CASH AND CASH EQUIVALENTS
otherwise.
CASH
- Layman’s point of view: money
- Money – standard medium of exchange in
business transactions, refers to the currency
and coins which are in circulation and legal
tender.
- Accounting parlance: special and broader
meaning, which includes money and any
negotiable instruments (can be easily
transferred from one place to another) that
is payable with money and acceptable by
the bank for deposit and immediate credit.
- Includes the following since it is acceptable
by the bank for deposit or immediate
encashment:
 Checks
 Bank drafts – are commitments by
banking institutions to advance
funds on demand by the party to
whom the draft was directed,
prepaid. According to Miss, they are
drawn from the funds of the bank.
 Money orders – are similar financial
instruments to bank drafts but are
drawn generally from authorized
offices or other financial
institutions, prepaid. According to
Miss, they are guaranteed
commercial transactions.
 Undeposited currency and coins
 Petty cash
 Demand deposits – amounts on
deposit in checking and savings
account, respectively.
 Foreign currencies – converted to
their peso value.
- Postdated checks cannot be considered as
cash yet because they are unacceptable by
the bank for deposit and immediate credit
or outright encashment.
UNRESTRICTED CASH
- No specific standard dealing with “cash”.
- PAS 1, Paragraph 66: “An entity shall
classify an asset as current when the asset is
cash or cash equivalent unless it is restricted
to settle liability for more than twelve
months after the end of the reporting
period.”
- The “cash” needs to be unrestricted in use,
meaning that it must be readily available in
payment of current obligations and not be
subject to any restrictions, contractual, or
CASH ITEMS INCLUDED IN CASH
a. Cash on Hand – includes:
 Undeposited cash collections
 Other cash items awaiting deposit:
o Customers’ checks
o Cashier’s or manager’s
check
o Traveler’s checks
o Bank drafts
o Money orders
b. Cash in Bank – includes:
 Demand deposit or checking
account
 Saving deposit which are
unrestricted as to withdrawal
 Certificate of deposits
c. Cash Fund – set aside for current purposes
such as:
 Petty cash fund
 Payroll fund
 Dividend fund
CASH EQUIVALENTS
- PAS 7, Paragraph 6: 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.
- Only highly liquid investments that are
acquired three months before maturity can
qualify as cash equivalents
 Three-month BSP treasury bill
 Three-year BSP treasury bill
purchased three months before date
of maturity
 Three-month time deposit
 Three-month money market
instrument or commercial paper –
must have high credit ratings or
credit scores. They guarantee very
secured investments, do not have a
collateral and the only assurance is
the credit rating.
* BSP – Bangko Sentral ng
Pilipinas (Issuer [Business Entity]
– Debtor [Government])
- Two conditions:
1. Must be one year or less (short term)
2. Purchased three months before
maturity date
 - Treasury bills are short term while treasury
bonds are long term investments.
- Equity securities cannot qualify as cash
equivalents because shares do not have a
maturity date.
- Preference shares are the type of share with
preference over dividends without voting
rights. With specified redemption date and
acquired three months before redemption
date can qualify as cash equivalents.
Redeemable in a way that has a maturity
date, a fund in order to pay the dividend in
due time.
- Date of purchase is important, which should
be three months or less before maturity.
- Bonds have a current and non-current part.
If they were newly acquired, it cannot be
listed as a cash equivalent.
INVESTMENT OF EXCESS CASH
- The control and proper use of cash is an
important aspect of ash management.
- Any cash accumulated in excess of that
needed for current operations should be
invested even temporarily in some type of
revenue earning investment like time
deposits, money market instruments and
treasury bills for the purpose of earning
interest income.
CLASSIFICATIONS OF INVESTMENT OF
EXCESS CASH
a. If the term is three months or less, such
instruments are classified as cash
equivalents and therefore included in the
caption “cash and cash equivalents”.
b. If the 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.
c. If the 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 as
current or temporary investments.
MEASUREMENT/VALUATION OF CASH IN
THE BALANCE SHEET
- Is generally at face value
- Cash in foreign currency is measured in
Philippine peso using the current exchange
rate as of the balance sheet date.
* Deposits in foreign countries which are
not subject to any foreign exchange
restriction are included in “cash”.
* Deposits in foreign bank which are
subject to foreign exchange restriction, if
material, should be classified separately
among noncurrent assets and the restriction
clearly indicated.
- Cash in bank or financial institutions
having financial difficulty or in bankruptcy
should be shown at its estimated realizable
or recoverable value.
FINANCIAL STATEMENT PRESENTATION
- Shown as the first item among the current
assets as one-line item but the detail of
which should be disclosed in the notes in
the financial statements.
- The first 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.
CASH FUND FOR A CERTAIN PURPOSE
- Cash fund set aside for use in current
operations or for payment of current
obligation, it is a current asset, included as
part of cash and cash equivalents.
