Chapter 1: Cash and Cash Equivalents

intermediate accounting 1 chapter 1: cash and cash equivalents

Cash

Cash

POV of layman, it means money

Money

is the standard medium of exchange in transactions. It refers to the currency and coins which are in transactions.

Cash

In Accounting, it includes money and any other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit

Cash

this includes checks, bank drafts, and money orders because these are acceptable by the bank for deposit or immediate encashment.

Postdated checks

these cannot be considered as cash yet because they are unacceptable by the bank for deposit and immediate credit or outright encashment

Cash

It must be readily available in the payment of current obligations and not be subject to any restrictions, contractual or otherwise.

Cash on Hand

includes undeposited cash collections and other cash items awaiting deposit such as customers' checks, cashier's or manager's checks, traveler's checks, bank drafts and money orders

Cash in Bank

includes demand deposit or checking account and saving deposit which are unrestricted as to withdrawal

Cash Fund

these are set aside for current purposes such as petty cash fund, payroll fund, dividend fund, travel fund and tax fund

Cash Equivalents

defines as 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. Only highly liquid investments acquired three months before maturity can qualify as cash equivalents

Cash Equivalents

three-month BSP treasury bill, BSP treasury bill purchased three months before date of maturity, three-month time deposit, three-month money market instrument or commercial paper

Equity securities or Equity investments

they cannot qualify as cash equivalents because shares do not have a maturity date

Preference Shares

This can be qualifies as cash equivalents if it has a specified redemption date and acquired three months before redemption date

Date of Purchase

this is an important thing to consider for cash equivalents which it should be 3 months or less before maturity.

Time Deposits, Money Market Instruments and Treasury Bills

Any cash accumulated in excess of that needed for current operations should be invested even temporarily in some type of revenue earning investment. These excess cash may be invested into:

Current Assets

These are classified if the term is more than 3 months but within one year such as short-term or temporary investments

Cash Equivalents

Such instruments are classified if the term is three months or less

Noncurrent Assets

These are classified if the term is more than one year such as long-term assets

face value

how is cash measured?

classification of the related liablity

It is the classification of a cash fund as current or noncurrent that parallels this.

Bank Overdraft

when the cash in bank account has a credit balance. It resulted from the issuance of checks in excess of the deposits

Bank Overdraft

it is classified as a current liability and should not not be offset against other bank accounts with debit balances

Compensating Balance

this generally takes the form of minimum checking or demand deposit account balance that must be maintained in connection with the borrowing arrangement with a bank.

Compensating Balance

this will deduct the amount borrowed because it provides a source of fund to the bank as partial compensation for the loan extended

informal compensating balance

because of this, the compensating balance is part of cash if the deposit is not legally restricted as to withdrawal by the borrower

formal compensating balance

this agreement is classified separately as cash held as compensating balance under current assets if the related loan is short-term and if the deposit is legally restricted.

noncurrent investment

if the related loan is long-term, the compensating balance is classified as what?

Undelivered or unreleased check

one that is merely drawn and recorded but not given to the payee before the end of reporting period

Undelivered or unreleased check

There is no payment when the check is pending delivery to the payee at the end of reporting period because it is still subject to the entity's control and may thus be canceled anytime before delivery at the discretion of the entity

Postdated check delivered

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

Postdated check delivered

the original entry recording a this shall also be reversed and therefore restored to the cash balance. The reason is that there is no payment until the check can be presented to the bank for encashment or deposit

Stale check

also known as check long outstanding.

Stale check

is a check not encased by the payee within a relatively long period of time

Negotiable Instruments Law

they provides that where the instrument is payable on demand, presentment must be made within a reasonable time after issue. Clearly, the law does not specify a definite period within which checks must be presented for encashment. Reference is made to usage of trade or business practice

check long outstanding

in banking practice, a check becomes stale if not encased within six months from the time of issuance. Of course, this is a matter of entity policy

stop payment order

the entity can issue this to the bank for the cancelation of a previously issued check even after three months only

check long outstanding

is the amount of stale check is immaterial, it is simply accounted for miscellaneous income. However, if the amount is material and liability is expected to continue, the cash is restored and the liability is set up

cash shortage

where the cash counts shows cash which is less than the balance per book, this has to be recorded as

cash overage

where the cash count shows cash which is more than the balance per books, this has to be recorded as

cash short or over

this is an account only a temporary or suspense account use when recording either cash shortage or cash overage

Imprest System

system of control cash which requires that all cash receipt should be deposited intact and all cash disbursements should be made by means of check

Petty cash fund

is money set aside to pay small expenses which cannot be paid conveniently by means of check. There are occasions when the issuance of checks becomes impractical or inconvenient such as when small amounts are paid or things are hurriedly bought or customers are entertained

Imprest fund system

is the one usually followed in handling petty cash transactions

Fluctuating fund system

this is the accounting for petty cash because the checks drawn to replenish the fund do not necessarily equal the petty cash disbursements

Fluctuating fund system

the replenishment checks are simply drawn upon the request of the petty cashier. Moreover, petty cash disbursements are immediately recorded thus resulting in a fluctuating petty cash balance per book from time to time