CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS

- Cash includes money and any other negotiable instrument that is payable in money and
acceptable by bank for deposit and immediate credit.
- Includes checks, bank drafts and money orders because these are acceptable by bank for
deposit and immediate credit.

Note: for an asset to be considered as cash an item must be considered as unrestricted in use. This
means that the cash must be immediately available in the payment of current obligations and not
subject to any restrictions, contractual or otherwise.

1. Cash on hand
– includes undeposited cash collections and other cash items awaiting deposit. Ex.
Customer’s check, cashier’s or manager’s checks, traveler’s checks, bank drafts and money
orders.

2. Cash in bank
– includes demand deposit or checking account and savings deposit which are unrestricted
as to withdrawal.

3. Cash fund set aside for current purposes such as petty cash fund payroll fund and dividend fund.

CASH EQUIVALENTS
- Are short term highly liquid investments that are readily convertible into cash and so near
their maturity that they present insignificant risk of changes in the value because of changes
in interest rates.
- Only highly liquid investments that are acquired three months before maturity can qualify
as cash equivalents.

Note: the date of purchase must be three months before maturity.

VALUATION OF CASH
1. Face value - generally
2. Current exchange rate – cash in foreign currency
3. Estimated realizable value – if the bank or financial institution holding the funds of the
company is in bankruptcy or financial difficulty.

Note: the caption “cash and cash equivalents” should be shown as first item among the current
assets. However, the details must be disclosed in the notes to financial statements.

I. Investment of excess cash (time deposit, money market instrument, treasury bills)
a. Three months or less – “cash and cash equivalents”
b. More than three months to one year – “ temporary investment or short-term investment”
c. More than one year – non current asset “ long-term investment”

II. Cash fund for certain purpose

 a. Current purpose – part of “cash and cash equivalent”( ex. Petty cash fund, payroll fund,
travel fund, interest fund, dividend fund and tax fund).
b. Noncurrent purpose – it is part of “long-term investment” (ex. Sinking fund, preference
share redemption fund, contingent fund, insurance fund, and fund for the acquisition or
construction of property, plant and equipment.

III. Bank overdraft

- When the cash in bank account has a credit balance. This is the result of issuance of checks
in excess of the deposits.
- Classifies as current liability and should not be offset against other bank accounts with
debit balances.

Note: bank overdraft is not permitted in the Philippines.

Exception to the rule on overdraft

- Offset against other bank account with debit balance if the bank maintains two or more
accounts in one bank.
- If the amount is immaterial

IV. Compensating balance

- 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. not legally restricted – part of cash

b. legally restricted
1. short-term – “cash held as compensating balance”
2. long-term – “noncurrent investment”

Note: if the problem is silent, not legally restricted (Conrado Valix), legally restricted (Conrado
Uberita), legally restricted (in practice).

V. Undelivered checks
- When they have been merely drawn and recorded but not given to the payees.

Cash xx
Accounts payable xx

VI. Postdated checks

- Means checks are drawn, recorded and already given to payees but they bear a date
subsequent to balance sheet date.

Cash xx
Accounts payable xx

VII. Stale checks

- When the checks are not encashed by the payees within a relatively long period of time.

Note: the banking practice dictates that checks not encashed within six months shall be
 considered stale.

1. Immaterial
Cash xx
Miscellaneous income xx

2. Material
Cash xx
Accounts payable xx

VIII. Window dressing

- Whenever some books are left open beyond the end of accounting period for the purpose
of showing a better picture of the financial highlights and profit activities of the business.

IX. Lapping
- A practice used for concealing a cash shortage. It consists of misappropriating a collection
from one customer and concealing this defalcation by applying subsequent collection made
from another customer.

X. Kiting
- Another device used to conceal a cash shortage.
- This 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.

