Cash and Cash Equivalents

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

Cash items included in cash

1. Cash on hand
2. Cash in bank
3. Cash fund

Cash Equivalents – short term and highly liquid investments that are readily convertible into cash and the maturity is near that they
present insignificant risk of changes in value ( acquired 3 months before maturity)

Note: Equity Securities cannot qualify as cash equivalents because shares do not have maturity date.
Preference shares with specifies redemption date and acquired three months before redemption date can qualify as cash
equivalents.

 Measurement of Cash – at face value

 Measurement of Cash in foreign currency – current exchange rate
 Measurement of Cash if a bank/financial institution holding the funds is in bankruptcy or financial difficulty- estimated
realizable value

Investments in time deposit, money market instruments and treasury bills

o If term is 3 months or less – cash equivalents
o If term is more than 3 months but within 1 year – short term investments; current asset
o If term is more than 1 year – long term investments; noncurrent asset
o If due within 1 year from end of the reporting period – temporary investments

Cash fund set aside

o Cash fund set aside for use in current operations – cash and cash equivalents; current asset
o Cash fund set aside for use in noncurrent purposes – long term investment; noncurrent asset

Imprest System – system of control of cash which requires that all cash receipts should be deposited intact and all cash disbursements
should be made by means of check.

Petty Cash Fund- money set aside to pay small expenses which cannot be paid conveniently by means of check.

2 methods of handling petty cash

1. Imprest Fund System
2. Fluctuating Fund System

Bank Reconciliation – statement which brings into agreement the cash balance per book and cash balance per bank. It is usually
prepared monthly because the bank provides the depositor with the bank statement at the end of every month.

Bank Statement – monthly report of the bank to the depositor showing the:
a. Cash balance per bank-beginning
b. Deposits
c. Checks drawn
d. Daily cash balance per bank during the month

General procedures in preparing the reconciliation

1. Determine the balance per book and the balance per bank.
2. Trace the cash receipts to the bank statement to ascertain whether there are deposits not yet acknowledged by the bank.
3. Trace the checks issued to the bank statement to ascertain whether there are checks not yet presented for payment.
4. The bank statement should be examined to determine whether there are bank credits or bank debits not yet recorded by the
depositor.
5. Watch out for errors. Again errors are reconciling items of the party which committed them.
Terms:
 Bank overdraft – when cash in bank has a credit balance; current liability; should not be offset against other bank accounts
with debit balances but can be offset to accounts with the same bank only if not material.
 Compensating balance – minimum checking or demand deposit account balance that must be maintained in a bank.
 Undelivered/Unreleased Check –drawn and recorded but not given to the payee before the end of reporting period.
 Postdated check delivered – check drawn, recorded and already given to the payee but it bears a date subsequent to the end of
reporting period.
 Stale check – check not encashed by the payee within a relatively long period of time.
 Cancelled check-checks issued by the depositor and paid by the bank during the month but cancelled by stamping or
punching to show that they have been paid.
 Credit Memos-items not representing deposits credited by the bank to the account of the depositor but not yet recorded by the
depositor as cash receipts. It has an effect of increasing the bank balance.
 Debit Memos –items not representing checks paid by bank which are charged or debited by the bank to the account of the
depositor but not yet recorded by the depositor as cash disbursements. It has an effect of decreasing the bank balance.
 Deposits in Transit – collections already recorded by the depositor as cash receipts but not yet reflected on the bank
statement.
 Outstanding Checks-checks already recorded by the depositor as cash disbursements but not yet reflected on the bank
statement.