Cash and Cash Equivalents

MSU-GSC 2ND Sem., AY 2020-2021

Sources of PFRS

 PAS 1 Presentation of Financial Statements

 PAS 32 Financial Instruments: Presentation
 IFRS 9 Financial Instruments
 IFRS 7 Financial Instruments: Disclosures
 PAS 7 Statement of Cash Flows
Current Assets, defined
 Current assets. An asset should be classified as current
when it satisfies any of the following criteria:

 it is expected to be realized in, or is intended for sale or

consumption in, the entity’s normal operating cycle;
 it is held primarily for the purpose of being traded;
 it is expected to be realized within twelve months after the
reporting period; or
 it is cash or cash equivalent unless it is restricted from being
exchanged or used to settle a liability for at least twelve months
after the reporting period.
Definitions
 Cash is defined as cash on hand and demand deposits with
banks or other financial institutions
 Cash is a financial instrument, specifically, a financial asset,
meeting the definitions of financial instruments and financial asset
under PFRS
 As contemplated in accounting, 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 they are acceptable by bank for deposit and
immediate encashment.
Definition (cont’d.)

 Cash equivalents is defined as short-term, highly liquid

investments that are readily convertible to known amounts of
cash and which are subject to an insignificant risk of changes
in value.
 This term includes other forms of near-cash items as well as
demand deposits and liquid - short-term securities.
Definitions (cont’d.)
 Operating cycle. Average time between the acquisition of
materials or services and the final cash realization from the
sale of products or services.
Presentation & Disclosure
 In the classified statement of financial position—

 Cash is presented as current assets provided further that it is

clearly management’s intention that the cash be available for
current purposes.
 Cash which is restricted and not available for use within
one year of the reporting period is normally given separate
disclosure and included in noncurrent assets.
 For example, cash in a demand deposit account, being held
specifically for the retirement of long-term debts not maturing
currently, should be excluded from current assets and shown
as a noncurrent investment.
 The following cash items are included
in cash:
Cash on hand Cash in bank Cash fund
- This includes - This includes - Set aside for
undeposited cash demand deposit or current purpose
collections and other checking account such as
cash items awaiting and savings deposit ➢ petty cash fund
deposit such as
which are ➢ payroll fund
➢ customer’s checks
unrestricted as ➢ VAT fund
➢ cashier’s or
manager’s checks
to withdrawal. ➢ dividend fund
➢ traveler’s checks ➢ travel fund
➢ bank drafts ➢ interest fund
➢ money orders
Cash equivalent
 To justify inclusion with cash in the caption “cash and cash
equivalents”, however, cash equivalents must be available
essentially upon demand.
Cash equivalents
 Two attributes:
1. They should be “short term” in nature; that is, they are held
for meeting short-term cash commitments.
 In other words, an investment normally qualifies as cash equivalent only
if it has a short maturity, (three months or less) from the date of
acquisition.
Example
 A time deposit with a bank (or a fixed deposit, as is referred to in some countries)
with an original maturity of six months would not qualify as cash equivalent.
2. They should be “highly liquid investments” that are “readily
convertible to known amounts of cash and are subject to an
insignificant risk of changes in value.”
Cash equivalents
 The standard further provides that only highly liquid investments
that are acquired three months before maturity can qualify as cash
equivalents.

 Examples of cash equivalents:

 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
 Thus, a BSP treasury bill that was purchased one year ago cannot qualify
as cash equivalent even if the remaining maturity is three months or less.
Investment of excess cash
Classification:

 If the term is three months or less, such instruments are

classified as cash equivalents
 If the term is more than 3 months but within one year, such
investments are classified as financial assets or temporary
investments and presented separately as current assets.
 If the term is more than one year, such investments are
classified as noncurrent or long term investments.
 If such investments become due within one year from the end
of the reporting period, they are reclassified as current or
temporary investments.
Foreign Currency

 Not subject to any foreign exchange restriction –

included in cash

 Subject to foreign exchange restriction – noncurrent

asset and the restriction clearly indicated
Cash fund for certain purpose
 Set aside for use in current operations or for the payment
of current obligation – cash and cash equivalents
 If the cash fund is set aside for noncurrent purpose or
payment of noncurrent obligation – long term
investment
 Examples are sinking fund, preference share redemption fund,
contingent fund, insurance fund and fund for acquisition or construction
of property, plant and equipment.
Compensating balances, defined

 generally takes the form of minimum checking or demand

deposit account balance that must be maintained in
connection with a borrowing arrangement with a bank.

 cash amounts that are not immediately accessible by the

owner.
 Not legally restricted Legally restricted
- informal compensating - formal compensating balance agreement
balance agreement
- part of cash The portion of an entity’s cash account that
is held as a compensating balance must be
segregated from cash and
• shown as a • shown as a current
noncurrent asset asset if the related
if the related borrowings are
borrowings are current liabilities,
noncurrent but under no
liabilities. circumstances
should these be
included in the
caption “cash.”
Cash in savings accounts subject to a
statutory notification requirement and
cash in certificates of deposit maturing
during the current operating cycle or
within one year
 May be included as current assets, but should be
separately captioned
 will be included in the short-term investments
Bank overdraft
 cash in bank account has a credit balance
TREATMENT
 Classified as current liability and should not be offset against other
bank accounts with debit balances
 When an entity maintains two or more accounts in one bank and
one account results in an overdraft, such can be offset against the
other bank account with debit balance in order to show “cash, net of
bank overdraft
 An overdraft can also be offset against the other bank account if
the amount is not material
 Undelivered or unreleased check

