CHAPTER 1 - CASH AND

CASH EQUIVALENTS
 LEARNING CONTENTS:
LEARNING OBJECTIVES:
1. Define cash and identify the 1. Cash and Cash
items that are included in the Equivalents
“Cash and Cash Equivalents”
line item. 2. Accounting for Petty
2. Account for petty cash funds
and cash shortages/overages. Cash Funds
DEFINITION OF CASH

• Cash is money or its equivalent that is readily available for

unrestricted use.

Examples:
a. Cash on hand – refers to undeposited collections awaiting
deposit and other current funds held as of the reporting date.
b. Cash in bank – refers to deposits in banks that are available
for immediate withdrawal and unrestricted use.
ILLUSTRATION 1
Which of the following will be treated as CASH of ABC Co.?
1. Coins and Currencies
2. Checks (Cashier’s Checks, Personal Checks, Manager Checks, Traveler's
Checks, and Certified Checks received from customers or other external parties.
3. Bank Drafts
4. Money Orders
5. Petty Cash Fund
6. Revolving Fnd
7. Payroll Fund
8. Change Fund
9. Dividend Fund
10. Tax Fund
11. Travel Fund
12. Travel Fund
13. Interest Fund
ILLUSTRATION 2

Which of the following will be treated as CASH of ABC Co.?

1. Postdated checks
2. IOUs or Advances to Employees
3. Sinking Fund
4. Plant Expansion Fund
5. Depreciation Fund
6. Preference Share Redemption Fund
7. Contingency Fund
8. Insurance Fund
9. Postage Stamps
POST-DATED CHECKS AND UNRELEASED
CHECKS
• Postdated checks received from customers are excluded from
cash but rather remains as account receivable.

• Postdated checks drawn are included in cash and at the same

time remains as accounts payable.

• Unreleased checks drawn are included in cash and at the same

time remains as accounts payable.

• Unused Credit Line is not included as cash but rather disclosed

only in the notes.

• Stale Checks issued are included in cash.

CASH EQUIVALENTS

• Cash equivalents are “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.” (PAS 7 Statement of Cash Flows)

• Only highly liquid investments that are acquired 3 months or

less before maturity can qualify as cash equivalents.
TREASURY BILLS AND TREASURY NOTES

• Treasury Bill is a short-term obligation issued by the

government at a discount. Treasury Bills normally have a
maturity of 90 days to less than a year.

• Treasury Notes and Treasury Bonds are long term

obligations issued by the government. Treasury notes have
a maturity of 1 year to less than 10 years. Treasury bonds
have a maturity of 10 years or more.
MONEY MARKET INSTRUMENT/COMMERCIAL
PAPERS AND 3-MONTH TIME DEPOSIT

• Money Market instruments and Commercial Papers

acquired 3 months before maturity date may qualify as a
cash and cash equivalent.

• Time deposits may qualify as a cash and cash equivalent.4

• Checks and Bank Drafts are not cash equivalent but are
recorded as cash

• Redeemable preference shares that have a mandatory

redemption which are acquired 3 months or less before
their specified redemption date
FINANCIAL STATEMENT PRESENTATION

• Items of cash and cash equivalents are aggregated and presented

in the statement of financial position under a single line item
described as “Cash and cash equivalents.” and are normally
presented as current assets.
MEASUREMENT

• Cash is measured at face amount.

• Cash denominated in foreign currency is translated at the
current exchange rate as of reporting date.
• Cash maintained in a bank undergoing bankruptcy is
excluded from cash and presented as receivable measured
at realizable value.
COMPENSATING BALANCE

• Compensating balances that are legally restricted as to

withdrawal by the borrower are excluded from cash.
• Compensating balances that are not legally restricted
as to withdrawal are included in cash.
• Whether restricted or not, compensating balances are
disclosed in the notes.
ILLUSTRATION 3
The books of ABC Co. show the following balances at December 31, 20x1:
● Cash on Hand – P100,000
● Cash in Bank – Current Account – P350,000
● Cash in Bank – Peso Savings Deposit – P2,000,000
● Cash in Bank – Dollar Deposit (Unrestricted) - $100,000
● Cash in Bank – Dollar Deposit (Restricted) - $20,000
● Cash in Money Market Account – P250,000
● 6-month Time Deposit - $60,000
● Treasury Bill, purchased 12/1/20x1, maturing 2/28/20x2 – P800,000
● Treasury Bond, purchased 3/1/20x2, maturing 2/28/20x2 – P500,000
● Treasury Note – P200,000
● Unused Credit Line – P2,000,000
● Redeemable Preference Shares, purchased 12/1/20x1, due on 3/1/20x2 –
P370,000
● Treasury shares, purchased 12/15/20x1, to be reissued on 3/5/20x2 – P50,000
● Sinking Fund – P200,000
ILLUSTRATION 3
Additional Information:
● Cash on hand includes a P20,000 customer check dates January 10,
20x2.
● During December 20x1, checks amounting to P60,000 and P40,000
were drawn against the Cash in Bank – Current Account. The
P60,000 check is dated January 15, 20x2. The P40,000 check is
dated December 31, 20x1 but was delivered to the payee only on
January 18, 20x2.
● The Cash in Bank – Peso savings deposit includes a deposit in
escrow amounting to P340,000 and a compensating balance of
P250,000 which is legally restricted.
● The cash in bank – dollar deposit (unrestricted) account includes
interest of $2,000, net of tax, directly credited to ABC Co.’s account.
The exchange rate at year-end is $1 is to P52.
BANK OVERDRAFT