ACCOUNTING FOR CASH SHORTAGE

Cash shortage xx
Cash xx

1. Cashier/ custodian
Due from cashier xx
Cash shortage xx

2. Cause is unclear
Loss from cash shortage xx
Cash shortage xx

ACCOUNTING FOR CASH OVERAGE

Cash xx
Cash overage xx

1. Cashier/custodian
Cash overage xx
Payable to cashier xx

2. No claim
 Cash overage xx
Miscellaneous income xx

IMPREST SYSTEM
- A system is a 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.
- There are times that this becomes impractical especially when small amounts are paid so it
becomes necessary to establish a petty cash fund.

1. Imprest fund system

- Usually followed in handling petty cash transactions.

The pertinent accounting procedures are:

a. Establishment of fund

Petty cash fund xx

Cash in bank xx

b. Payment of expenses out of the fund

- No journal entry (only a petty cash voucher is prepared ).

c. Replenishment of petty cash payments

Expenses xx
Cash in bank xx

d. Adjustment for unreplenished expenses

Expenses xx
Petty cash fund xx

e. Increase in fund

Petty cash fund xx

Cash in bank xx

f. Decrease in fund

Cash in bank xx
Petty cash fund xx

2. Fluctuating fund system

- The checks drawn to replenish the fund do not necessarily equal the petty cash
disbursements. The replenishment checks are simply drawn upon the request of the petty
cashier.

a. Establishment of fund
 Petty cash fund xx
Cash in bank xx

b. Payment of expenses out of the fund

Expenses xx
Petty cash fund xx

c. Replenishment or increase of the fund

Petty cash fund xx

Cash in bank xx

d. No adjustment at the end of the period because petty cash expenses are recorded outright.

e. Decrease in the fund

Cash in bank xx
Petty cash fund xx

BANK RECONCILIATION
- A statement which brings into agreement the cash balance per book and the cash balance per
bank.
- necessary only for a demand deposit account.

Bank statement
- a monthly report of the bank to the depositor showing the cash balance per bank at the
beginning, the deposits acknowledged, the checks paid, other charges and credits and the
daily cash balance per bank during the month.

Reconciling items
1. Book reconciling items
a. credit memos
b. debit memos
c. errors

2. Bank reconciling items

a. deposit in transit
b. outstanding checks
c. errors

Adjusted Balance Method

Book balance xx Bank balance xx

Add: Credit memos xx Add: Deposit in Transit xx
Total xx Total xx
Less: Debit memos (xx) Less: Outstanding checks (xx)
Errors xx Errors xx
Adjusted book balance xx Adjusted bank balance xx

Credit memos
- representing deposits credited by the bank to the account of the depositor but not
recorded by the depositor as cash receipts.

a. notes receivable collected by bank

b. proceeds of bank loan
c. matured time deposits transferred by the bank to the account of the depositor

Debit memos
- refer to 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.

a. NSF or no sufficient fund checks

b. Technically defective checks
c. Bank service charge
d. Reduction of loan

Deposit in transit
- are collections already recorded by the depositor as cash receipts but not yet recorded by
the depositor as cash receipts but not yet reflected on the bank statement.

a. collections already forwarded to the bank but too late to appear in the bank statement.
b. Undeposited collections or those still in the hands of the depositor ( cash on hand ).

Outstanding checks
- checks already recorded by the depositor as cash disbursements but not yet reflected on
the bank statement.

a. checks drawn for payment and already given to payees but not yet presented for payment.
b. Certified checks – deduction from total outstanding checks

Form of bank reconciliation

a. adjusted balance method – the book balance and the bank balance are brought to a correct
cash balance that must appear on the balance sheet.

b. book to bank method – the book balance is reconciled with the bank balance or the book
balance is adjusted to equal the bank balance.

c. bank to book method – the bank balance is reconciled with the book balance or the bank
balance is adjusted to equal the book balance.

