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CASH AND CASH EQUIVALENTS subject to any restrictions, contractual, or

otherwise.
CASH
CASH ITEMS INCLUDED IN CASH
- Layman’s point of view: money
- Money – standard medium of exchange in a. Cash on Hand – includes:
business transactions, refers to the currency  Undeposited cash collections
and coins which are in circulation and legal  Other cash items awaiting deposit:
tender. o Customers’ checks
- Accounting parlance: special and broader o Cashier’s or manager’s
meaning, which includes money and any check
negotiable instruments (can be easily o Traveler’s checks
transferred from one place to another) that o Bank drafts
is payable with money and acceptable by o Money orders
the bank for deposit and immediate credit. b. Cash in Bank – includes:
- Includes the following since it is acceptable  Demand deposit or checking
by the bank for deposit or immediate account
encashment:  Saving deposit which are
 Checks unrestricted as to withdrawal
 Bank drafts – are commitments by  Certificate of deposits
banking institutions to advance c. Cash Fund – set aside for current purposes
funds on demand by the party to such as:
whom the draft was directed,  Petty cash fund
prepaid. According to Miss, they are  Payroll fund
drawn from the funds of the bank.  Dividend fund
 Money orders – are similar financial
instruments to bank drafts but are CASH EQUIVALENTS
drawn generally from authorized - PAS 7, Paragraph 6: Short-term and highly
offices or other financial liquid investments that are readily
institutions, prepaid. According to convertible into cash and so near their
Miss, they are guaranteed maturity that they present insignificant risk
commercial transactions. of changes in value because of changes in
 Undeposited currency and coins interest rates.
 Petty cash - Only highly liquid investments that are
 Demand deposits – amounts on acquired three months before maturity can
deposit in checking and savings qualify as cash equivalents
account, respectively.  Three-month BSP treasury bill
 Foreign currencies – converted to  Three-year BSP treasury bill
their peso value. purchased three months before date
- Postdated checks cannot be considered as of maturity
cash yet because they are unacceptable by  Three-month time deposit
the bank for deposit and immediate credit  Three-month money market
or outright encashment. instrument or commercial paper –
UNRESTRICTED CASH must have high credit ratings or
credit scores. They guarantee very
- No specific standard dealing with “cash”. secured investments, do not have a
- PAS 1, Paragraph 66: “An entity shall collateral and the only assurance is
classify an asset as current when the asset is the credit rating.
cash or cash equivalent unless it is restricted * BSP – Bangko Sentral ng
to settle liability for more than twelve Pilipinas (Issuer [Business Entity]
months after the end of the reporting – Debtor [Government])
period.” - Two conditions:
- The “cash” needs to be unrestricted in use, 1. Must be one year or less (short term)
meaning that it must be readily available in 2. Purchased three months before
payment of current obligations and not be maturity date
- Treasury bills are short term while treasury * Deposits in foreign countries which are
bonds are long term investments. not subject to any foreign exchange
- Equity securities cannot qualify as cash restriction are included in “cash”.
equivalents because shares do not have a * Deposits in foreign bank which are
maturity date. subject to foreign exchange restriction, if
- Preference shares are the type of share with material, should be classified separately
preference over dividends without voting among noncurrent assets and the restriction
rights. With specified redemption date and clearly indicated.
acquired three months before redemption - Cash in bank or financial institutions
date can qualify as cash equivalents. having financial difficulty or in bankruptcy
Redeemable in a way that has a maturity should be shown at its estimated realizable
date, a fund in order to pay the dividend in or recoverable value.
due time.
- Date of purchase is important, which should FINANCIAL STATEMENT PRESENTATION
be three months or less before maturity. - Shown as the first item among the current
- Bonds have a current and non-current part. assets as one-line item but the detail of
If they were newly acquired, it cannot be which should be disclosed in the notes in
listed as a cash equivalent. the financial statements.
INVESTMENT OF EXCESS CASH - The first caption includes all cash items,
such as cash on hand, cash in bank, petty
- The control and proper use of cash is an cash fund and cash equivalents which are
important aspect of ash management. unrestricted in use for current operations.
- Any cash accumulated in excess of that
needed for current operations should be CASH FUND FOR A CERTAIN PURPOSE
invested even temporarily in some type of - Cash fund set aside for use in current
revenue earning investment like time operations or for payment of current
deposits, money market instruments and obligation, it is a current asset, included as
treasury bills for the purpose of earning part of cash and cash equivalents.
interest income. - Examples:
CLASSIFICATIONS OF INVESTMENT OF  Petty cash fund
EXCESS CASH  Payroll fund
 Travel fund
a. If the term is three months or less, such  Interest fund
instruments are classified as cash  Dividend fund
equivalents and therefore included in the  Tax fund
caption “cash and cash equivalents”. - Cash fund set aside for noncurrent purpose
b. If the term is more than three months but or payment of noncurrent obligation, it is
within one year, such investments are shown as a long-term investment.
classified as short-term financial assets or - Examples:
temporary investments and presented  Sinking fund
separately as current assets.  Preference share
c. If the term is more than one year, such  Redemption fund
investments are classified as noncurrent or  Contingent fund
long-term investments.  Insurance fund
* However, if such investments become due  Fund for acquisition of property,
within one year from the end of the plant and equipment
reporting period, they are reclassified as
current or temporary investments. CLASSIFICATION OF CASH FUND

