Cash Cash Equivalents: Practical Accounting 1 Theory of Accounts

CHAPTER
Cash Cash Equivalents

Definition It includes money and any other negotiable instrument that is payable in money and
acceptable by the bank for deposit and immediate credit.
✓ Checks ✓ Bank Drafts ✓ Money Orders ✓ Petty Cash Fund ✓ Payroll Fund ✓ Travel
Fund ✓ Interest Fund ✓ Dividend Fund ✓ Tax Fund ✘ Sinking Fund ✘ Preferred Redemption
Fund ✘ Plant Expansion Fund ✘ Insurance Fund
Definition These are 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. (PAS 7, par. 6) Only highly liquid investments that are acquired
three months before maturity can qualify as cash equivalents.
✓ 3-month BSP Treasury Bill ✓ BSP Treasury Bill (more than 3 months) purchased 3 months
before
maturity date ✓ 3-month Time Deposit ✓ 3-month Money Market Instrument ✓ Preference
shares (with specified redemption date) purchased 3
months before redemption date ✘ Equity securities – no maturity date
Valuation
In Local Currency In Foreign Currency If Recoverable Value < Face Value* = Face Value =
Current Exchange Rate = Estimated Realizable Value
Note: *Cash in bank or in financial institutions having financial difficulty or in bankruptcy should be shown at its
recoverable value.
Financial Statement Presentation
Aggregate cash and cash equivalents should be shown as the 1st line item among the current
assets. Details comprising the cash and cash equivalents should be disclosed in the notes to
financial statements.
Financial Statement Classification
Classified as Cash and Cash Equivalents Classified as a separate line item 1.
Unrestricted/Current Use Restricted/Noncurrent Use → Long-term Investment Note: Classification
of cash fund as current or noncurrent should parallel the classification of the related liability.
If material, foreign bank deposits subject to foreign exchange restriction shall be classified separately among
noncurrent assets and restriction clearly indicated. 2.
Investment in Time Deposit, Money Market
Instrument and Treasury Bills
If Term ≤ 3 months 3 months < Term ≤ 1 year → Short-term Investment
Term > 1 year → Long-term Investment Note: There is an assumption of 3 month-term when the problem
does not specify.
Practical Accounting 1 Theory of Accounts
2
USL
LUE NOTES
B
Chapter 2 – Cash and Cash Equivalents USL Blue Notes 9
3. General Rule: Bank overdraft (Credit Balance Bank Account) → Current

Liability
Exception: It can be an offset against other bank account if the amount is immaterial and/or when
the entity maintains 2 or more accounts in 1 bank.
4. Informal Compensating Balance Formal Compensating Balance

─ not legally restricted ─ legally restricted
If related loan is short-term → Cash held as compensating balance
If related loan is long-term → Noncurrent Investment
Note: In the absence of any information, compensating balance is always considered not available for an
unrestricted use.
Restoration of Cash Balance from: Check as payment Check as receipt Unreleased Check ↑Cash
↓Account Payable ↓Cash ↑Account Receivable Postdated Check ↑Cash ↓Account Payable ↓Cash ↑Account
Receivable Stale Check* ↑Cash ↓Account Payable ↓Cash ↑Account Receivable Note: *A check becomes stale if not
encashed within 6 months from the issuance date. However, the entity may issue a “stop payment order”
for cancelation of stale check even for less than 6
months.
Misstatement Practices Concerning Cash

Balance:
1. Window Dressing is a practice of opening the books of accounts beyond the close of the accounting
period for
the purpose of showing a better financial position and performance. 2. Lapping consists of
misappropriating a collection from one customer and concealing this defalcation when
collection is made from another customer. 3. Kiting is a transfer of cash from one bank to
another bank usually employed at the end of the month.
Petty Cash
Fund
1. Imprest Fund
System
Petty cash expenses are recorded upon replenishment.
Replenishment amount = Petty cash disbursements 2.
Fluctuating Fund System
Petty cash expenses are immediately recorded.
Replenishment amount = or > or < Petty cash
disbursements
Bank
Reconciliation
Book reconciling
items
1. Credit Memos – deposits credited by the bank; not yet recorded as cash receipts in books 2.
Debit Memos – checks debited by the bank; not yet recorded as cash disbursements in books
Bank reconciling items
1. Deposits in transit – already recorded as cash receipts in books; not yet credited by the bank 2.
Outstanding checks – already recorded as cash disbursements in books; not yet debited by the
bank Forms 1. Adjusted balance method – book balance and bank balance → correct cash
balance
2. Book to bank
method 3. Bank to
book method
Proof of cash is an expanded reconciliation in that it includes proof of receipts and

disbursements.
Theory of Accounts Practical Accounting 1

10 USL Blue Notes Chapter 2 – Cash and Cash Equivalents
Illustrative
Problem
1. On December 31, 2014, the cash account of Maktech Company showed the following
details:
Undeposited collections 60,000 Cash in bank – PCIB checking account 500,000 Cash in bank –
PNB (overdraft) (50,000) Undeposited NSF check received from the customer, dated Dec. 1, 2014
15,000 Undeposited check from a customer, dated Jan. 15, 2015 25,000 Cash in bank – PCIB
(fund for payroll) 150,000 Cash in bank – PCIB (saving deposit) 100,000 Cash in bank – PCIB
(money market instrument, 90 days) 2,000,000 Cash in foreign bank (restricted) 100,000 IOUs
from officers 30,000 Sinking fund cash 450,000 Listed shares held as trading investment 120,000
Petty cash fund (all funds were reimbursed on 12/31/2014) 50,000 Time deposit (due February
1,2015) 250,000 Treasury bills 1,000,000 Traveler’s check 50,000
Solutio
n:
Undeposited collections 60,000 PCIB checking account 500,000 PCIB payroll fund 150,000 PCIB
saving deposit 100,000 Petty cash fund 50,000 Time deposit 250,000 Treasury bills 1,000,000
Traveler’s check 50,000 PCIB money market 2,000,000 Total cash and cash equivalents
4,160,000
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CHAPTER

Cash Cash Equivalents

3. General Rule: Bank overdraft (Credit Balance Bank Account) → Current

4. Informal Compensating Balance Formal Compensating Balance

Misstatement Practices Concerning Cash

Proof of cash is an expanded reconciliation in that it includes proof of receipts and

Theory of Accounts Practical Accounting 1

Practical Accounting 1 Theory of Accounts

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