CHAPTER 1 : CASH AND CASH EQUIVALENTS

Intermediate Accounting 1

○ example: when checks are

received in full settlement
CASH
of an account receivable,
● started from gold. cash is immediately
● a current asset. debited.
● the most liquid asset.
○ liquid(ity) - ability to do or
MONEY
buy whatever you want.
● in layman’s term “money” ● the standard medium of
○ layman - ordinary people exchange in business
● no specific standard transactions.
● only guidance is found in PAS 1, ○ medium of exchange -
paragraph 66. system used to facilitate
○ an entity shall classify an the purchase and sale of
asset as current when the goods and services
asset is cash or a cash between parties.
equivalent unless it is ● currency and coins which are in
restricted to settle a circulation and legal tender.
liability for more than ○ circulation - currency and
twelve (12) months after coins are in the community
the end of the reporting (peso).
period. ○ legal tender - accepted by
● includes money and any other the people because it is
negotiable instrument that is authorized by law.
payable in money and acceptable
by the bank for deposit and CASH MANAGEMENT
immediate credit.
○ negotiable instrument - ● control and proper use of cash is
accepted by anyone. an important aspect.
■ can be used in any ● entity must maintain sufficient
transactions. cash for use in current operations.
■ e.g. check - a
promise as still UNRESTRICTED CASH
unsure if there's a
● to be reported as “cash” an item
value.
must be unrestricted in use.
○ immediate credit - you
○ restricted - prohibited from
own it, payable of the bank
using it. (e.g. cash is in a
to you.
bank under litigation or
● includes: checks, bank drafts, and
bankruptcy)
money orders (accepted by the
○ cash must be readily
bank for deposit or immediate
available in the payment of
encashment)
current obligations and not
○ deposit - put in the bank
be subject to any
○ immediate encashment -
from check to being cash

with love, @hjea.

CHAPTER 1 : CASH AND CASH EQUIVALENTS
Intermediate Accounting 1

restrictions, contractual or ■ check issued and

otherwise. approved by a
bank’s manager.
○ traveler’s checks
RESTRICTION OF CASH
■ there’s a balance or
● no restriction = cash fund.
● current operation = cash fund ■ check carried by a
○ cash fund = cash traveler issued and
approved by the
CASH ITEMS INCLUDED IN CASH bank or financial
institutions.
● classified as cash therefore a
○ bank drafts
current asset.
■ there’s a balance or
○ cash on hand
fund.
○ cash in bank
■ document written
○ cash fund
and approved by a
bank itself.
CASH ON HAND
○ money orders
● cash nearby or in possession. ■ there’s a balance or
● this includes: funds.
○ undeposited cash ■ from financial
collections institutions (e.g.
■ bills and coins western union,
■ not yet deposited gcash)
but already ■ you give money
collected. then they give you
● cash items awaiting deposit the same money
○ customers’ checks order that you've
■ not sure if there's a given.
balance or fund.
■ customer paid in
CHECKS
check to a business
not still deposited. ● when given, must be withdrawn in
○ cashier’s checks a reasonable period of time.
■ there’s a balance or
fund. UNDELIVERED CHECKS
■ check issued and ● checks that’s already prepared
approved by a but not yet delivered.
bank’s cashier. ● reverse the entry.
○ manager’s checks
■ there’s a balance or POST-DATED CHECKS
fund.
● postdated checks received
cannot be considered as cash yet
because the postdated

with love, @hjea.

CHAPTER 1 : CASH AND CASH EQUIVALENTS
Intermediate Accounting 1

checks are unacceptable by the ● cash in the possession of the bank.

bank for deposit and immediate ● this includes:
credit or outright encashment. ○ demand deposit or
○ postdated checks - the checking account
date on the checks are ■ you can withdraw
higher or later than today anytime.
or in the current. ■ deposited with no
○ e.g date issued 1/20 intention to save or
date on the check 1/30 get interest but to
the date to be recorded as use in daily
the payment is on 1/30. transactions.
● the date on the checks are higher ■ have a document
or later than today or in the with value rather
current. than having the
● not considered as cash. money physically
○ not considered as payment (check).
until the date on the check ○ savings deposit
comes. ■ cash in the bank
with the motive to
JOURNAL ENTRY save for future use.
from A/P XXX ● unrestricted as to withdrawal.
Cash XXX
JOURNAL ENTRY
to Cash XXX e.g. Electricity Expense XXX
A/P XXX Cash in Bank XXX

STALE CHECKS
BANK OVERDRAFT
○ stale - no longer new or
● not allowed by the law but may
given a long time ago.
happen.
● no definite period.
● cash in bank has a credit balance.
○ usually three (3) or six (6)
○ results from the issuance of
months in the banking
checks in excess of the
industry.
deposits.
■ e.g. cash in bank
JOURNAL ENTRY
(1.5M) & check
from A/P XXX issued (2M)
Cash XXX ● classified as a current liability.
● should not be offset against other
to Cash XXX bank accounts with debit
Misc. Income XXX balances.

