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Cash and Cash Equivalents

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29 views20 pages

Cash and Cash Equivalents

hope this helps

Uploaded by

PEA- Princess Nicole lentija
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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(Intermediate Accounting 1A)

LECTURE AID

2019
Chapter 2 Cash and Cash Equivalents

Learning Objectives

• Define cash and identify the items that are

included in the “Cash and Cash Equivalents”


line item.

• Account for petty cash funds and cash

shortages/overages.
What is Cash?
• Cash is money or its equivalent that is readily
available for unrestricted use.
• Money is the standard medium of exchange
and the basis of accounting measurements.
• Other negotiable instruments that can be used
to settle obligations and are readily available
for unrestricted use may form part of cash
Examples of Cash
• Cash on Hand • Cash in Bank • Cash Fund - Current
o Coins and Bills o Demand o Change Fund
o Customer’s check Deposit/Checking o Payroll Fund
o Undeposited cash Account o Purchasing Fund
collections o Savings Deposit o Revolving Fund
o Traveler’s Check o Interest Fund
o Cashier’s/official/tr o Petty Cash Fund
easurer’s/manager’s o Dividend Fund
check o Travel Fund
o Postal Money orders o Tax Fund
o Bank Drafts o Other funds used in
current operations.
Post-dated checks – RECEIVED
• Postdated checks are checks that is dated for the future time.

• Postdated checks received from customers are excluded from cash.

Example:
You received customer’s checks totaling P100,000.
The entry to record the receipt of the checks:
Date Cash P100,000
Accounts Receivable P100,000

At the end of the reporting period, you found out that a customer’s check
of P20,000, included in the collections is postdated.
The adjusting entry is as follows:
Date Accounts Receivable P20,000
Cash P20,000
Post-dated checks & Undelivered Checks - DRAWN
Example: You wrote the following checks today
o Check #1 is drawn for P10,000 and dated today but yet to be delivered to
the payee Mr. A. next year.
o Check #2 is drawn for P15,000 and was delivered to payee Mr. B today but the
check is dated 5 months from now,
The entry for the checks drawn is as Follows:

Date Accounts Payable – Mr. A P10,000


Accounts Payable – Mr. B P15,000
Cash P25,000
If financial statements are prepared today, both the checks must be reverted back
to cash and accounts payable:
The entry for the checks drawn is as Follows:

Date Cash P25,000


Accounts Payable – Mr. A P10,000
Accounts Payable – Mr. B P15,000
Stale Checks

• If check is delivered to payee and are not encashed

withtin a relatively long period o time, normally banks


have 6 months or more threshold for checks to be
considered “stale”.

• Stale checks are reverted back to cash, same as

undelivered check.
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.
Examples of Cash Equivalents
• Treasury bills, notes or bonds acquired 3 months before maturity date
o Treasury Bills 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.
o Treasury notes and treasury bonds are long-term obligations issued also by the
government. Treasury notes have a maturity of 1 year to less than 10 years. Treasury
bonds have maturity of 10 years and more.

• Money market instrument or commercial paper acquired 3 months before

maturity date.
o Money market instruments are investments in portfolio of short-term securities.
o Commercial papers consist of short-term, unsecured, notes payable issued in large
denominations by large companies with high credit ratings to other institutional
investors. It has normally a maturity date of less than 270 days.

• 3-month time deposit


Sample Problem – Cash Equivalents
ABC Co. holds the following short –term investments as of December 31, 20x1:

1. 1-year Treasury bill Maturing on March 30, 20x2 acquired on July 1, 20x1.

2. 1-year Treasury bill maturing on March 30, 20x2 acquired on December 31,

20x1.
Requirement: Which of the investments may qualify as cash equivalent?

Answer:

• Only the second T-bill qualify as cash equivalent because it is acquired

3months or less before maturity date. (acquired on December 31, 20x1 and
matures on March 30, 20x2

• Note that what is important is the date of acquisition which should be 3

months or less before maturity 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.”

• Computation and composition of Cash and Cash


equivalents is presented in the Notes to FS.
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 balance is a minimum amount that must be
maintained in an entity’s bank account as support for funds
borrowed from the bank. (Maintaining 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


Bank overdraft
• Bank overdraft (cash overdraft) is a negative

balance in the cash in bank account resulting from


overpayment of checks in excess of the amount of
deposit.

•A bank overdraft is presented as a current

liability, unless it qualifies to be offset against cash.


Bank overdraft – (cont.)
For example:
ABC Company had the following Bank Accounts
Cash in Bank – savings BPI – P100,000
Cash in Bank – current BPI – P50,000
Cash in Bank – savings BDO – (P10,000)
Cash in Bank – current BDO – P20,000

• The cash in Bank – savings BDO (P10,000) is considered bank overdraft

• According to standard – it can be offset against Cash in Bank – current


BDO for both came from the same bank.
• Assuming that ABC company had only one bank account in BDO which
has an overdraft. It is treated as Current Liability.
Petty cash fund
• Petty cash fund is money set aside to defray

relatively small amounts of cash disbursements.

• What constitutes a “small amount” is a matter of

company policy.
Accounting for Petty Cash fund
• To establish the petty cash fund
Date Petty cash fund xxx
Cash in bank xxx

• Disbursement of petty cash fund (usage of fund)


Date No journal entry required – Only
memorandum entry

• Replenishment of petty cash fund


Date Various expense accounts xxx
Cash in bank xxx

• IfDate
at the end of theexpense
Various year, petty cash is not replenishedxxx
accounts
Petty cash fund xxx
Accounting for Petty Cash fund – (cont.)
• To increase the petty cash fund
Date Petty cash fund xxx
Cash in bank xxx

• To decrease the petty cash fund


Date Cash in Bank xxx
Petty cash fund xxx

• Shortage in petty cash fund – if replenished


Date Various expense accounts xxx
Cash short or over xxx
Cash in bank xxx

• Overage
Date inVarious
petty cash fund
expense – if replenished
accounts xxx
Cash short or over xxx
Cash in bank xxx
OPEN FORUM
QUESTIONS????
REACTIONS!!!!!
END

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