Batangas State University

Pablo Borbon Campus

The National Engineering University

LEARNING MODULE IN
ACC 205

Cash and Cash Equivalents

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

OBJECTIVES

1. Define cash and cash equivalents

2. Identify items under cash and cash equivalents.
3. Analyze the considerations in identify cash and cash equivalents and
investments.
4. Discuss the measurement of cash and cash equivalents.
5. Describe additional items which are included and excluded to cash.
6. Solve problems involving identifying cash and cash equivalents.

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

CASH
Cash includes money and any other negotiable instrument that is payable and acceptable by
the bank for deposit and immediate credit.

Cash is money or its equivalent that is readily available for unrestricted use.
Examples:
a. Cash on Hand
b. Cash in Bank
c. Cash fund (set aside for current purpose).

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Pablo Borbon Campus
The National Engineering University

CASH ON HAND

-Customer’s check awaiting deposit

-Undeposited cash collections (currencies such as bills and coins)
-Traveler’s Check
-Cashier’s/Official/Treasurer’s/Manager’s checks.
-Postal money orders (a demand credit instrument issued and payable by a
post office)
-Bank drafts (a written order addressed to the bank to pay an amount of
money to the order of the maker)

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

CASH IN BANK

-Current account/checking account/demand deposit/commercial deposit

Generally non-interest bearing
Withdrawable by checks against bank
-Savings deposit (Savings Account-SA)
Generally interest bearing
Depositor is issued an ATM Card or passbook
Withdrawable in ATM station or within the bank

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Pablo Borbon Campus
The National Engineering University

CASH FUND FOR CURRENT

OPERATIONS
-Change fund
-Payroll fund
-Purchasing fund (for purchasing of inventories)
-Revolving fund (fund that is used for limited or specific purpose set by management)
-Interest Fund
-Petty Cash Fund (for small and miscellaneous disbursements)
-Dividend Fund
-Travel Fund
-Tax Fund

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 Batangas State University
Pablo Borbon Campus
The National Engineering University
FUND FOR NON CURRENT
OPERATIONS
These are part of noncurrent assets and SHOULD NOT BE INCLUDED as part of CASH.
Examples are as follows:
1. Pension Fund – generally, noncurrent investment but if the related liability is current, the fund is
included as cash.
2. Preferred Redemption Fund – Non current investment unless the preferred share has a
mandatory redemption and if redeemable: within 1 year from the reporting period – part of current
investment ; within 3 months from the reporting period – Cash Equivalent
3. Acquisition of PPE Fund – Always non-current even if expected to be disbursed next year.
4. Contingent Fund – Noncurrent Investment
5. Insurance – Noncurrent Investment
6. Sinking Fund – Noncurrent Investment, if the related bonds payable is current, the fund is
included as cash

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

IMPORTANT NOTE

Classification of cash fund as current or non current should be parallel to

the classification applied to the related liability

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

CASH EQUIVALENTS
Cash equivalent 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. (PAS 7
Statement of Cash Flows)

Only highly liquid investments that are acquired 3 months or less

before maturity can qualify as cash equivalents.

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

CASH EQUIVALENTS
1. Three-month BSP treasury bills
2. Three-month Time deposit
3. Three-month Money Market instrument or commercial paper
4. xx years BSP treasury bills, Commercial paper or Redeemable
preference shares purchased three months before maturity

NOTE:
What is important is the DATE OF PURCHASE (which should be THREE
MONTHS OR LESS)

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

IMPORTANT NOTE

-Ifthe item cannot be included as cash equivalent it did not qualify the cut-
off time period (i.e. 3 months), it will always be classified as
INVESTMENTS (Short-term or long-term) depending on the period up to
maturity

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

Measurement of Cash and Cash Equivalent

- is at face value

Financial Statement Presentation

- “Cash and Cash equivalents” should be shown
as the first line item among the current assets

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Building the Nation
 Batangas State University
Pablo Borbon Campus
The National Engineering University

Bank Overdraft
-when the Cash in Bank account has a credit balance, it is said to be an overdraft.
The credit balance in the cash in bank account results from the issuance of checks in
excess of deposits (deposits<disbursements).