Preparation of adjusting entries

- only the book reconciling items require adjusting entries on the book of the depositor. The
adjustments are necessary to bring the cash balance to its correct balance for statement
presentation purposes.
PROOF OF CASH
- an expanded reconciliation in that it includes proof of receipts and disbursements.
- useful in discovering possible discrepancies in handling cash.
Adjusted balance method
Previous Month Current Month (CM)
(PM)
Balance Receipts Disbursements Balance
Balance per book xx xx Xx xx
Credit Memo
PM xx (xx)
CM xx xx
Debit Memo
PM (xx) (xx)
CM Xx (xx)
Errors xx(xx) xx(xx) xx(xx) xx(xx)
Adjusted book xxxx xxxx Xxxx xxxx
balance

Balance per bank xx xx Xx xx

Deposit in transit
PM xx (xx)
CM xx xx
Outstanding checks
PM (xx) (xx)
CM Xx (xx)
Errors xx(xx) xx(xx) xx(xx) xx(xx)
Adjusted bank xxxx xxxx Xxxx xxxx
balance

LOANS AND RECEIVABLES

LOANS AND RECEIVALBLES

- nonderivative financial asset. 1 F
- with fixed or determinable payments. 2 F
- may or may not have fixed or determinable payments.
- not quoted in an active market (not traded).
- the holder can recover substantially all of its investment.
- the holder does not have the intention to hold them to maturity.

CONCEPT OF RECEIVABLES
- a FINANCIAL ASSET.
- represent a contractual right to receive cash or another financial asset from another entity.

1. Trade Receivables 3.
 - claims arising from sale of merchandise or services in the ordinary course of business.
- classified as CURRENT ASSET.

a. Accounts Receivables 4 8
- open accounts or not supported by promissory notes.

b. Notes Receivables
- supported by formal promise to pay in the form of notes. 5

2. Nontrade Receivables 6
- claims arising from sources other than the sale of merchandise or services in the ordinary
course of business.
- classified as CURRENT ASSET if collectible within one year.
- classified as NONCURRENT ASSET if collectible after one year.

Note: For banks and other financial institutions, receivables result primarily from loans
to customers.

Examples of Nontrade receivables

1. Advances to shareholders, directors, officers and employees. 7 8f
 current – collectible within one year. 8
 noncurrent – collectible beyond one year.

2. Advances to affiliates – treated as long-term investment. 11

3. Advances to suppliers – treated as current asset. 9

4. Subscriptions receivable
 current – collectible within one year.
 deduction from subscribed share capital – collectible beyond one year. 10

5. Debit balance in creditors account t

 current – collectible within one year.
 if amount is not material – can be offsetted and shown as net accounts
payable.

6. Special deposit on contract bids – normally classified as noncurrent asset. 12

7. Accrued income – current asset. 13

8. Claims receivable – current asset.

MEASUREMENT OF RECEIVABLES
A. Initial Measurement
1. Short-term - @ FACE VALUE 14

2. Long-term
a. Interest bearing - @ FACE VALUE 15
 b. Non-interest bearing - @ PRESENT VALUE 16

B. Subsequent Measurement - @ AMORTIZED COST 17

Accounts Receivable
A. Initial Measurement - @ Face Value 18

B. Subsequent Measurement - @ NET REALIZABLE VALUE 19

Note: Net realizable value is computed as Initial amount less deductions from ordinary course of
business activities.

Deductions from Accounts Receivable 21-24

1. Allowance for Freight Charge
2. Allowance for Sales Return
3. Allowance for Sales Discount
4. Allowance for Doubtful Accounts

FREIGHT CHARGE
I. Terms related to Freight charge

1. FOB Destination 25
- ownership of goods are vested to the buyer upon receipt of goods.
- seller pays the freight charge up to point of destination.

2. FOB Shipping Point 26

- ownership of goods are vested to the buyer upon shipment of goods.
- buyer pays the freight charge from shipment to point of destination.

3. Freight Collect 27
- freight charge is actually paid by the buyer.

4. Freight Prepaid
- freight charge is already paid by the seller. 28

ALLOWANCE FOR SALES RETURNS 29

- considered as a deduction from sales 30

Sales return xx
Allowance for sales return xx

SALES DISCOUNT 31
- a reduction from invoice price.

