Cash and Cash Equivalents [Combined]

Money

Money

paper currency and coins which are in circulation and legal tender

False - does not allow

[T/F] Savings deposit allow direct withdrawal through check.

Bank Draft

used when the seller has no relationship with the buyer

Money

standard medium of exchange in business transactions [buy goods, services, pay obligations]

Cash [Layman Perspective]

paper currency and coins which are in circulation and legal tender.

Money

Layman Perspective of Cash

Cash [Accounting Parlance]

money and any other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit

Cash [Accounting Parlance]

includes checks, bank drafts and money orders

False - debited

[T/F] when checks are received in full settlement of an account receivable, cash is immediately credited

True

[T/F] when postdated checks received cannot be considered as cash yet because they are unacceptable by the bank for deposit and immediate credit or outright encashment

first line; current assets

the caption “cash and cash equivalents” should be shown as the ________ item among ________.

1. Cash on hand

2. Cash in bank

3. Cash funds

4. Cash Equivalents

cash items included in cash and cash equivalents

notes to financial statements

the details comprising cash and cash equivalents should be disclosed in the _____________.

1. Cash as a Financial Instrument

   • Financial Asset [Holder]

   • Financial Liability [Banko Sentral ng Pilipinas / BSP]

2. Cash as Medium of Exchange

3. Unrestricted

4. Acceptable by Banks and Other Institutions at Face Value

Nature of Cash

Face Value

the value written on cash is the exact value for it

False - no specific

[T/F] There is a specific standard dealing with cash.

PAS 1, Paragraph 66

[PAS] An entity shall classify an asset as current when the asset is cash or a cash equivalent unless it is restricted to settle a liability for more than/ at least twelve months after the end of the reporting period.

False - unrestricted

[T/F] to be reported as cash, an item must be restricted in use

True

[T/f] cash must be readily available in the payment of current obligations and not be subject to any restrictions, contractual or otherwise.

1. Cash on hand

2. Cash in bank

3. Cash funds

Cash Items included in Cash [General Ledger / Control Accounts]

Cash on hand

unrestricted money items which are undeposited cash collections, like currency and coins, and other cash items awaiting deposit

False - Most

[T/F] All negotiable instruments qualify as cash because they can be converted into cash on demand or they are acceptable by financial institutions for immediate deposits or withdrawal

1. Ordinary (Customers’) Check

2. Certified Check

3. Cashier’s Check

4. Traveler’s Check

5. Bank Drafts

6. Money Orders

Examples of Negotiable Instruments [Cash on hand]

Dr. Receipts

Cr. Disbursements

Recognition / Derecognition of Cash on hand

Ordinary [Customers’] Check

calls for a bank to pay the amount shown from the maker’s account; cash in the POV of the payee

Certified Check 

issuing bank guarantees payment by certifying there are sufficient funds available in the account from which the check is drawn to cover

Certified Check 

Signed by the payer and guaranteed by the bank that the payer has sufficient balance to pay

Cashier’s Check

instrument of payment generally considered the same as cash; it is drawn on the bank’s own funds and signed by an officer of the bank; guaranteed funds; drawn against the bank’s account and not an individual

Traveler’s Check

issued by an express company or bank bearing the signature of the purchaser and to be cashed when countersigned in the presence of a payee;

Traveler’s Check

Not used as much anymore because it is easier to use a debit card at an atm; and few vendors accept it

False - indirectly

[T/F] Traveler’s Check is directly acceptable everywhere and has lower fees than credit cards but higher exchange rates.