● general rule: offsetting is not

allowed.
○ offsetting - when there is a
CASH IN BANK negative amount get the

with love, @hjea.

CHAPTER 1 : CASH AND CASH EQUIVALENTS
Intermediate Accounting 1

same amount from the integral part of cash

positive amount so the management.
negative amount will be ○ fluctuates - rise and fall
zero. irregularly in number or
○ e.g. for offsetting amount.
A - (200,000) current liability or ○ integral - necessary
overdrawn
B - 1,000,000 current asset CASH FUND
C - 2,500,000 current asset ● is included as a part of cash and
total cash is B&C only, cash equivalents.
A is a liability. ● is a cash but there's a restriction.
● not necessary to adjust and open ○ restriction must be for
a bank overdraft account in the current operations.
ledger. ■ e.g. in a sari-sari
○ i.e. Cash in Bank - A Bank is store (change for
maintained in the leger buyers)
with a credit balance. ○ you cannot use the cash
even if you have it, either
EXCEPTION TO THE RULE OF OVERDRAFT on hand or bank because
there's a purpose or usage
● an overdraft can also be offset
of it.
against the other bank account if
● if a cash fund is set aside for use in
immaterial (amount is too little
current operations or for the
and can be ignored).
payment of current obligations it is
○ immaterial (concept) -
a current asset.
even if not recorded or
● set aside for current purposes or
omitted the business or
operation.
people will not be affected.
○ current operation = cash
● can be offset if it’s the same bank.
fund
● when an entity maintains two or
○ cash fund = cash
more accounts in one bank and
○ cash = current asset
one account results in an
● this includes :
overdraft, such overdraft can be
● change fund
offset against the other bank
○ funds set aside for change
account with a debit balance in
for customers.
order to show cash, net of bank
● travel fund
overdraft or bank overdraft, net of
other bank account.

○ funds set aside for

● if there are past transactions with
traveling.
the bank and owner of the check.
● interest fund
● under IFRS bank overdraft can be
○ funds set aside for paying
offset against the other bank
interest.
account when payable on
● tax fund
demand and often fluctuates
○ funds set aside for paying
from positive to negative as an
tax.

with love, @hjea.

CHAPTER 1 : CASH AND CASH EQUIVALENTS
Intermediate Accounting 1

● petty cash fund ■ funds set aside for

○ funds set aside for paying safety nets that
small expenses or for protect bankrupt
buying small items. traders from
● payroll fund adverse losses and
○ funds set aside for the ensure that the
payment of salaries. profits of winning
● dividend fund traders are paid out
○ funds set aside for the in full.
payment to the ○ acquisition fund
shareholders. ■ funds set aside for a
capital which is
FOR NONCURRENT OPERATIONS OR raised for buying
PURPOSE another business.
● set aside for noncurrent purpose (e.g. for housing)
or payment of noncurrent ○ construction of property,
obligation therefore shown as plant and equipment (e.g.
long-term investment. plant expansion fund)
● not considered as cash. ■ funds set aside for
● long-term = liability construction of
○ non-current liability plant expansion.
○ non-current asset
■ e.g. bonds payable CLASSIFICATION OF CASH FUND
for 10 years (sinking ● classification of cash fund a
funds) current or noncurrent should
● this includes: parallel the classification of the
○ sinking fund related liability.
■ funds set aside for ○ e.g. sinking fund that is set
paying a debt or aside to pay a bond
bond. payable shall be classified
○ preference share as current asset when the
redemption fund bond payable is already
■ funds set aside for due within one year after
the repayment by the end of reporting period.
the company of the
obligation on ○ a cash fund set aside for
the acquisition of a
account of shares noncurrent asset should
issued. be classified as noncurrent
○ contingent fund regardless of the year of
■ funds set aside for disbursement.
emergencies or
unexpected
COMPENSATING BALANCE
outflows, mainly
economic crises. ● generally takes a form of
○ insurance fund minimum checking or demand

with love, @hjea.

