very similar to gift certificates.
 Cryptocurrencies

Cryptocurrency cannot be considered as cash item

since only a limited number of entities accept this as a
form of payment (i.e., limited use).
Cryptocurrency is not cash because
cryptocurrencies do not currently have the
characteristics of cash

In particular, no cryptocurrency is used as a medium of

exchange or as the monetary unit in pricing goods or
services to such an extent that it would be the basis
on which all transactions are measured and
recognized in financial statements.
Instead, it is accounted for either:
Ø PAS 38, Intangible Assets; or
Ø PAS 2, Inventories, if it qualifies as an inventory.
THE END!