CHAPTER 1

CASH AND CASH

EQUIVALENTS
 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.

But if the checks received are postdated, they cannot be

considered as cash yet because these checks are
unacceptable by the bank for deposit and immediate credit
or outright encashment.
 Example of Check
 UNRESTRICTED CASH
(PAS 1, paragraph 66) 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”, an item must be

unrestricted in use.
 CASH ITEMS INCLUDED IN CASH

CASH ON HAND CASH IN BANK CASH FUND

• Undeposited cash • Demand deposit or • Petty cash fund
collections checking account • Payroll fund
• Customers’ checks • Saving deposit • Dividend fund
• Cashier’s or
Manager’s checks
• Travelers Checks
• Bank Drafts
• Money Orders
 CASH EQUIVALENTS
(PAS 7) short-term and highly liquid investments that are really
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. Note that what is important is the
date of purchase which should be three months or less before maturity.

Examples of cash equivalents are:

 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

Preference Shares with specified redemption date and acquired three

months before redemption date can qualify as cash equivalents.
 MEASUREMENT OF CASH

Cash is measured at face value.

Cash in foreign currency is measured at the current

exchange rate.

If a bank or financial institution holding the funds of an

entity is in bankruptcy, cash should be written down to
estimated realizable value if the amount recoverable is
estimated to lower than the face value.
 INVESTMENT IN EXCESS OF CASH

Any cash accumulated in excess of that needed for current 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. Such investments should be
classified as follows:

a. If the term is three months or less = CASH EQUIVALENTS

b. If the term is more than three months but within one year =
SHORT – TERM INVESTMENT OR TEMPORARY
INVESTMENTS
c. If the term is more than one year = LONG-TERM INVESTMENT
(However, if such become due within one year from the end of the
reporting period, they are classified as current assets)
 FOREIGN CURRENCY

Cash in foreign currency should be translated to Philippine

pesos using the current exchange rate.

CASH FUND FOR A CERTAIN PURPOSE

If the cash fund is set aside for use in current operations or for
payment of current obligations it is a current asset.

If the cash fund is set aside for non current purpose or payment
of non current obligation, it is shown as long-term investment.

Classification of cash fund as current or non current should

parallel the classification applied to related liability.
BANK OVERDRAFT

When the cash in bank account has a credit balance, it is said to

be an overdraft. It results from the issuance of checks in excess
of the deposits.

Rules on overdraft: A bank overdraft is classified as a current

liability and should not be offset against other bank accounts
with debit balances.

Exception to the rule of 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.
COMPENSATING BALANCE

If the 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.

If the deposit is legally restricted because of formal

compensating balance agreement, the compensating balance is
classified as 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 non current investment.
UNDELIVERED OR UNRELEASED CHECK
An undelivered or unreleased check is one that is merely drawn and
recorded but not given to the payee before the end of reporting period.
There is no payment when the check is pending delivery to the pay
at the end of reporting period.
The reason is that undelivered check is still subject to the entity’s 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 follows:
Cash xx
Accounts Payable xx
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
cancelations 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
end of reporting period.
STALE CHECK OR CHECK LONG OUTSTANDING

A stale check is a check not encashed by payee within a

relatively long period of time
In banking practice, a check becomes stale if not within six
months from the time of issuance.
ACCOUNTING FOR CASH OVERAGE

The cash shortage or over account is only a temporary or

suspense account. When financial statements are prepared the
same should be adjusted.

Note that whether it is cash shortage or cash overage, the

offsetting account is cash short or over account.

Where the cash count shows cash which is less than the balance
per book, there is a cash shortage to be recorded as follows :

Cash short or over xx

Cash xx
STATEMENT OF CASH FLOW – DIRECT METHOD

A statement of cash flows is a financial statement that

summarizes the cash inflows and outflows of a company
for a period of time (generally one year or one quarter).
There are three elements of a statement of cash flows:

Operating cash flows – Operating cash flows are the

inflows and outflows of cash from acquiring, selling, and
delivering goods for sale, as well as providing services.

Investing cash flows – Investing cash flows are the

inflows and outflows of cash from acquiring and selling
investments, property, plant and equipment, and intangibles,
as well as from lending money and collecting on loans.
STATEMENT OF CASH FLOW – DIRECT METHOD

Financing cash flows – Financing cash flows are the

inflows and outflows of cash from obtaining resources
from owners and paying them dividends, as well as
obtaining and repaying resources from creditors on long-
term credit.

The net cash flows from the above business

activities, operating, investing and financing are then added
to or subtracted from the cash balance beginning of the
period to arrive at the cash balance at the end of the period.
STATEMENT OF CASH FLOW – DIRECT METHOD
CASH FLOWS FROM OPERATING ACTIVITIES

PAS 7, paragraph 18, provides that an entity shall report cash

flows from operating activities using either the direct method
or indirect method.
DIRECT METHOD
The direct method shows in detail or itemizes the cash
receipts and payments.

The difference between the cash receipts and cash payments

represents the net cash flow from operating activities.
In essence, the direct method is the “cash basis” income
statement.
Accordingly, some formulas may be necessary for
determining cash receipts and cash payments.
EXAMPLE: STATEMENT OF CASH FLOW
 Item Accrual basis Cash basis
Sales Cash sales + sales on Cash sales +
account collection of trade
receivables
Purchases Cash purchases + Cash purchases +
purchases on account payment to trade
creditors
Income other than Income earned are Income received are
sales considered income considered income
regardless of when regardless of when
received earned
Expenses in general Items incurred are Items paid are
considered expense considered expense
regardless of when regardless of when
paid incurred.
Sales
Purchases
Income other than sales
Expenses in general