Cash and Cash Equivalents PDF

 

CASH AND CASH EQUIVALENTS

Cash   includes money and any other negotiable instrument that is Cash payable in money and acceptable by the bank for deposit and immediate credit. To be reported as cash, an item must be unrestricted in use. This means that the cash must be readily available in the payment of current obligations and not be subject to any restrictions. Included in cash:   Coins and bills in legal tender by BSP 

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Checks (subject to certain conditions) Bank drafts Money orders (money market funds)

Types of checks: checks: 1.  Post-dated checks checks - not part of cash and cash equivalents 2.  Not sufficient fund (NSF) checks  checks  –  not part of cash and cash equivalents 3.  Certified checks  checks  – – part of cash and cash equivalents because it is certified and insured by the bank to have sufficiency of fund backed in the check. Examples of certified checks include: a. Manager’s check – certified by the manager of the bank b. Cashier’s check – certified by the teller or cashier of the bank c. Traveller’s check – certified for travel purposes of the depositor

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Antedated checks (checks dated on past date)  –  part of cash and cash equivalents provided that they are to be encashed or deposited to the bank six months following the date of the check.

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Stale checks (checks long outstanding)  – not part of cash and cash equivalents because it is deemed to be expired. Checks must be deposited or encashed six months following the date of the check.

Cash equivalentsequivalents- 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 (Statement of Cash Flows) definition] Included in cash equivalents:   Three-month BSP treasury bill   Three-year BSP treasury bill purchased three months before maturity date   Three-month bank deposit   Three-month money market instrument   Preference shares with specified redemption date and acquired three months before redemption date   Certificates of deposit (having original maturities of 90 

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days or less) Measurement value.    Cash is measured at face at face value.    Cash in foreign currency is measured at current exchange date (balance sheet date)   Cash is measured at estimated realizable value if bank is in financial difficulty or bankruptcy and if recoverable amount is lower than face value (currently, cash account is insured up to P500,000) 

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Classification for investments   If term is three months or less, classified as cash equivalents 

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If term is more than three months but within one year, classified as marketable securities, or short-term investments, and are separate current assets in the financial f inancial statements If term is more than one year, classified as long-term investments which are non-current assets.

Cash in a foreign bank t hey are   If not subject to foreign exchange restriction, they included as cash.   If subject to foreign exchange restriction and material, they are reclassified as cash restricted in foreign bank which are non-current assets. 

Example Analysis of a Check The date of the check is on October Oct ober 15, 2014 and has an amount of P15,000. The check is not certified by the bank. Therefore:   Before October 15, 2014, the check is post-dated and the maker should have at least P15,000 in his account.   On October 15, 2014, if the maker has failed to have at least P15,000 in his account, the check would bounce or marked as 

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NSF check. Once the check is deposited to the t he bank, the drawer will receive a notice of DAIF (drawn against insufficient funds) After October 15, 2014, assuming the check has sufficient funds, it will be an antedated check. On April 15, 2015 (six months after the check date), assuming the check has not been deposited nor encashed, it is deemed as expired and it will become a stale check.

The following cash items are included in “cash.” Cash on hand  – cash collections and cash items (checks, bank   drafts and money orders) awaiting bank deposit   Cash in bank  –  demand or savings deposit, or checking account which are unrestricted as to withdrawal Cash fund  –  cash set aside for current purposes (petty cash   fund, payroll fund, dividend fund.

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Cash fund set for a purpose   For use in current operations  – classified as current asset. 

 

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Examples include: petty cash fund, payroll fund, travel fund, interest fund, dividend fund, and tax fund. For use in non-current operations  – classified as long-term investment . Examples include sinking fund, contingent fund, fund for acquisition of PPE, etc. If the fund is set aside for use within one year after the reporting period, it will be reclassified as current asset.  

Items Not Cash or Cash Equivalents 1.  Time certificates of deposit (if original maturity over 90 days) 2.  IOU’s from officers  3.  Sinking Fund Cash 4.  NSF checks and post-dated checks- it should be reverted r everted back to A/R 5.  Postage stamps 6. 