A bank overdraft is presented as a current

liability, unless it qualifies to be offset against cash.
ILLUSTRATION 4
The cash balance of ABC Co. comprises the following:
● Cash on Hand – P100,000
● Cash in Bank – Savings –BPI – P200,000
● Cash in Bank – Current – BPI – (P80,000)
● Cash in Bank – Deposit in Escrow – Metrobank – P100,000
● Cash in Bank – Current – Metrobank (P20,000)
● Cash in Bank – Current – BDO – (P30,000)
Additional Information:
● Cash on Hand includes undeposited collections of P20,000.
● The cash in bank – savings maintained at BPI includes a P50,000
compensating balance which is not restricted.

● Requirement: Compute for the amount of cash to be reported in the

financial statements.
ACCOUNTING FOR CASH SHORTAGES AND
OVERAGES

Cash Count conducted may reveal a cash amount less than or

greater than the balance per records, in which case there may be a
cash shortage or a cash overage.

Cash shortage or overage may be debited/credited to a suspense

account called “Cash Shortage or Overage” pending proper
investigation for the cause of the cash shortage or overage.

● Shortage - May result into a receivable/Loss on cash shortage

● Overage - May result into a payable/Gain on Cash Overage
CONCEALMENT OF CASH SHORTAGES

1. Lapping - This occurs when collection of receivable from one

customer is misappropriated and then concealed by applying a
subsequent collection from another customer. Lapping is made
possible when the incompatible duties of recording and cash
custody are combined.
a. It may be detected through confirmation of accounts.
b. Writing off of bad debt should be with proper approval.
CONCEALMENT OF CASH SHORTAGES

2. Kiting - occurs when cash shortage is concealed by overstating

the balance of cash. Kiting is made possible by exploiting the
float period. (i.e., the time it takes for a check to clear at the
bank where it was drawn).
a. When Cash Receipts per book comes earlier than the Cash
Disbursements per book.
b. When Cash Receipts per bank comes earlier than the Cash
Disbursements per bank.
CONCEALMENT OF CASH SHORTAGES

3. Window Dressing - It is primarily a method of fraudulent

financial reporting instead of concealing cash shortages.
Window dressing occurs when books are not closed at year-end
and transactions in the subsequent period are deliberately
recorded in the current period to improve the entity’s financial
performance or financial ratios. This fraudulent reporting is
also called “cooking the books”.
PETTY CASH FUND

Petty cash fund is money set aside to defray

relatively small amounts of cash disbursements.

Accounting Procedures for Petty Cash Fund:

1. Establishment of Petty Cash Fund
2. Disbursement out of the Petty Cash Fund
3. Replenishment of Petty Cash Fund
ILLUSTRATION - PETTY CASH FUND

On September 1, 20x1, the BOD of ABC Co. passed resolution

for the establishment of a P10,000 petty cash fund. Single
disbursements amounting to less than P2,000 will be made
through this fund. Those amounting to P2,000 or more will
be made through checks.

Disbursements made in the PCF were as follows:

1. Groceries for use of employees in the pantry - P1,400
2. Transportation of Mang Benny, the messenger - P500
3. Snacks during meetings and conferences - P1,000
4. Gasoline for Company Vehicles - P3,000
5. Pedicure of Ms. Ana – Authorized - P3000
Coins and Currencies counted is P500.
ILLUSTRATION - PETTY CASH FUND
On September 1, 20x1, the BOD of ABC Co. passed resolution for
the establishment of a P5,000 petty cash fund.

Transactions made in the PCF were as follows:

1. Gasoline for Delivery Equipment - P1,000
2. Medical Supplies for Employees - P680
3. Advances to Employees - P740
4. Contributions from Employees to a bereaved employee -
P800
5. Check drawn to the order of the petty cash custodian -
P1,000
6. Personal checks drawn by the petty cash custodian - P800

Coins and Currencies counted total P850