CHAPTER 1 : CASH AND CASH EQUIVALENTS
Intermediate Accounting 1

deposit account balance that ○ i.e. formal restriction (real)

must be maintained in connection = cannot be considered
with a borrowing arrangement cash.
with a bank. ● if silent = informal
○ e.g. an entity borrows 5M
from a bank and agrees to
CASH EQUIVALENTS
maintain a 10% or 500K
minimum compensating ● short-term and highly liquid
balance in a demand investments (PAS 7 par. 6)
deposit account. ● only highly liquid investments
● this arrangement results in the acquired three (3) months before
reduction of the amount borrowed maturity can qualify.
because the compensating ○ liquid investments -
balances provide a source of ● PAS 7, paragraph 6
funds to the bank as partial ○ short-term and highly
compensation for the loan liquid investments that
received. are readily convertible into
● getting a loan from a bank but you cash and so near their
need to first deposit a certain maturity that they present
amount as a compensation. insignificant risk of
changes in value
CLASSIFICATION OF COMPENSATING because of changes in
BALANCE interest rate.
● the deposit is not legally ● examples:
restricted as to withdrawal by the
borrower because of an informal ■ BSP = Bangko
balance agreement Sentral ng Pilipinas
compensating balance is a part of ○ three (3) month BSP
cash. treasury bill
○ i.e. informal restriction = ○ three (3) year BSP treasury
can be considered as cash. bill purchased three (3)
months before date of
maturity.
● the deposit is legally restricted ○ three (3) month time
because of a formal deposit.
compensating balance ○ three (3) month money
agreement, the compensating is market instrument or
classified separately as “cash held commercial paper.
as compensating balance” under ● date of purchase is important,
current assets if the related loan is which should be three (3) months
“short-term” or less before maturity.
○ related loan is a ● preferences shares with specified
“long-term” the redemption date and acquired
compensating balance is three (3) months before
classified as noncurrent redemption date can qualify as
investment. cash equivalents.

with love, @hjea.

CHAPTER 1 : CASH AND CASH EQUIVALENTS
Intermediate Accounting 1

○ redemption date - caption as cash and cash

equivalents.
NOT QUALIFIED AS CASH EQUIVALENTS
● BSP treasury bill that was SHORT-TERM FINANCIAL ASSETS
purchased one (1) year ago ● also classified as temporary
cannot qualify as cash investments.
equivalent even if the remaining ● if the term is “more than three (3)
maturity is three (3) months or months but within one (1) year”
less from the end of the reporting such investments are classified as
period. short-term financial assets.
● equity securities cannot qualify ● presented separately as current
as cash equivalents because assets.
shares do not have a maturity
date. LONG-TERM INVESTMENTS
○ equity securities - ● also classified as noncurrent
investments.
INVESTMENT OF EXCESS CASH ● if the term is “more than one (1)
year” such investments are
● any cash accumulated in excess
classified long-term investments.
of that needed for current
operations should be invested
TEMPORARY INVESTMENTS
even temporarily in some type of
revenue earning investment. ● also classified as current
● excess cash may be invested in : investments.
○ time deposits ● investments that become due
■ within one (1) year from the end of
○ money market instrument the reporting period are
■ reclassified as temporary
○ treasury bills investments.
■
● for the purpose of earning interest MEASUREMENT OF CASH
income.
● cash is measured at face value.
○ face value - what is written
CLASSIFICATIONS OF INVESTMENT OF on the document (money)
EXCESS CASH it is what it is.
● investments in time deposit, ■ measured at face
money market instruments and value initially and
treasury bills should be properly subsequently.
classified. ● measurement - putting on an
amount to an asset.
CASH EQUIVALENTS ○ initially - amount when you
first bought or saw it.
● if the term is “three (3) months or
■ amount now
less” such instruments are
○ subsequently - amount of
classified as cash equivalents
it as time goes by.
○ included in the

with love, @hjea.

CHAPTER 1 : CASH AND CASH EQUIVALENTS
Intermediate Accounting 1

■ then or in the future ● cash and cash equivalents should

be shown as the first line item.
CASH IN FOREIGN CURRENCY ○ this caption includes all
● measured at the current cash items, such as cash
exchange rate. on hand, cash in bank,
● should be translated to Philippine petty cash fund and cash
pesos using the current exchange equivalents which are
rate. ○ unrestricted in use for
○ current - day you are current operations.
converting ● details comprising the cash and
cash equivalents should be
disclosed in the notes to financial
FOREIGN CURRENCY
statements.
● deposits = money put in bank
● deposits in foreign countries
which are not subject to any XXXXXXXXXXXXXXXXXX
foreign exchange restriction are ● xxxxxxxxxxxxxxxxxxxxx
included in “cash”.

IMPORTANT INFO

● deposits in foreign bank which are

Notes notes notes notes notes
subject to foreign exchange
restriction should be classified
separately among noncurrent
assets and the restriction clearly
indicated.

ESTIMATED REALIZABLE VALUE

● if a bank or financial institution
holding the funds of an 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

● is a current asset.
○ exemption: when cash is
restricted or at least twelve
(12) months after the end
of the reporting period.

with love, @hjea.