Note: Cash discount can either be sales discount – discount on the part of the seller or
purchase discount – discount on the part of the buyer.
 1. Gross Method
- initially records sales at gross amount.
- records sales discount account if payment is made on discount period. 32

2. Net Method 33
- initially records sales at net amount.
- do not record sales discount account if payment is made on discount period since
it already recorded the transaction at net.

ACCOUNTING FOR BAD DEBTS

- the assumed portion of the credit that cannot be collected.
- considered as selling expense if credit and collection is under the charge of the sales
manager.
- considered as administrative expense if credit and collection is under the charge of an
officer other than the sales manager.

1. Allowance Method
- requires the recognition of a bad debt loss if the accounts are doubtful of
collection.

a. Considered doubtful of collection

Doubtful Accounts xx
Allowance for Doubtful accounts xx

b. Considered worthless or uncollectible

Allowance for doubtful accounts xx
Accounts receivable xx

c. Recovery of accounts previously written off

Accounts receivable xx
Allowance for doubtful accounts xx

Cash xx
Accounts receivable xx

2. Direct Write-off Method

- requires recognition of bad debt loss only when the accounts proved to be
worthless or uncollectible.

a. Considered doubtful of collection

No entry.

b. Considered worthless or uncollectible

Bad debts xx
Accounts receivable xx

c. Recovery of accounts previously written off

 Accounts receivable xx
Bad debts xx

Cash xx
Accounts receivable xx

METHODS OF ESTIMATING DOUBTFUL ACCOUNTS

1. Aging of Accounts Receivable
- involves an analysis of the accounts where they are classified into not due or past
due.
- past due accounts are classified in terms of length of period they are past due.
- an allowance is determined by multiplying the total of each classification by the
rate or percent of loss experienced by the entity for each category.
- amount computed represents the REQUIRED ALLOWANCE FOR DOUBTFUL
ACCOUNTS AT THE END OF THE PERIOD.

2. Percent of Accounts Receivable

- has the advantage of presenting the accounts receivable at estimated net
realizable value.
- an allowance is determined by multiplying ending balance of accounts receivable
by a certain rate.
- the resulting balance/amount is the required balance for the allowance for
doubtful accounts.

3. Percent of Sales
- has the advantage of presenting proper matching of cost against revenue
because bad debt loss is directly related to sales and reported in the year of
sale.
- a certain rate is multiplied by the amount of sales to determine the doubtful
accounts expense.

LOANS RECEIVABLE
- receivables of banks and other financial institutions.
- can either be short-term or long-term.

Origination Fees – the fees charged by the bank against the borrower for the creation of
the loan.

1. Origination fees received from borrower

- recognized as unearned interest income and amortized over the term of
the loan.

2. Direct origination costs

- origination fees not chargeable against the borrower.
- offsetted directly against any unearned origination fees received.

Note: Origination fees received > Direct origination cost = Unearned interest income*
* amortization will increase interest income.
 Origination fees received < Direct origination cost = Direct origination costs**
** amortization will decrease interest income.

Principal amount of receivable xx

Origination fees received (xx)
Direct origination cost incurred xx
Initial carrying amount of loan xx

Note: Because of the origination fees received and the direct origination costs, a NEW
EFFECTIVE RATE must be computed. The effective rate is computed through the “TRIAL
AND ERROR” or “INTERPOLATION” approach.

Impairment of Loan
- to be assessed at every end of reporting period to determine any impairment loss.

Objective evidence of impairment

1. Significant financial difficulty of the issuer or obligor.
2. Breach of contract, such as default or delinquency in interest or principal payment.
3. Debt restructuring
4. Probability of the borrower’s bankruptcy or other financial reorganization.
5. Disappearance of an active market.
6. Decrease in the estimated future cash flows.

Measurement of Impairment
- measured as the difference between the carrying amount of the loan and the present
value of estimated future cash flows discounted at the original effective rate of the
loan.
- the amount of loss shall be recognized in profit or loss.

RECEIVABLE FINANCING
- the financial flexibility or capability of an entity to raise money out of its receivables.