 Post-dated checks delivered

 Customer’s
 Company’s

 Stale checks/ checks long outstanding

 Window dressing

 Lapping

 Kiting
 Petty cash and other imprest cash accounts are
usually presented in financial statements with other cash
accounts.
 Due to materiality considerations, under current rules these
need not be set forth in a separate caption unless so desired.
Transaction Imprest system Fluctuating system
Establishment of PCF ----- xx PCF ----- xx
fund Cash in bank -----xx Cash in bank -----xx
Disbursement No entry Expenses ----- xx
PCF --------------xx
Replenishment Expenses ----- xx PCF ----- xx
Cash in bank -----xx Cash in bank -----xx
If fund is not Expenses ----- xx No entry
replenished at the PCF --------------xx
end of the reporting (reversing entry is required
period beginning of the next
accounting period)
Valuation
 Cash is generally valued at face amount.

 Cash in foreign currency is valued at Philippine peso using

the current exchange rate as of the balance sheet date.

 Cash in bank or financial institutions having financial

difficulty or in bankruptcy should be shown at its estimated
realizable or recoverable value.
What is Bank Reconciliation
 is a 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
 Reconciling Items
Book reconciling items Bank reconciling items
1. Credit memos – items not 1. Deposits in transit – collections
representing deposits credited by already recorded by the depositor
the bank to the account of the as cash receipts but not yet
depositor but not yet recorded by reflected on the bank statement.
the depositor as cash receipts.
Includes:
Examples: A. collections already forwarded
A. notes receivable collected by to the bank for deposit but too
the bank in favour of the late to appear in the bank
depositor statement
B. proceeds of bank loan B. undeposited collections; cash
C. matured time deposits on hand awaiting deposit
transferred by bank to the
current account
1. Debit memos – items not representing check 1. Outstanding checks –are checks already
paid by the bank which are charged or debited recorded by the depositor as cash
by the bank to the account of the depositor disbursements but not yet reflected on the
and not yet recorded by the depositor as cash bank statement.
disbursement
Includes:
Examples: A. Checks drawn and already given to payees
A. No sufficient fund checks – checks but not yet presented for payment
deposited by returned by the bank because
of insufficiency of fund (DAIF) ** Certified checks are checks where the
B. Technically defective checks – checks bank has stamped on its face the word
deposited but returned by the bank because accepted or certified indicating sufficiency
of technical defects such as absence of of fund. These should be deducted from
signature, erasures not countersigned, the total outstanding checks (if included
mutilated checks, conflict between amount therein)
in words and amount in figures
C. Bank service charge – charges for interest,
collection, checkbook, penalty
D. Reduction of loan – amount deducted
from the current account of depositor in
payment for loan
2. Errors 2. Errors
 Forms of Bank Reconciliation
Adjusted balance method Book to bank method Bank to book method
- The book balance and the bank - The book balance is reconciled - The bank balance is reconciled
balance are brought to a correct with the bank balance or the with the book balance or the
cash balance that must appear on book balance is adjusted to equal bank balance is adjusted to equal
the balance sheet to the bank balance the book balance
- Preferred method

Proforma Reconciliation

Book balance xx Book balance xx Bank balance xx

Add: Credit memos xx Add: Credit memo xx Add: Debit memo xx
Less Debit memos (xx) Outstanding check xx xx Deposit in transit xx xx
Adjusted book balance xx Less: Debit memo xx Less: Credit memo xx
Deposit in transit xx (xx) Outstanding checks xx (xx)
Bank balance xx Bank balance xx Book balance xx
Add: Deposit in transit xx
Less: Outstanding checks (xx)
Adjusted bank balance xx

NOTE: Only book reconciling items

need adjusting entries.
Errors and their treatment
 Understatement of cash receipts on the book of depositor
Dr. Cash in bank..............xx
Cr. Accounts receivable.............xx
 Understatement of checks drawn by depositor
Dr.Accounts payable.............xx
Cr. Cash in bank........................xx
 Deposit of another entity is credited by bank to the account of the
depositor
 No adjustment is necessary on the book of the depositor; deduction from bank balance

 Check of another entity charged to the account of the depositor

 No adjustment is necessary on the book of the depositor: addition to bank balance
Proof of Cash
 A proof of cash is an expanded reconciliation that includes
proof of receipts and disbursements.

 This approach may be useful in discovering possible

discrepancies in handling cash particularly when cash receipts
have been recorded but have not been deposited

 The procedures followed for a one – date reconciliation are

the same for a two – date reconciliation.
 Computation of deposit in transit (DIT)

DIT – beginning of the month xx

Add cash receipts deposited during the month xx

Total deposits acknowledged by bank xx

Less deposits acknowledged by bank during the month xx

Deposit in transit – end of the month xx

Computation of outstanding checks(OC)

OC – beginning of the month xx

Add checks drawn by depositor during the month xx

Total checks to be paid by bank xx

Less checks paid by bank during the month xx

OC – end of the month xx

 End of
Presentation