CHAPTER 2: CASH & CASH EQUIVALENTS

What is Cash?

• Individuals - money in one’s wallet or purse

• Business - most liquid asset, medium of exchange that facilitates smooth flow of daily operations

• Cash if a financial asset

• PAS 32 -contractual right to receive cash or another financial asset from another entity/ to exchange financial assets & or liabilities with another entity.

• Cash is a medium of exchange

Categories of Cash

• Cash on hand - cash in one’s wallet (MTCB)

  • Manager’s checks

  • Travelers checks

  • Cashier’s checks, & banks drafts

• Cash in bank (S&C)

  • Savings and checking accounts

• Cash funds - Include but are not limited to. To be classified as cash it must be set aside for current purposes (PIP DTT)

  • Petty cash fund

  • Payroll fund

  • Travel fund

  • Interest fund

  • Dividend fund

  • Tax fund

Cash equivalents

• PAS 7: short term highly liquid investments readily convertible to known amounts of cash. (9 MCCT)

  • Investments must be purchased 90 days or less before its maturity date to be seen as cash equivalents

    • 90 day time deposits

    • Treasury bills

    • Commercial papers

    • Certificate of deposits

    • Money market placements

• Investments exceeding 90 days but not exceeding one year are called SHORT TERM INVESTMENTS 

Other Notes

• Compensating Balance - minimum balance an account holder should maintain in his/her bank account. Included if it could be withdrawn by the depositor without due penalties. 

• Stale Checks - checks that have not been presented for payment within 180 days from their date of issue

• PDC - checks that bear a future date on its face. Payment or collection of the check is only collected on the specified date on its face. 

• NSF Check - No sufficient fund 

• Cash set Aside for Acquisition of Non current assets - not considered cash & cash equivalents

• Bank overdraft - withdrawals or checks  exceeding the balance currently in the entity’s bank account

Internal Control

• Separation of Cash Duties

  • Accountants - Separate person for recording (reconciliation) recorded in the books of accounts; all transactions related to cash, basis for verifying

  • Treasury department & cashier - Management of cash receives and releases the actual cash when it comes to receipt and disbursement of cash

• Limiting access to cash (minimal contact to actual cash) - susceptible to theft and embezzlement that’s why there is minimal contact to actual cash

  • Cash receipts - directed to the bank account 

  • Actual cash must be intact - deposited at the end of the day out of the custodians hands) 

• Proper documentation of Cash receipts

  • OR or Invoice (for record purposes)

  • Cash receipts - logbook/cash receipts journal

• Strict control of cash disbursements - cash going out the door 

  • Should be supported with a proper approval, must be legitimate

  • Small disbursements - petty cash fund and controlled by petty cash custodian

Cash Control

• Voucher System - authorizing and controlling cash disbursements

  • Cash voucher - document supporting cash transaction

    • Need PO indicating what needs to be acquired (Purchase Order) - submitting to the vendor 

    • Sales Invoice will be given

    • Delivery Receipt will be given 

    • Cash disbursement voucher containing all the PO, SI, & DR showcasing who prepared it and the amount to be paid (PREPARED BY THE DISBURSEMENT TEAM)

• Imprest System - control measures for cash receipts and cash disbursements

  • Ensures cash receipts are intact and 100% deposited to the bank

  • Cash disbursements - through check & wire transfer

• Petty Cash Fund - maximum of 10,000 pesos

  • Fund being used for  transactions that are minimal in amount

  • Secured BY the petty cash custodian 

  • Petty cash voucher - every time an employee requests, there must be a petty cash voucher and business justified

  • Petty Cash book - book of record 

Bank Reconciliation

• Type of Deposit accounts

  • Savings 

    •  regular accounts earning interest (unrestricted account)

    • Passbook savings account or an ATM savings account

  • Time deposit 

    • Has a maturity date 

    • yields higher interest rate (high restriction - bank limits your use of money)

    • Pretermination fee: withdraws before maturity or preterminate their account to be able to withdraw their money

  • Checking account (current account/demand deposit account)

    • Do not earn interest

    • Used as a pass through account (used in terms of payment undertaken by the company) - helps control disbursements

    • Deposits increases its bank balance, & checks reduce its balance

Form of Reconciling

• Reconciling items due to timing difference  - when only one party records the transaction at the end of the month:

  • ADD in BANK - Deposit in transit - made but is yet to be recognized by the bank

  • MINUS in BANK - Outstanding checks - issued but not yet negotiated to the bank (cash was yet to be deducted from the bank account but has already been done so in the book account) 

  • MINUS in BOOK - Debit Memo - deducted by the bank in the entity’s account but not recorded by the entity in their book account yet

  • ADD in BOOK - Credit Memo - added by the bank but are not recorded by the entity yet (interest earned from the account) - UNKNOWN TILL YOU SEE YOUR BANK STATEMENT

• Reconciliating items due to error

  • Who committed error:

    • Depositors fault = books is corrected

    • bank s fault = bank is corrected

  • Type of error:

    • Overstatement of deposit = deducted from cash balance

    • Understatement of deposit = added to cash balance

    • Overstatement of issued check = added to cash balance

    • Overstatement of issued check = deducted from cash balance

Format of reconciliation

• Bank to bank method - bank statement to cash amount (reconciling item: 250k  bank money transferred to 10k in your book account, what transactions happened that led to 10k)

• Book to bank method - determining reconciling items to ensure the difference are accounted for 

• Adjusted Balance Method - simultaneously reconciling bank & book ,what should be the amount of cash one needs to report to their cash account