CASH AND CASH

EQUIVALENTS
CASH
• Financial asset
A financial asset is any asset that is:
a. Cash
b. A contractual right to receive cash or another financial asset from
another entity
c. A contractual right to exchange financial instrument with another
entity under conditions that are potentially favorable
d. An equity instrument of another entity
CASH EQUIVALENTS
• Short-term, highly liquid investments that can be converted easily into
cash
• Present insignificant risk in changes of interest rates
• Investments of 90 days or less
ITEMS CLASSIFIED AS CASH
• Cash on hand
• Undeposited coins and currency (Change funds)
• Demand/savings deposits
• Manager’s/cashier’s checks
• Customers’/personal checks
• Traveler’s checks
• Bank drafts
• Money orders
As of now, the common form of money order is Western Union Money Order.
• Cash fund
Petty cash fund, Payroll fund, Travel fund, Interest fund, Dividend fund, Tax fund
• Cash must be readily available and free of restrictions
• This means that the cash must be readily available in the payment of
current obligations and not be subject to any restrictions, contractual
or otherwise.
• Certificate of Deposits (CDs), money-market funds, and treasury bills are classified as
temporary investments.
 Certificates of Deposits (CDs): Represent formal evidence of indebtedness, issued by a
bank, subject to withdrawal under the specific terms of the instrument
Common form is time deposits
 Money-market Funds: A variation of the mutual fund, the mix of treasury bills, and
commercial paper making up the fund’s portfolio that determines the yield.
 Treasury Bills: Short-term debt obligation backed by the Philippine government with a
maturity of less than one year
 Commercial Paper: Short-term note issued by corporations with good credit ratings.
These notes generally yield a higher rate than Treasury Bills.
Common form is issuance of bonds
REPORTING CASH
• Under the caption Cash and Cash Equivalents and is shown as the first item among the
current assets on the statement of financial position
• Not necessary to classify cash to distinguish between currencies on hand, undeposited
checks, cash in banks, or deposits at various locations
• The details comprising the “cash and cash equivalents” should be disclosed in the notes
in financial statements.
• Compensating Balances: Amounts maintained by a corporation with a bank in support
of existing borrowing arrangements
Requires disclosures in the FS
Reported as cash if not legally restricted.
If restricted as to withdrawal,
Identified as current assets separate from cash, if they relate to short-term loan
Identified as non-current assets separate from cash, if they relate to long-term loan
BANK OVERDRAFT
• The resulting negative balance when an entity makes withdrawals or writes
checks that would exceed the balance of the amount it currently has with the
bank
• May be offset against available cash in another account in the same bank but
not in other banks
• Offsetting against other bank account is allowed if the amount involved is
immaterial.
• Reported as a current liability if cannot be offset.
• If bank overdraft repayable on demand form an integral part of entity’s cash
management, the overdraft may be included as component of cash and cash
equivalents as deduction.
OTHER ISSUES
• Unreleased Checks: Issued check, recorded but not given to the payee
before the end of the reporting period
 Journal Entry:
Accounts Payable xxx
Cash xxx
 Adjusting Entry:
Cash xxx
Accounts Payable xxx
• Postdated Checks Received: A check written with a future date; Cannot be turned into
cash prior to the dates shown on the checks; Reported as receivable (not yet a
negotiable instrument)
• Postdated Checks Issued and Delivered: A check drawn, recorded and already given to
the payee but bears a date subsequent to the end of the reporting period.
 Journal Entry:
Accounts Payable xxx
Cash xxx
 Adjusting Entry:
Cash xxx
Accounts Payable xxx
• Stale Checks Issued: A check not presented to a bank after a specified
time, typically six months; Restore to cash account
For immaterial amount, record to Miscellaneous Income.
For material amount and liability is expected, restore the liability account.
• Advances to O & E, NSF Checks, Travel Advances: Reported as
receivable
• Postage Stamps: Reported as office supplies/prepaid expenses
• Cash not available for current operations (Restricted Cash)
Sinking fund, Plant expansion fund, Contingent fund, Insurance fund
Sinking Fund: Cash set aside for settlement of long-term obligations
Plant Expansion Fund: Cash set aside for purchase of property, plant, and equipment
Contingent Fund: Cash set aside for unforeseen loss in the future
• Deposits in foreign banks
No foreign exchange restriction → Cash
If restricted → Reported separately as non-current asset and disclose the
nature of restrictions
VALUATION
• At face value
• Cash in foreign currency is valued at the current exchange rate at SFP
date
• Cash being held by a financing institution that is in bankruptcy or
other financial difficulty is written down to estimated realizable value
if the amount recoverable is estimated to be lower than the face
amount
If the bank is a member of PDIC, deposits are insured up to Php500,000 per
depositor.