- Examples:
 Petty cash fund
 Payroll fund
 Travel fund
 Interest fund
 Dividend fund
 Tax fund
- Cash fund set aside for noncurrent purpose
or payment of noncurrent obligation, it is
shown as a long-term investment.
- Examples:
 Sinking fund
 Preference share
 Redemption fund
 Contingent fund
 Insurance fund
 Fund for acquisition of property,
plant and equipment
CLASSIFICATION OF CASH FUND
- The classification as current or noncurrent
should parallel the classification of related
liability.
- However, a cash fund set aside for the
acquisition of a noncurrent asset should be
classified as noncurrent regardless of the
year of disbursement.
BANK OVERDRAFT
- The cash in bank account has a credit
balance, it is said to be an overdraft. Credit
balance in the cash in bank account means
that there is issuance of checks in excess of
deposits.
- When this occurs, we say that the checking
account customer has overdrawn its
account. The overdraft means that the
bank's records indicate a negative checking
account balance.
- A bank overdraft is classified as a current
liability and should not be offset against
other bank accounts with debit balances.
- It is not necessary to adjust and open a bank
overdraft account in the ledger.
- Generally, overdrafts are not permitted in
the Philippines.
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.
- An overdraft can also be offset against the
other bank account if the amount is not
material.
COMPENSATING BALANCE
- Generally, takes the form of minimum
checking or demand deposit account
balance that must be maintained in
connection with a borrowing arrangement
with a bank.
- A set of amount of cash that a firm must
keep to its checking account or savings
account at all times as part of a loan
agreement.
- Reduction of the amount borrowed because
the compensating balance provides a source
of fund to the bank as partial compensation
for the loan extended.
CLASSIFICATION OF COMPENSATING
BALANCE
- Deposit is not legally restricted as to
withdrawal by the borrower because of an
informal compensating balance agreement,
the compensating balance is part of cash.
- 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 it is long term, the
compensating balance is classified as
noncurrent investment.
UNDELIVERED OR UNRELEASED CHECK
- One that is merely drawn and recorded but
not given to the payee before the end of the
reporting period.
- No payment when the check is pending
delivery to the payee at the end of the
reporting period.
- Reason: It is still subject to the entity’s
control and may thus be cancelled anytime
before the delivery at the discretion of the
entity.
- Adjusting entry is required to restore cash
balance and set up the liability.
- In practice, the foregoing adjustment is
sometimes ignored because the amount in
not very substantial and there is no evidence
of actual cancellation of the check in the
subsequent period.
POSTDATED CHECK DELIVERED
- A check drawn, recorded, and already given
to the payee but it bears a date subsequent
to the end of reporting period.
- Original entry recording a delivered
postdated check shall also be reversed and
therefore restored to the cash balance.
- Reason: No payment until the check can be
presented to the bank for encashment or
deposit.
STALE OR CHECK LONG OUTSTANDING
- A check not encashed by the payee within a
relatively long period of time.
- Negotiable Instruments Law provides that
where the instrument is payable on demand
and this includes checks, presentment must
be made within a “reasonable time” after its
issue.
- “Reasonable time” must be determined
through the consideration regarding the
nature of the instrument, usage of trade or
business, with resect to such instrument and
the facts of the particular case.
- Law: does not specify a definite period.
Reference is made to usage of trade or
business practice.
- Banking practice: A check becomes stale if
not encashed within six months from the
time of issuance. Matter of entity policy.
 - If the amount on the stale check is
immaterial, it is simply accounted for as
miscellaneous income.
- If the amount on the stale check is material
and liability is expected to continue, the
cash is restored and the liability is again set
up.
CASH SHORTAGE AND OVERAGE
- Cash short or over account – only a
temporary or suspense account which
should be adjusted when the financial
statements are prepared.
IMPREST SYSTEM
- A system of control of cash which requires
that all cash receipts should be deposited
intact and all cash disbursement should be
made by means of check, which is
sometimes, impossible.
PETTY CASH FUND
- Money set aside to pay small expenses
which cannot be paid conveniently by
means of check.
- Two methods of handling the petty cash:
a. IMPREST FUND SYSTEM
- the one usually followed in
handling petty cash transactions.
- Replenish means to return the
amount of actual cash in the petty
cash box back to the amount
appearing in the general ledger
account Petty Cash.
b. FLUCTUATING FUND SYSTEM
- the checks drawn to replenish the
fund do not necessarily equal the
petty cash disbursements.
- are simply drawn upon the request
of the petty cashier.
- immediately recorded thus
resulting in a fluctuating petty cash
balance per book.
- disbursements from the petty cash
fund are immediately recorded in
contradistinction with the imprest
fund system.
- the replenishment check may or
may not be the same as the petty
cash disbursement.