Under PFRS overdraft should be reported as a liability and should not be offset against
other bank account with debit balances

Exception to the rule of Overdrafts

It may be offset against a positive balance, when the entity maintains two
accounts in one bank and one account results in an overdraft, such overdraft can be offset
against the other bank account with debit balance
Moreover, an overdraft can also be offset against the other bank account if the
amount is not material. However, overdrafts are not permitted in the Philippines.

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

Compensating Balances
- are minimum amounts that a company agrees to maintain in a bank checking
or demand deposit account as support or collateral for a loan of the depositor.
• Not legally restricted- the amount is reported as part of Cash. The nature of
the arrangement is disclosed in the notes of the financial statements.
• Legally Restricted- the amount should be classified separately either as
current asset or non-current asset depending on the nature of the loan.

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Pablo Borbon Campus
The National Engineering University

Undelivered or Unreleased Checks

are the company’s checks drawn and recorded as disbursed but are not
actually issued or delivered to the payees as of the reporting date. These
checks should not be deducted from the company’s cash balance until they
have been mailed or otherwise delivered. Therefore, these checks should be
reverted to the cash balance. As a result, liabilities that the checks are intended
to liquidate still exist and should be reported as current payables.

Entry:
Cash xxx
Accounts Payable xxx

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Pablo Borbon Campus
The National Engineering University

Postdated Check

are company’s check which has been recorded as issued and delivered
to payee before or at the end of the reporting period but it bears a date
subsequent to the end of reporting period, hence should be reverted to cash
and the corresponding liability shall continue to be recognized, because there is
no actual payment yet, as of that date.

Entry:
Cash xxx
Accounts Payable xxx

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Pablo Borbon Campus
The National Engineering University

Stale Check or Check Long Outstanding

is a check not encashed by the payee within relatively a long period
from the time of issuance.

Entries:
• If the amount of stale check is immaterial
Cash xxx
Miscellaneous Income xxx
• If the amount is material and liability is expected to continue
Cash xxx
Accounts Payable xxx

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

Window dressing
Is a practice of opening the books of accounts beyond the close of the reporting period for the
purpose of showing a better financial position and performance.

Window dressing is usually accomplished as follows:

a. By recording as of the last day of the reporting period collections made subsequent to the close of the
period.
b. By recording as of the last day of the reporting period payments of accounts made subsequent to the
close period.

Such practices are unacceptable and undesirable. The entries made to window dress must be
reversed to correct the statements.
• In a very broad sense, window dressing is any deliberate misstatement of the assets, liabilities,
equity, income, and expenses.
• When the statements contain any untruth or falsity, the statements are said to be window dressed.

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

Lapping
- Is a practice used for concealing cash shortage.
- Consists of misappropriating a collection from one customer and concealing this
defalcation by applying a subsequent collection made from another customer.
- Involves a series of postponements of the entries for the collection of receivables.
- This is possible when an entity has poor internal control and especially when the bookkeeper
and cashier are one and the same person

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

Kiting
- Is another device used to conceal a cash shortage.
- It is possible when an entity maintains current accounts in different banks. Kiting is usually
employed at the end of the month.
- It occurs when a check is drawn against a first bank and depositing the same check in a second
bank to cover the shortage in the latter bank. No entry is made for both the drawing and deposit
of the check.

Leading Innovations, Transforming Lives,

Building the Nation
 Batangas State University
Pablo Borbon Campus
The National Engineering University

Problem Solving

Leading Innovations, Transforming Lives,

Building the Nation
 Batangas State University
Pablo Borbon Campus
The National Engineering University

Leading Innovations, Transforming Lives,

Building the Nation
 Batangas State University
Pablo Borbon Campus
The National Engineering University

Leading Innovations, Transforming Lives,

Building the Nation
 Batangas State University
Pablo Borbon Campus
The National Engineering University

Leading Innovations, Transforming Lives,

Building the Nation
 Batangas State University
Pablo Borbon Campus
The National Engineering University

Leading Innovations, Transforming Lives,

Building the Nation
 Batangas State University
Pablo Borbon Campus
The National Engineering University

Leading Innovations, Transforming Lives,

Building the Nation