Chapter 2 - Cash and Cash equivalents

Money

is the standard medium of exchange in business transactions

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 rates

cash on hand

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

cash in bank

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

cash fund

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

cash

must be unrestricted in use, money or its equivalent

what can qualify as cash equivalents

highly liquid investments that are acquired 3 months or less before maturity

equity securities

can’t qualify as cash equivalents because shares don’t have maturity dates

preference shares with specified redemption rate

must be acquired three months before redemption date so that it can qualify as cash equivalent

t-bill purchased 1 year ago

cannot qualify as cash equivalent even if remaining maturity is 3 months or less because date of purchase should be 3 months or less from maturity

term is more than 3 months but within 1 year investments

short-term financial assets

term is more than 1 year investments

classified as non-current or long-term investments

bank drafts

guarantees by bank to advance funds on the demand by the party to whom the draft was directed

sinking fund

not included as cash

plant expansion fund

not included as cash

depreciation fund

not included as cash

contingency fund

not included as cash

preference share redemption fund

not included as cash

insurance fund

not included as cash

postage stamps

not included as cash

unused postage stamps are treated as

prepaid supplies

postdated checks

does not qualify as cash, they will only be available at a future date

unused credit line

not included in cash, but rather disclosed only in the notes. It is the difference between amount of line of credit and amount that was actually borrowed

stale checks

when checks are not encashed within a relatively long period of time, normally 6 months, it is included in cash

checks and bank drafts cannot qualify as cash equivalents because

these are not short-term investments, when they are unrestricted and immediately available for use, they are classified as cash

cash and cash equivalents are normally presented as

current asset

cash is measured at

face value

cash maintained in a bank undergoing bankruptcy id

excluded from cash and presented as receivable measured at realizable value

compensating balance

minimum amount that must be maintained in an entity’s bank account as support for funds borrowed from the bank

compensating balance increase both

the yield rate for the lender and the effective interest rate for the borrower

deposit in escrow

a restricted amount held in trust by another party

bank overdraft

is a negative(credit) balance in the cash in bank account resulting from an overpayment of checks in excess of the amount of the deposit.

current liabilities

overdrafts are payable on demand thus they are presented as

Financial assets and liabilities may be offset if the entity has both:

legal right of setoff and intention to settle the amounts on a net basis or simultaneously

internal control

is any action or process effected by management that is designed to help an entity achieve its objectives

imprest system

requires that all cash receipts should be deposited intact and all cash disbursements should be made through checks

voucher system

is an internal control over all cash disbursements. a voucher is prepared for every cash disbursement

voucher

a business document or written authorization that supports every disbursement made by an entity

cash shortage

is initially debited

cash overage

is initially credited

lapping

occurs when collection of receivables from one customer is misappropriated and then concealed by applying a subsequent collection from another customer

kiting

occurs when the cash shortage is concealed by overstating the balance

petty cash fund

money set aside to defray relatively small amounts of cash disbursements

the petty cash custodian shall not

retain the supporting documents for replenished petty cash disbursements but rather surrender them to the accounting department