Review Materials

Prepared by:
Junior Philippine Institute of
Accountants UC-Banilad Chapter
F.Y. 2019-2020
Cash and Cash Equivalents
 WHAT IS CASH?
CASH

From the point of view of a layman, “cash” simply means money.

Money is the standard medium of exchange in business transactions. It refers to the currency and coins
which are in circulation and legal tender.

However, in the accounting parlance, the term "cash" has a special and broader meaning. It connotes
more than money.

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 these are acceptable by the
bank for deposit or immediate encashment.

UNRESTRICTED CASH

 There is no specific standard in dealing with “cash”.

The only guidance is found in PAS 1, paragraph 66, which provides that "an entity shall classify an asset
as current when it is cash or a cash equivalent unless it is restricted from being exchanged or used to
settle a liability for at least twelve months after the end of reporting period."
 Unrestricted Cash

▪ Accordingly, to be reported as

“
"cash" as a current asset,
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, contractual or
otherwise.
▪ Thus, unrestricted cash
includes cash on hand, cash in
bank and cash fund set aside
for current purposes.

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WHAT IS THE MEANING OF CASH EQUIVALENTS?
CASH EQUIVALENTS

PAS 7, paragraph 6, defines cash equivalents as 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 further states that "only highly liquid investments that are acquired three months before
maturity can qualify as cash equivalents".

 Examples of cash equivalents are:

a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before data of maturity
c. Three-month time deposit
d. Three-month money market instrument

Equity securities cannot qualify as cash equivalents because shares do not have a maturity date.

However, preference shares with specified redemption date and acquired three months before
redemption date can qualify as cash equivalents.

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 Valuation of Cash in the
Statement of Financial Position
• Cash is valued at face value.
• Cash in foreign currency is valued at the current exchange rate.

If a bank or financial institution holding the funds of the entity is in bankruptcy or financial difficulty,
cash should be written down to estimated realizable value if the amount recoverable is estimated to be
lower than the face value.

Financial Statement Presentation And Classification Of Cash And Cash Equivalents

Explained

• The caption “cash and cash equivalents” should be shown as the first item among the current assets.
• This caption includes all cash items, such as cash on hand, cash in bank, petty cash fund and cash
equivalents which are unrestricted in use for current operations.

However, the details comprising the “cash and cash equivalents” should be disclosed in the notes to
financial statements.

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Classification of Investments in time deposit, money
market instrument, and treasury bills
Investments in time deposit, money market instruments and treasury bills should be classified as
follows:
 If the term is three months or less, such instruments are classified as cash equivalents and
therefore included in the caption “cash and cash equivalents”.
 If the term is more than three months but within one year, such investments are classified as
short-term or temporary investments and presented separately as current assets.
 If the term is more than one year, such investments are classified as long-term investments.

However, if such investments become due within one year from the end of the reporting period, they
are reclassified as temporary investments.

TREATMENT OF FOREIGN CURRENCY

• Cash in foreign currency shall be translated to Philippine pesos using the current exchange rate.
Deposits in foreign countries which are not subject to any foreign exchange restriction are included in
“cash”. Deposits in foreign bank which are subject to foreign exchange restriction, if material, shall be
classified separately among noncurrent assets and the restriction clearly indicated.
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CASH FUND Set Aside for a Certain Purpose

If the cash fund is set aside for use in current operations, it is a current asset. It is included as part of
cash and cash equivalents.
 Examples of such fund are petty cash fund, payroll fund, travel fund, interest fund, dividend
fund and tax fund.

On the other hand, if the cash fund is set aside for noncurrent purposes, it is shown as long-term
investment.
 Examples of such fund are sinking fund, preferred redemption fund, contingent fund, insurance
fund and fund for acquisition or construction of property, plant and equipment.

Classification of a cash fund as current or noncurrent should parallel the classification of the
related liability.

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 BANK OVERDRAFT
When the cash in bank account has a credit balance, it is said to be an overdraft. The credit balance in
the cash in bank account results from the issuance of checks in excess of the deposits.

A bank overdraft is classified as a current liability and should not be offset against other bank
accounts with debit balances.

However, when the entity maintains two or more accounts in one bank and one account results in an
overdraft, such overdraft may be offset against the other bank account with a debit balance.

Moreover, an overdraft may also be offset against the other bank account if the amount is not material.

Compensating Balance and its Classification in the Statement of Financial Position

A compensating balance is the minimum checking or demand deposit account balance that must be
maintained in connection with a borrowing arrangement with a bank.

For example, an entity borrows P2,000,000 from a bank and agrees to maintain 10% compensating
balance or P200,000 in a current ot checking account.

In effect, this arrangement results in the reduction of the amount borrowed because the compensating
balance provides a source of funds to the bank as partial compensation for the loan extended.

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TREATMENT OF COMPENSATING BALANCE
 If the deposit is not legally restricted as to withdrawal by the borrower because of an informal
compensating balance agreement, the compensating balance is part of cash.
 If the deposit is legally restricted because of a formal compensating balance agreement, the
compensating balance is classified separately as “cash held as compensating balance” under
current assets if the related loan is short-term.
 If the related loan is long-term, the compensating balance is classified as noncurrent
investment.

In many instances and in accordance with normal banking practices, deposits are not legally
restricted because most often compensating balance agreements are informal and therefore not
legally binding.

The amount and nature of such agreements whether legally or not legally restricted shall be fully
disclosed in the notes to financial statements.

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Terms to REMEMBER:
1. An undelivered or unreleased check is one that is merely drawn and recorded but not given to
the payee before the end of reporting period.
The unreleased check shall not be treated as outstanding check. Accordingly, the original entry for the
payment shall be reversed so as to restore the cash balance and the related liability account.

2. A postdated check delivered is a check drawn, recorded, and already given to the payee but it
bears a date subsequent to the end of reporting period.
The original entry recording a delivered postdated check shall also be reversed and therefore restored
to the cash balance.

3. A stale check is a check not encashed by the payee within a relatively long period of time.

4. 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.

5. Lapping consists of misappropriating a collection from one customer and concealing this
defalcation when collection is made from another customer.

6. Kiting is a transfer of cash from one bank to another bank. Kiting is usually employed at the end of
the month.

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TWO Systems of Handling Petty Cash
Petty cash is a small amount of cash that is kept on the company premises to pay for minor cash
needs. Examples of these payments are office supplies, cards, flowers, and so forth. Petty cash is stored
in a petty cash drawer or box near where it is most needed. A separate accounting system is used to
track petty cash transactions.

1. Imprest fund system – Petty cash expenses are recorded upon replenishment. The amount
of the replenishment is normally equal to the petty cash disbursements.
The imprest system is an internal control device for cash which requires that all cash receipts should be
deposited intact and all cash payments should be made by means of check. Small disbursements are
paid out of the petty cash fund.
2. Fluctuating fund system – Petty cash expenses are immediately recorded. The amount of
replenishment may be equal to, more or less than, the petty cash disbursements.

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 End of Topic
Please see complementary test bank for
practice problems and theories.

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 Dear, you.
Always be in pursuit for
the one you have not yet
become. Keep going!
Love,
Your UCB-JPIA family

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Reference:

Valix, C. T., Peralta, J. F., & Valix, C. A. (2011). Financial accounting.

Manila, PH: GIC Enterprises.

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