1. Pledging of Accounts Receivable

2. Assignment of Accounts Receivable
3. Factoring of Accounts Receivable
4. Discounting of Notes Receivable

Pledge of Accounts Receivable

- receivable is considered as a collateral security for the payment of the loan.
- the accounting entry made is the accounting for the loan only.
- if the loan is discounted, the interest for the loan is deducted in advance.
- considered as borrowings only.
- is general, because all accounts receivable serve as collateral security for the loan.

Assignment of Accounts Receivable

- means that a borrower called the assignor transfers its rights in some of its accounts
receivable to a lender called the assignee in consideration for a loan.
 - is specific, because specific accounts receivable serve as collateral security for the
loan.

1. Notification Basis
- customers are notified to make their payments directly to the assignee.

2. Nonnotification Basis
- customers are not informed that their accounts have been assigned.

Note: *The assignee usually lends only a certain percentage of the face value of the
accounts assigned because the assigned accounts may not be fully realized.
The percentage may be 70%, 80% or 90%.
* The assignee charges interest for the loan, service charge or finance charge
and assignment.

Factoring of Accounts Receivable

- sale of accounts receivable on a WITHOUT RECOURSE NOTIFICATION BASIS.

Note: *In factoring, an entity sells its accounts receivable to a bank or finance entity
called a factor.
*A gain or loss is recognized – the difference between proceeds received and
carrying value.

1. Casual Factoring
- considered as ordinary sale of receivable.
- difference between sales price over book value is considered gain or loss.

2. Factoring with a continuing agreement

- there is a continuing agreement between the finance company and the entity.
- the factor assumes the credit and collection function.
- the factor usually charges a commission.
- the factor also withholds an amount as protection against customer’s returns and
allowances and other special adjustments (FACTORS HOLDBACK).

Note: Factor’s holdback is a receivable from factor and classified as current asset.

Notes Receivable
- are claims supported by formal promises to pay usually in the form of notes.

Note: When a promissory note matures and is not paid, it is said to be dishonored.

Measurement of Notes Receivable

1. Initial Measurement
a. short-term - @ face value

b. long-term
1. interest bearing - @ face value
2. noninterest bearing - @ present value
 2. Subsequent Measurement - @ amortized cost

Discounting of Notes Receivable

- means that the payee may obtain cash by indorsing it. Thus, legally the payee becomes
an endorser and the bank becomes an endorsee.

1. With recourse
- means that the endorser shall pay the endorsee (bank) if the maker dishonors the
note. This is the contingent liability or secondary liability of the endorser.

a. Conditional sale of Notes Receivable

- there is a need to recognize a contingent liability – “note receivable
discounted”.

Note: Note receivable discounted account is deducted from total notes receivable
when preparing the statement of financial position with disclosure of the contingent
liability.

b. Secured Borrowing
- the note receivable is not derecognized but instead an accounting liability is
recorded at an amount equal to the face amount of the note receivable
discounted.

2. Without recourse
- means that the endorser avoids future liability even if the maker refuses to pay the
endorsee on the date of maturity.

Terms in discounting of notes

1. Net Proceeds 5
- the discounted value of the note received by the endorser from the endorsee.

Net Proceeds = Maturity value – Discount

2. Maturity value 6
- the amount due on the note at the date of maturity.

Maturity Value = Princip al + Interest

3. Maturity date
- the date on which the note should be paid.

4. Principal
- the amount appearing on the face of the note. It is also referred to as FACE VALUE.
5. Interest 7
- the amount of interest for the full term of the note.

Interest = Principal x rate x time

6. Interest rate
- the rate appearing on the face of the note.

7. Time
- the period within which interest shall accrue.

8. Discount 8
- the amount of interest deducted by the bank in advance.

Discount = Maturity value x discount rate x discount period

9. Discount Rate
- the rate used by the bank in computing the discount.
- if no discount rate is given, the interest rate is safely assumed as the discount rate.

10. Discount period

- the period of time from the date of discounting to maturity date.
- the UNEXPIRED TERM of the note.