MANAGEMENT AND CONTROL OF
CASH
• Since cash is the most liquid asset, internal control of cash is
imperative.
• Controls must prevent unauthorized use of cash.
• Management must have necessary information for proper use of cash.
INTERNAL CONTROL OVER CASH
RECEIPTS
• Establishment of Responsibility: Only designated personnel are authorized to handle
cash receipts (cashiers)
• Documentation Procedures: Use official receipts, cash register tapes, and deposit slips
• Independent Internal Verification: Supervisors count cash receipts daily; Treasurer
compares total receipts to bank deposits daily
• Segregation of Duties: Different individuals receive cash, record cash receipts, and
hold the cash
• Physical, Mechanical, and Electronic Controls: Store cash in safes and bank values;
Limit access to storage areas; Use cash registers
• Other Controls: Bond personnel who handle cash; Require employees to take
vacations; Deposit all cash in bank daily
PHYSICAL PROTECTION OF CASH
BALANCES
Company should:
• Minimize the cash on hand.
• Only have on hand petty cash and current day’s receipts.
• Transmit each day’s receipts to the bank as soon as practicable.
• Periodically prove (reconcile) the balance shown in the general ledger.
INTERNAL CONTROL OVER CASH
DISBURSEMENTS
• Generally, internal control over cash disbursements is more effective
when companies pay by check, rather than by cash.
• Application:
Voucher System: Prevents indiscriminate and unauthorized purchases and
incurrences of expenses because the whole cycle of purchasing, verifying,
paying, and recording requires the involvement of various employees and
departments
Voucher: Document that supports a cash transaction
Electronic Funds Transfers (EFT) system: Online transactions that lessen the
handling of cash
Petty Cash Fund
• Establishment of Responsibility: Only designated personnel are authorized to sign
checks (treasurer)
• Documentation Procedures: Use prenumbered checks and account for them in
sequence; Each check must have an approved invoice
• Independent Internal Verification: Compare checks to invoices; Reconcile bank
statement monthly
• Segregation of Duties: Different individuals approve and make payments; Check
signers do not record disbursements
• Physical, Mechanical, and Electronic Controls: Stamp invoices (PAID)
To avoid double payment
• Other Controls: Store blank checks in safes, with limited access
PETTY CASH FUND
• Accounting Methods:
Imprest Fund System
Fluctuating Fund System
• Activities:
Establishment of fund: The company designates one employee to handle the
petty cash and the check is issued payable to that petty cash custodian
Payment of expenses from the fund
Replenishment of petty cash payments
CASH OVER AND SHORT
• Account used when the petty cash fund fails to prove out
• Debited when there is a cash shortage
(Petty cash expenses + Remaining petty cash on hand) < Imprest Amount
May be closed to a receivable or loss/miscellaneous expense account
• Credited when there is a cash overage
(Petty cash expenses + Remaining petty cash on hand) > Imprest Amount
May be closed to a liability or miscellaneous income account
BANK RECONCILIATION
CASH IN BANK
• Major Types of Deposit Accounts:
Savings Account: Passbook savings account or an ATM savings account
Earn interest
Time Deposit Account (or certificate of time deposit account)
Earns higher interest than a savings account
Withdrawal is only allowed upon its maturity.
Checking Account: Current account or demand deposit account
The current practice of banks is to allow a minimal rate of interest to encourage
depositors to put more funds in their checking accounts.
• Any deposit made with the bank increases the cash in bank account
while any checks issued decreases its balance.
• Any deposit made with the bank increases the liability account while
any checks issued by the depositor decreases its balance.
• Bank statement is normally issued by the bank to a depositor on a
monthly basis.
BANK RECONCILIATION
• A comparison of the bank balance with the book’s balance
• Two Types of Reconciling Items:
1. Reconciling items due to time difference
Deposits in Transit: Already recorded by the entity but not yet recognized by
the bank. (Balance of books > Balance of bank)
Outstanding Checks: Checks issued and recorded by the depositor but the
payee has not negotiated with the bank (Balance of books < Balance of bank)
Bank Debits (Debit Memos): Items deducted by the bank from the
depositor's account but not yet recorded by the entity itself
NSF check, cost of check books, service and penalty charges, and payment of
loans
Bank Credits (Credit Memo): Items added by the bank to the
depositor's account but not yet recorded by the entity itself
Bank collecting a note for the depositor, interest earned on the entity’s
account, and proceeds of loan granted by the bank to the entity
2. Reconciling items due to error
Determine who committed the error:
If the depositor committed the error, the balance per books should be corrected.
If the bank committed the error, the balance per bank should be corrected.
Determine the type of error committed and its effect on cash balance.