Intermediate Accounting 1
Chapter 1: Cash and Cash Equivalents
To understand the concept of cash
money and other negotiable instrument payable in money and acceptable by the bank and immediate credit. Ex. cash, bank drafts, money orders (prepaid paper payment documents; a safe alternative to cash or personal checks used for sending money and paying bills.
PAS 1, Paragraph 66: an entity shall shall classify an asset as current when the asset is cash or cash equivalent unless it is restricted to settle a liability for more than twelve months after the end of the reporting period.
a. Cash on hand, undeposited cash collections and cash items awaiting cash deposit (customer’s check, cashier’s or manager’s checks, travelers checks, bank drafts and money order)
b. Cash in bank, demand deposit, checking account, and saving deposit unrestricted to withdrawal.
c. Cash Fund, set aside for current purposes (p →etty cash fund, payroll fund, and dividend fund)
To understand the concept of cash equivalents
Cash equivalents - PAS 7, paragraph 6: short-term and highly liquidated investments that are readily into cash and near their maturity rate. Only highly liquid investments acquired 3 months before maturity.
a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before maturity date
c. Three-month time deposit
d. three-month money market or instrument or commercial paper
!It is important to note that it is the date of purchase that matters!
Investment of excess cash, excess of cash needed for operations should be invested in some type of revenue earning investments.
classifications of investment of excess cash
1. If the term is 3 months or less → cash equivalents → included in the caption cash and cash equivalents.
2. If the term is more than 3 months but within one year → short-term financial assets or temporary investments → presented separately as current assets.
3. if the term is more than 1 year → long-term investments → noncurrent assets
Measurement of cash
Cash → Face value
cash in foreign currency → current exchange rate
In case of bankruptcy of financial institution → estimated realizable value (if amount recoverable is estimated to be lower than face value)
Cash fund for a certain purpose
Cash fund for current operations/obligations = current asset | included as part of cash and cash equivalents. Ex. petty cash fund, payroll fund, travel fund, interest fund, dividend fund, and tax fund.
Cash fund for noncurrent assets/obligations = long-term investment. ex. sinking fund, preference share, redemption fund, contingent fund, insurance fund, funds for acquisition or construction of property, plant and equipment.
classification of cash fund - current or noncurrent = parallel to the classification of related liability.
Bank overdraft - cash in bank has a credit balance. Classified as current liability. Can be offset against another bank account owned by the same entity.
Overdrafts are not permitted in the Philippines
Compensation balance - minimum checking or demand deposit account to be maintained in connection with a borrowing arrangement. Reduction in amount borrowed as a source of fund for the bank as partial compensation.
Classification:
a. cash = deposit not legally restricted because of informal compensating agreement
b. current assets = deposit is legally restricted because of formal compensating agreement, classified as “cash held as compensating balance”, short term
c. noncurrent investment = related loan is long-term.
Undelivered or unreleased check - drawn and recorded but not yet given to the payee before the end of reporting period.
Cash xx
Accounts payable or appropriate account xx
Postdated check delivered - check drawn, recorded and given to payee but the date is subsequent (after the official cutoff date) to the end of reporting period.
Stale check or check long outstanding - check not uncashed by payee within relatively long period of time. Law = does not specify definite period; Banking practice = checks are considered stale after 6 months | depends on entity policy.
Immaterial → cash
miscellaneous income
Material → cash
accounts payable or appropriate account
Accounting for cash shortage - cash account shows cash less than the balance per book.
DEBIT: cash short or over CREDIT: cash
*cash short or over, a temporary or suspense account
Cashier/custodian is held responsible:
DEBIT: due from cashier CREDIT: cash short or over
Failure to disclose cause of shortage
DEBIT: Loss from cash shortage CREDIT: cash short or over
Accounting for cash overage - cash is more than the balance per book
DEBIT: cash CREDIT: cash short or over
No claim
DEBIT: cash short or over CREDIT: miscellaneous income
Overage is found to be the money of cashier
DEBIT: Cash short or over CREDIT: payable to cashier