CHAPTER 2 - CASH AND CASH EQUIVALENTS

Cash - medium of exchange facilitating smooth flow of daily operations. 

• Financial asset: (PAS 32) -  contractual right to receive cash or another financial asset from another entity

Categories of Cash

• Cash in bank (SC) - savings and checking accounts

• Cash on hand (MTCB) - checks on hand, manager’s check, travellers check, cashier’s check, bank drafts.

• Cash fund (PCPTIDT) s - petty cash, payroll, travel, interest, dividend and tax - funds. 

  • Must be set aside for current purposes

Cash equivalents - short term, highly liquid investment readily convertible to cash 

• PAS 7: allows purchases of 90 days or less before maturity date to be classified as cash equivalents (TTCCM) 

  • 90-day time deposits

  • Treasury bills

  • Commercial papers

  • Certificate of deposit

  • Money market placements

Other Notes

• ADDED (INCLUDED)

  • Postdated check - bear a future date on its face. 

  • Compensating Balance - minimum balance should be maintained in the bank. (part of cash only when can be withdrawn)

• DEDUCTED

• Stale checks - checks received by an entity but not yet negotiated. Not part of cash if it exceeds six months. (MUST BE DEDUCTED WHEN IS CURRENTLY DATED AFTER EXPIRATION) 

• NSF Check - check previously received from customers as collection of customer’s account. No Sufficient Fund (DEDUCTED WHEN THERE IS NO AMOUNT)

• Bank Overdraft - entity withdrawals exceeds bank balances

Internal Control

1. Separation of cash duties - receiving and depositing should be separate from the one reconciling

2. Limiting access to cash - cash receipts of the day should be deposited immediately to the bank on the same day

3. Proper documentation of cash receipts 

4. Strict control of cash disbursements

VOUCHER AND IMPREST SYSTEMS

VOUCHER SYSTEM - method of authorizing and controlling cash disbursements 

• Cash voucher - supports cash transaction 

• Cash or cash checks are not immediately paid upon the purchase of goods or incurrence of expense. 

IMPREST SYSTEM - cash receipts are deposited daily into the bank and ALE are paid by check except for small or petty expenditures. 

• Petty Cash Fund - for small or petty expenditures

BANK RECONCILIATION

• Savings account - earns interest and may either be passbook or ATM 

• Time deposit - earns higher interest and withdrawal is only allowed upon maturity date

• Checking account - current/demand deposit account; does not earn interest. 

  • Reconciling items due to timing difference

    • Deposit in transit: increase books but no bank (ADDED TO BANK)

    • Outstanding checks: decrease books but no bank (DEDUCTED FROM BANK)

    • Bank debit memos: NSF checks, cost of check books, service and penalty charges, reduction of loans (DEDUCTED FROM BOOKS)

    • Bank credit memos: (ADDED TO BOOKS)

  • Reconciling items due to error

    • Overstatement of deposit - DEDUCTED

    • Understatement of deposit - ADDED

    • Overstatement of check - ADDED

    • Understatement of check - DEDUCTED