Cash in closed bank –classify realizable value as other receivables

 

Bank Overdraft

   

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When cash in bank account has a credit balance.

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It is classified as a current liability liabil ity and should not be offset against other bank accounts with debit balances

 

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Exception to the rule: rule: If an entity maintains two or more bank accounts in one bank and one account results in an overdraft, such overdraft can be offset against the t he other bank account with debit balance.  balance.  

Compensating Balance- Generally takes the form minimum checking or demand deposit account balance that must be maintained in connection with a borrowing arrangement with a bank. Classification of Compensating Balance:

a)  If the deposit is not legally restricted as to withdrawal by the

ISSUES IN CASH Window Dressing  Dressing  - Opening the accounts even after the reporting period. In a broad sense, WD is any deliberate misstatement of assets, liabilities, equity, income and expenses.  expenses.   Lapping - Used for concealing cash shortage. Practice used for concealing cash shortage, where it consists of misappropriating collections in customers. It consists of misappropriating a collection from one customer and concealing the defalcation by applying a subsequent collection made from another customer. Involves series of postponements of the entries for the collection of receivables, possible because of poor internal control. Kitting itting   - 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. No entry is made for both transactions.  transactions.  

borrower because of an informal compensating balance cash   agreement = part of cash 

b)  If the deposit is legally restricted because of a formal compensating balance agreement = classified separately as “cash held as compensating balance” balance”  under current assets if

the related loan is short-term

c)  If the related loan is long term = classify as noncurrent investment

IMPREST SYSTEM  IMPREST SYSTEM - 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. c heck.   Petty Cash FundFund- is money set aside to pay small expense which cannot be conveniently paid by means of check. There are two methods of handling the petty cash, namely

Undelivered checks – checks that is drawn and recorded but is not given to payees; it is still cash of the company. Pro-forma Entry Cash xxx Accounts payable xxx

I. IMPREST FUND SYSTEM

Post-dated checks delivered  – checks that is sent to payees but has a date subsequent in the reporting period; it is still cash of the company.

2. Payment of expenses out of the fund NO JOURNAL ENTRY (memo entries only)

Stale checks – checks released by the company that has been expired Pro-forma Entry Cash xxx Miscellaneous income xxx (if immaterial) Cash xxx Accounts payable xxx (if material)  material)   ILLUSTRATION – KIESO, ET AL

Journal entries: 1. To establish the fund: Petty Cash fund Cash in bank

3. Replenishment of petty cash payments: Expenses Cash in bank

xx xx

xx xx

4. Year-end adjustment to adjust the unreplenished expenses in order to estate the correct petty cash balance: Expenses xx Petty Cash fund

xx

Note: The adjustment is to be reversed at the BEG of the next accounting period so that normal replenishment procedures may be followed. 5. An increase in the fund is recorded as follows: Petty Cash fund xx Cash in bank

xx

6. A decrease in the fund is recorded as follows: Cash in Bank xx Petty Cash fund

xx

 

 

II. FLUCTUATING FUND SYSTEM   Petty cash disbursements are immediately recorded.   The checks drawn to replenish the fund do not necessarily

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equal the petty cash disbursements. 1. To establish the fund: Petty Cash fund Cash in bank

xx

The cash overage is treated as miscellaneous income if there is no claim on the same , the entry is: Cash short or over Miscellaneous income

xx xx

3. An increase in the fund is recorded as follows: Petty Cash fund xx Cash in bank

xx

4. Year-end adjustment:  necessary because the petty cash expenses are NO adjustment  necessary recorded outright. 5.  A decrease in the fund is recorded as follows: Cash in Bank xx Petty Cash fund

xx xx

Note: Whether it is a cash shortage or cash overage, the offsetting account is cash short or over account. Such account should be adjusted when statements are prepared.

xx

2. Payment of expenses out of the fund : Expenses Petty Cash fund

 Accounting for cash ov  Accounting overage erage The entry to record cash overage is: Cash Cash short or over

Where the cash overage is properly found to be the money of the cashier , the entry is: Cash short or over Payable to cashier

BANK RECONCILIATIONS Bank reconciliation is a statement which brings into agreement the cash balance per book and cash balance per bank.  bank.   The reconciliation compares the amount of cash shown on the monthly bank statement  with the amount of cash reported in the general ledger.