Bank Drafts

a bill exchange drawn by a bank on another bank; payment is guaranteed by the issuing banks; used when the seller has no relationship with the buyer

Money Orders

order granted upon a payment of a sum and a small commission, by open post office, bank or telegraph, company, and payable at another

Money Orders

a certificate issued by a government or banking institution that allows the state of pay to receive cash on demand

Money Orders

functions like a check, the purchaser may stop payment; it can be purchased with cash or debit/credit cards, available at credit unions and post office

Money Orders

after purchasing, pay the full amount and fee then fill in your name, contact information, name of recipient and their contact information

Cash in Bank

demand deposit or checking account and saving deposit which are unrestricted as to withdrawal; cash on hand that are deposited in bank

Dr. deposits / net interest on deposit [reduced with tax]

Cr. withdrawals / service charges

Recognition / Derecognition [Cash in bank]

Savings Account - Savings Deposit

accounts that pay interest; typically below market interest rate; does not allow direct withdrawal through check; pays interest rate higher than checking account but lower than the treasury bill

Checking / Demand Deposit

allows withdrawal without advance notice; includes accounts that requires 6 days or less of advance notice

Current Account

bank account that secures money and helps manage finances; facilitates the making of payment such as direct debit; let people pay you easily; usually opened by businessmen; amount can be deposited or withdrawn anytime; meant for daily transactions to carry out business transactions

1. Foreign Currency [deposited in the Philippines]

2. Deposits in Foreign Countries

3. Cash from Closed Banks

4. Bank Overdraft

5. Compensating Balance

6. Undelivered or Unreleased Checks

7. Postdated Checks [issued by the company and received from customer]

8. Stale Checks

Other Cash in Bank Related Items

Foreign Currency [deposited in the Philippines]

translated to PHP using the current exchange rate when presented in FS

False - at the end of the reporting period

[T/F] the current exchange rate to be use when translating foreign currency deposited in the PHP is the exchange rate at the time of transaction.

Cash

not subject to foreign exchange restrictions

Non-current Financial Assets

subject to foreign exchange restrictions

Cash from Closed Banks

part of receivables up to recoverable amount

estimated / net realizable value

a bank or financial institution holding the funds of an entity is in bankruptcy or financial difficulty and the amount recoverable is estimated to be lower than the face amount

500,000

Philippine Deposit Insurance Corporation guarantees ________ to be returned when a bank closes.

Philippine Deposit Insurance Corporation

PDIC [Meaning]

Overdraft

cash in bank account has a credit balance; not permitted in the Philippines

Current Liability

Bank Overdraft is classified as _____________.

True

[T/F] When an entity maintains two or more accounts in one bank and one account results in an overdraft, such overdraft can be offset against the other bank account with a debit balance to show cash, net of bank overdraft or bank overdraft, net of other bank account.

False - is not material

[T/F] An overdraft can be offset against the other bank account if the amount is material.

IFRS; Cash Management

Under ______, bank overdraft can be offset against other bank account when payable on demand and often fluctuates from positive to negative as an integral part of ________.

Compensating Balance

minimum checking or demand deposit account balance that must be maintained in connection with a borrowing arrangement with a bank

1. Cash

2. Cash Held as -Compensating Balance [Current Assets]

3. Noncurrent Financial Assets

Classification of Compensating Balance

Cash

compensating balance deposit is not legally restricted as to withdrawal by the borrower because of an informal compensating balance agreement [classification]

Cash Held as -Compensating Balance [Current Assets]

compensating balance deposit is legally restricted because of a formal compensating balance agreement; related loan is short-term [classification]

Noncurrent Financial Assets

compensating balance; legally restricted; long term investment; related loan is long-term [classification]

Undelivered or Unreleased Checks

drawn and recorded but not given to the payee before the end of reporting period

True

[T/F] undelivered check is still subject to the entity's control and may thus be canceled anytime before delivery at the discretion of the entity.

Dr. Cash

Cr. Accounts payable or approriate account

for an undelivered check, an adjusting entry is required to restore the cash balance and set up the liability. [adjusting entry]

Postdated Checks [issued by the company]

drawn, recorded and already given to the payee but it bears a date subsequent to the end of reporting period.

True

[T/F] original entry recording a delivered postdated check shall also be reversed and therefore restored to the cash balance.

Dr. Cash

Cr. Accounts payable or appropriate account

reversal entry for postdated checks [issued by the company]

Dr. Accounts Receivable

Cr. Cash

reversal entry for postdated checks [received from customer]

Stale Check

check not encashed by the payee within a relatively long period of time.

Negotiable Instruments Law - Stale Check

where the instrument is payable on demand, presentment must be made within a reasonable time after issue; no definite period; made to usage of trade or business practice.

