CASH AND CASH EQUIVALENTS
DEFINITIONS:
o Cash - includes money in the form of currency and coins, negotiable instruments in the form of checks and money orders acceptable by the bank for immediate credit and bank deposits whether in a savings or current account.
o Cash Equivalents - under PAS 7, cash equivalents are short-term and highly liquid investments that are readily convertible into cash and so near their maturity that they present insignificant risk in changes in value because of changes in interest rates.
o Bank Reconciliation - a statement that that settles the difference between the bank statement balance and the cash balance per book which is the current balance in the checkbook of the depositor.
o Book Reconciling Items - include credit memos, debit memos and errors that need to be adjusted by the depositor to reconcile with the adjusted balance.
o Bank Reconciling Items - these include deposits in transit, outstanding checks and errors.
o Certified Checks - checks that have been accepted by the bank and where the drawer’s account has been debited but the money has yet to be withdrawn by the payee. The funds are now held by the bank on behalf of the payee and the check is no longer outstanding.
o Petty Cash Fund - money set aside to pay small and recurring expenses where it will be inefficient to settle such payments by issuing checks. Petty cash fund may be accounted for using either imprest fund system or fluctuating fund system.
o Imprest Control System - a control system where all cash receipts including checks to be deposited intact and all cash disbursements be made by the issuance of a check.
Cash includes the following items plus adjustments:
✓ Undeposited currency and coins.
✓ Checks and money orders held unless the checks are post-dated, defective or stale. Such items shall still be included as receivables.
✓ Unrestricted bank deposits.
✓ Funds on hand and deposits that are for current use. This includes petty cash fund, payroll fund and funds for taxes and dividends as mentioned in PAS 1 but excludes funds appropriated for non-current assets.
✓ Foreign currencies converted to their peso values.
✓ Bank drafts.
Special Items of Cash
o Bank overdraft – A credit or negative balance in the bank account of the depositor resulting from an issuance of a check that exceeds the amount of the deposit.
✓ As a rule, an overdraft shall be classified as a current liability and not offset against current accounts with a positive or debit balance.
✓ As an exception, if the overdraft is in a bank where there are other accounts that have a positive balance and those accounts are
sufficient to cover the overdraft, the total cash shall be shown net of the overdraft.
o Compensating balance
● If this amount is legally restricted to withdrawal, it is therefore excluded from cash. However, in cases that it still remains to be unrestricted, the compensating balance shall be part of cash. If the compensating balance is legally restricted the following rules shall be followed:
✓ The related loan is short-term: The compensating balance shall be part of current assets but separately from cash.
✓ The related loan is long-term: The compensating balance is part of noncurrent assets as an investment.
● An informal agreement to maintain a minimum amount of deposit will not be legally restricted and therefore included in cash.
Cash Equivalents
o The three important characteristics for cash equivalents as mentioned in PAS 7 are short-term, highly liquid and near maturity. In other words, short-term debt instruments with low risk (also low yield) and acquired 3 months or less from maturity date shall be considered as cash equivalents.
✓ Examples include Treasury Bills, Bonds and Notes, Time Deposits, Certificate of deposits and Bankers Acceptances and Commercial Papers.
o Time deposits – Bank savings account that earns interest but not subject to immediate withdrawal or check issuance.
● Time deposits are excluded from cash because of their restriction on availability as funds and are classified as investments and shall follow these specific classifications:
a. Cash equivalents if the original term is 3 months or less.
b. Short term investments if the original term is more than 3 months to 1 year
c. Long-term investments if the original term is more than 1 year.
o Credit memos include collections by the bank; interest credited by the bank and matured time deposits transferred to the current account.
o Debit memos include NSF checks, bank service charges and authorized bank debits
CASH AND CASH EQUIVALENTS
DEFINITIONS:
o Cash - includes money in the form of currency and coins, negotiable instruments in the form of checks and money orders acceptable by the bank for immediate credit and bank deposits whether in a savings or current account.
o Cash Equivalents - under PAS 7, cash equivalents are short-term and highly liquid investments that are readily convertible into cash and so near their maturity that they present insignificant risk in changes in value because of changes in interest rates.
o Bank Reconciliation - a statement that that settles the difference between the bank statement balance and the cash balance per book which is the current balance in the checkbook of the depositor.
o Book Reconciling Items - include credit memos, debit memos and errors that need to be adjusted by the depositor to reconcile with the adjusted balance.
o Bank Reconciling Items - these include deposits in transit, outstanding checks and errors.
o Certified Checks - checks that have been accepted by the bank and where the drawer’s account has been debited but the money has yet to be withdrawn by the payee. The funds are now held by the bank on behalf of the payee and the check is no longer outstanding.
o Petty Cash Fund - money set aside to pay small and recurring expenses where it will be inefficient to settle such payments by issuing checks. Petty cash fund may be accounted for using either imprest fund system or fluctuating fund system.
o Imprest Control System - a control system where all cash receipts including checks to be deposited intact and all cash disbursements be made by the issuance of a check.
Cash includes the following items plus adjustments:
✓ Undeposited currency and coins.
✓ Checks and money orders held unless the checks are post-dated, defective or stale. Such items shall still be included as receivables.
✓ Unrestricted bank deposits.
✓ Funds on hand and deposits that are for current use. This includes petty cash fund, payroll fund and funds for taxes and dividends as mentioned in PAS 1 but excludes funds appropriated for non-current assets.
✓ Foreign currencies converted to their peso values.
✓ Bank drafts.
Special Items of Cash
o Bank overdraft – A credit or negative balance in the bank account of the depositor resulting from an issuance of a check that exceeds the amount of the deposit.
✓ As a rule, an overdraft shall be classified as a current liability and not offset against current accounts with a positive or debit balance.
✓ As an exception, if the overdraft is in a bank where there are other accounts that have a positive balance and those accounts are
sufficient to cover the overdraft, the total cash shall be shown net of the overdraft.
o Compensating balance
● If this amount is legally restricted to withdrawal, it is therefore excluded from cash. However, in cases that it still remains to be unrestricted, the compensating balance shall be part of cash. If the compensating balance is legally restricted the following rules shall be followed:
✓ The related loan is short-term: The compensating balance shall be part of current assets but separately from cash.
✓ The related loan is long-term: The compensating balance is part of noncurrent assets as an investment.
● An informal agreement to maintain a minimum amount of deposit will not be legally restricted and therefore included in cash.
Cash Equivalents
o The three important characteristics for cash equivalents as mentioned in PAS 7 are short-term, highly liquid and near maturity. In other words, short-term debt instruments with low risk (also low yield) and acquired 3 months or less from maturity date shall be considered as cash equivalents.
✓ Examples include Treasury Bills, Bonds and Notes, Time Deposits, Certificate of deposits and Bankers Acceptances and Commercial Papers.
o Time deposits – Bank savings account that earns interest but not subject to immediate withdrawal or check issuance.
● Time deposits are excluded from cash because of their restriction on availability as funds and are classified as investments and shall follow these specific classifications:
a. Cash equivalents if the original term is 3 months or less.
b. Short term investments if the original term is more than 3 months to 1 year
c. Long-term investments if the original term is more than 1 year.
o Credit memos include collections by the bank; interest credited by the bank and matured time deposits transferred to the current account.
o Debit memos include NSF checks, bank service charges and authorized bank debits