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RECONCILING ITEMS:

ACCOUNTING FOR CASH SHORTAGE/OVERAGE SHORTAGE/OVERAGE Occasional errors may cause the petty cash fund to be out of balance. The sum of the cash and receipts will differ from the correct Petty Cash balance. This might be the result of simple mistakes, such as math errors in making change, or perhaps someone failed to provide a receipt for an appropriate expenditure. Whatever the cause, the available cash must be brought back to the appropriate level.   level.

1. 

Book Reconciling Items: a)  Credit memos- refer to items not representing deposits credited by the bank to the account of the depositor but not yet recorded by the depositor as cash receipts. Examples:   N/R collected by bank in favor of the depositor and 

 

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Accounting for cash shortage/overage Cash count < balance per book = cash c ash shortage

b)  Debit memos- refer to items w/c are charged or debited by

Cash count > balance per book = cash c ash overage

the bank to the account of the depositor but not yet recorded by the depositor as cash disbursements. Examples:   NSF checks   Technicall Technically y defective checks   Bank service charges   Reduction of loan- payment of loan

Accounting for cash shortage

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The entry to record cash shortage is: Cash short or over Cash

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xx

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xx

Note: The cash short or over account is only a temporary or suspense account. When financial statements are prepared, the same should be adjusted. Hence,  If the cashier is responsible  for cash shortage, the adjustment is: Due from cashier Cash short or over

credited to the account of the depositor Proceeds of bank loan credited to the account of the depositor Matured time deposits transferred by the bank to the current account of the depositor

If reasonable efforts fail to disclose the cause of the shortage, the adjustment is: Loss from cash shortage Cash short or over.

c) 

2. 

Errors

Bank Reconciling Items: a)  Deposits in transit – are collections already recorded by the depositor as cash receipts but not yet reflected on the bank statement. b)  Outstanding checks- already recorded by the depositor as cash disbursements but not yet reflected on the bank statement.

 

Note: certified check should be deducted from outstanding check (if included therein) because they they are no longer outstanding for bank recon purposes.

c) 

Errors rrors  

SEVERAL FACTORS BRING ABOUT THIS DIFFERENTIAL a. 

Deposits in transit = Funds sent by the depositor to the bank that have not been recorded by the bank and deposits made after the bank's cutoff date will not be included in the bank statement. In both cases, the balance per the depositor's records will be higher than those of the bank.

b. 

Outstanding checks = Checks written for payment by the depositor that have not been presented to the bank will result in a higher balance per bank records than per depositor records.

c. 

Service charges = Service charges are deducted by the bank. The depositor will not deduct this amount from its records until it is made aware of the charge, usually in the following month. Balance per books is overstated until this amount is subtracted.

d. 

Bank collections = the bank may make collections on the depositor's behalf, increasing the depositor’s  bank balance. If the depositor is not aware the collection was credited to its balance, the balance per depositor's records will be understated.

Proforma Reconciliation: Adjusted Balance Method ABM means that the book balance and the book balance are adjusted to equal correct cash balance. Book Balance  Balance 

XX

Add: Credit Memos

XX

Total

XX

Less: Debit Memos

XX

Adjusted Bank Balance  Balance  

XX

Bank Balance  Balance 

XX

Add: Deposits in transit

XX

Total

XX

Less: Outstanding Checks

XX

Adjusted Bank Balance  Balance  

XX

Note: Errors will have to be analysed for proper treatment. But errors are reconciling items of the party which committed them.