2 Cash and Cash Equivalents Summary Reviewer
2 Cash and Cash Equivalents Summary Reviewer
2 Cash and Cash Equivalents Summary Reviewer
BLUE NOTES
CHAPTER
2 S
L
Cash Cash Equivalents
Definition Definition
It includes money and any other These are short-term and highly liquid investments that are readily
negotiable instrument that is payable in convertible into cash and so near their maturity that they present
money and acceptable by the bank for insignificant risk of changes in value because of changes in interest rates.
deposit and immediate credit. (PAS 7, par. 6)
Only highly liquid investments that are acquired three months before
Checks maturity can qualify as cash equivalents.
Bank Drafts
Money Orders 3-month BSP Treasury Bill
Petty Cash Fund BSP Treasury Bill (more than 3 months) purchased 3 months before
Payroll Fund maturity date
Travel Fund 3-month Time Deposit
Interest Fund 3-month Money Market Instrument
Dividend Fund Preference shares (with specified redemption date) purchased 3
Tax Fund months before redemption date
Sinking Fund Equity securities – no maturity date
Preferred Redemption Fund
Plant Expansion Fund
Insurance Fund
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.
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.
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.
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
Solution:
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