Banking Practice - Stale Checks

check becomes stale if not encashed within six months from the time of issuance; not standardized but a matter of entity policy

6; 3; stop payment order

• check becomes stale if not encashed within ______ months from the time of issuance; not standardized but a matter of entity policy

• after ______ months only, the entity may issue a ________ to the bank for the cancelation of a previously issued check

Dr. Cash

Cr. Miscellaneous Income

entry to record stale check if the amount is immaterial

Dr. Cash

Cr. Accounts Payable or appropriate account

entry to record stale check if the amount is material and liability is expected to continue

No Sufficient Funds [NSF] Check

bank account does not contain sufficient funds or the bank account has been closed.

Drawn Against Uncollected Deposit [DAUD] Check

sufficient funds but not yet available to the drawer because the deposit, usually a check, had not yet been cleared

Drawn Against Insufficient Funds [DAIF] Check

any unfunded check will be considered as returned or bounced checks.

1. No Sufficient Funds [NSF] Check

2. Drawn Against Uncollected Deposit [DAUD] Check

3. Drawn Against Insufficient Funds [DAIF] Check

Accounting Treatment of Other Cash Related Items [Receivables]

Cash Funds

set aside for current purposes such as petty cash fund, payroll fund and dividend fund

Cash Funds

funds segregated by the management to finance specific operating activities of the business enterprise or for payment of obligation

Dr. upon establishent / increase of fund

Cr. decrease of fund

Recognition / Derecognition [Cash Funds]

1. Working Funds [Current Asset]

2. Cash Funds for Noncurrent Purpose [Noncurrent Financial Asset]

two types of cash funds

Working Funds

finance current operations; payment of current obligation; part of cash

Cash Funds for Noncurrent Purpose

finance noncurrent operations; payment of long-term obligation; part of long-term investment

1. Petty Cash Fund – petty or small expenses

2. Change Fund – giving change

3. Payroll Fund – set aside cash from daily operations for the salary of employees

4. Dividend Fund – set aside when dividend is declared

5. Tax Fund – to pay for whatever taxes like VAT, Income Tax, and the like

6. Interest Fund – to pay interest that is currently due for loans

7. Travel Fund – travel expenses of employees or key management personnel

examples of working funds

1. Preference Share Redemption Fund

2. Contingent Fund

3. Insurance Fund

4. Sinking Fund

5. Fund for Acquisition of Property

examples of cash funds for noncurrent purpose

True

[T/F] sinking fund is parallel to the classification of the related liability; if it is a noncurrent liability then it will fall under NCFA but if it is a current liability than it is considered as CCE.

False - Fluctuating Fund System

[T/F] In an Imprest Fund System, no adjustment is necessary at the end of the accounting period because the petty cash expenses are recorded outright.

Cash Management

the monitoring and maintaining of cash flow to ensure that a business has enough funds to function

1. Easily converted to cash

2. Highly liquid financial instrument

3. With maturity date

Nature of Cash Equivalents

PAS 7, Paragraph 6

[PAS] 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 rate.

short-term and highly liquid investments; insignificant risk of changes in value

cash equivalents are _________________ that are readily convertible into cash and so near their maturity that they present __________________ because of changes in interest rate.

True

[T/F] only highly liquid investments acquired three months before maturity can qualify

False - not qualified

[T/F] equity securities or equity investments are qualified since shares do not have a maturity date.

True

[T/F] preference shares with specified redemption date and acquired three months before redemption date are qualified

False - does not qualify

[T/F] a BSP treasury bill that was purchased one year ago qualifies as cash equivalent as long as the remaining maturity is three months or less from the end of reporting period

True

[T/F] Control and Proper Use of Cash is an important aspect of cash management; entity must maintain sufficient cash for use in current operations.

1. cash equivalents:  3 months or less

2. short-term investment or temporary [current financial assets]: more than three months but within one year

3. noncurrent financial asset or long-term investments: more than one year

Classifications of Investments

True

[T/F] long-term investments that become due within one year from the end of the reporting period are reclassified as current.