MEASUREMENT/VALUATION OF CASH IN - The classification as current or noncurrent


THE BALANCE SHEET should parallel the classification of related
liability.
- Is generally at face value - However, a cash fund set aside for the
- Cash in foreign currency is measured in acquisition of a noncurrent asset should be
Philippine peso using the current exchange classified as noncurrent regardless of the
rate as of the balance sheet date. year of disbursement.
BANK OVERDRAFT separately as “cash held as compensating
balance” under current assets if the related
- The cash in bank account has a credit loan is short-term. If it is long term, the
balance, it is said to be an overdraft. Credit compensating balance is classified as
balance in the cash in bank account means noncurrent investment.
that there is issuance of checks in excess of
deposits. UNDELIVERED OR UNRELEASED CHECK
- When this occurs, we say that the checking
account customer has overdrawn its - One that is merely drawn and recorded but
account. The overdraft means that the not given to the payee before the end of the
bank's records indicate a negative checking reporting period.
account balance. - No payment when the check is pending
- A bank overdraft is classified as a current delivery to the payee at the end of the
liability and should not be offset against reporting period.
other bank accounts with debit balances. - Reason: It is still subject to the entity’s
- It is not necessary to adjust and open a bank control and may thus be cancelled anytime
overdraft account in the ledger. before the delivery at the discretion of the
- Generally, overdrafts are not permitted in entity.
the Philippines. - Adjusting entry is required to restore cash
balance and set up the liability.
EXCEPTION TO THE RULE ON OVERDRAFT - In practice, the foregoing adjustment is
sometimes ignored because the amount in
- When an entity maintains two or more not very substantial and there is no evidence
accounts in one bank and one account of actual cancellation of the check in the
results in an overdraft, such overdraft can subsequent period.
be offset against the other bank account
with a debit balance in order to show “cash, POSTDATED CHECK DELIVERED
net of bank overdraft.
- An overdraft can also be offset against the - A check drawn, recorded, and already given
other bank account if the amount is not to the payee but it bears a date subsequent
material. to the end of reporting period.
- Original entry recording a delivered
COMPENSATING BALANCE postdated check shall also be reversed and
therefore restored to the cash balance.
- Generally, takes the form of minimum - Reason: No payment until the check can be
checking or demand deposit account presented to the bank for encashment or
balance that must be maintained in deposit.
connection with a borrowing arrangement
with a bank. STALE OR CHECK LONG OUTSTANDING
- A set of amount of cash that a firm must
keep to its checking account or savings - A check not encashed by the payee within a
account at all times as part of a loan relatively long period of time.
agreement. - Negotiable Instruments Law provides that
- Reduction of the amount borrowed because where the instrument is payable on demand
the compensating balance provides a source and this includes checks, presentment must
of fund to the bank as partial compensation be made within a “reasonable time” after its
for the loan extended. issue.
- “Reasonable time” must be determined
CLASSIFICATION OF COMPENSATING through the consideration regarding the
BALANCE nature of the instrument, usage of trade or
business, with resect to such instrument and
- Deposit is not legally restricted as to the facts of the particular case.
withdrawal by the borrower because of an - Law: does not specify a definite period.
informal compensating balance agreement, Reference is made to usage of trade or
the compensating balance is part of cash. business practice.
- Deposit is legally restricted because of a - Banking practice: A check becomes stale if
formal compensating balance agreement; not encashed within six months from the
the compensating balance is classified 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.