Lesson 1 - Cash and Cash Equivalents

Review Module 1 Cash and Cash Equivalents

P.M.G. Clamor August 24, 2011

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

to settle a liability for at least twelve months after the end of the reporting period.”

Included in cash:  Coins and bills in legal tender by BSP  Checks (subject to certain conditions)  Bank drafts  Money orders

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)

Types of checks:  Post-dated checks (checks dated on future date) – not part of cash and cash equivalents because they are not yet accepted by the bank for deposit and immediate encashment.  Not sufficient fund (NSF) checks – not part of cash and cash equivalents because the check has insufficient balance not enough for the amount written in the check.  Certified 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: o Manager’s check – certified by the manager of the bank o Cashier’s check – certified by the teller or cashier of the bank o Traveler’s check – certified for travel purposes of the depositor  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.  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. Example Analysis of a Check The date of the check is on October 15, 2011 and has an amount of P15,000. The check is not certified by the bank. Therefore:  Before October 15, 2011, the check is post-dated and the maker should have at least P15,000 in his account.  On October 15, 2011, if the maker has failed to have at least P15,000 in his account, the check would bounce or marked as NSF check. Once the check is deposited to the bank, the drawer will receive a notice of DAIF (drawn against insufficient funds)  After October 15, 2011, assuming the check has sufficient funds, it will be an antedated check.  On April 15, 2012 (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.

Unrestricted cash PAS 1 (Presentation of Financial Statements) provides that “an entity shall classify an asset as current when the asset is cash or a cash equivalent unless it is restricted from being exchanged or used

Cash equivalents – short and highly liquid instruments (three months before maturity) that are readily convertible to cash and so near their maturity that they present insignificant risk of change 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 Measurement  Cash is measured 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) Classification for investments  If term is three months or less, classified as cash equivalents  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 statements  If term is more than one year, classified as long-term investments which are non-current assets. Cash in a foreign bank  If not subject to foreign exchange restriction, they are 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. Cash fund set for a purpose  For use in current operations – classified as current asset. 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

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Review Module 1 Cash and Cash Equivalents

P.M.G. Clamor August 24, 2011

aside for use within one year after the reporting period, it will be reclassified as current asset. Bank overdraft – happens when there is a credit balance in the cash in bank account.  Bank overdrafts should not be offset against other bank accounts with debit balances, except: o The entity maintains two or more accounts in one bank (account title: cash, net of bank overdraft) o The entity maintains accounts in other banks if the amount is immaterial Compensating balance – minimum account balance that must be maintained in connection with borrowing arrangement with bank  If not legally restricted, compensating balance is part of cash  If legally restricted, compensating balance is reclassified as cash held as compensating balance. It can be current or non-current depending on the term of the loan 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 Accounts payable

xxx xxx

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. Stale checks – checks released by the company that has been expired Pro-forma Entry Cash Miscellaneous income # Cash Accounts payable

xxx xxx (if immaterial)

Loss from cash shortage xxx Cash short or over xxx Assuming investigation is unsuccessful Pro-forma entries for overage Cash xxx Cash short or over xxx Discovery of shortage # Cash short or over xxx Payable to cashier xxx Assuming the money is from cashier # Cash short or over xxx Miscellaneous income xxx Assuming there is no claim on overage Accounting for petty cash 1. Establishment of fund Imprest & Fluctating: Petty cash fund Cash in bank 2. Payment of expenses in PCF Imprest: No entry Fluctating: Expenses Petty cash fund 3. Replenishment of PCF Imprest: Expenses Cash in bank Fluctating: Petty cash fund Cash in bank

xxx xxx

xxx xxx

xxx xxx xxx xxx

xxx xxx (if material)

Issues in cash: Window dressing – opening the accounts even after the reporting period Lapping – practice used for concealing cash shortage, where it consists of misappropriating collections in customers. Kitting – practice used for concealing cash shortage through bank reconciliation. Accounting for cash shortage/overage Pro-forma entries for shortage: Cash short or over xxx Cash xxx Discovery of shortage # Due from cashier xxx Cash short or over xxx Assuming cashier is responsible for shortage #

4. Adjustment of expenses at the end of accounting period Imprest: Expenses xxx Petty cash fund xxx Fluctating: No entry 5. Increase (decrease) of PCF Imprest & Fluctating Petty cash fund Cash in bank # Cash in bank Petty cash fund

xxx xxx (increase) xxx xxx (decrease)

THE END

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