Cash and Cash Equivalents

CASH and CASH EQUIVALENTS CASH PAS 1, paragraph 66 “refers to money (currency) that is readily available for use. It may be kept in physical form, digital form, or invested in a short-term money market product. In Economics, cash refers only to money that is in the physical form.” - Corporate Finance Institute “ an entity shall classify an asset as current when it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the end of reporting period.” Currencies such as Bills and Coins Cashier’s check, Official Check, Treasurer’s Check, Manager’s Check Customer’s Check Stale Checks made by the entity. CASH ON HAND Checks Checks which are at least 6 months are considered stale. Tellers in banks will sometimes reject a check if the date is over 6 months that is why Stale checks made by the entity is still under cash control of the company. Thus, there’s a liability for a company to pay in the future because the check became stale, and the amount is not yet paid. Undelivered and Post-dated checks made by the entity. Money Order Bank Drafts Checks that are not yet delivered remains to be in the possession of the company that is why Undelivered checks are still Cash of the company. On the other hand, post-dated checks are one that is written with a future date indicated in it. This check is yet to be paid because it is for the future payment, the cash is still in the possession of the company. CASH CASH ON HAND Demand Deposit/ Checking Account/ Current Account Savings Deposit CASH IN BANK Compensating Balance If the problem is silent, assume that the Compensating Balance is UNRESTRICTED (a.k.a Informal), therefore, Compensating Balance is considered Cash. If the compensating balance is RESTRICTED (a.k.a Formal) Restriction that is more than 12 months, then the Compensating balance is LONG TERM INVESTMENT. Restriction that is less than or equal to 12 months, then the Compensating balance is SHORT TERM INVESTMENT. If the problem is silent, as a General rule, the Bank Overdraft is classified as Current Liability. Bank Overdraft Exception to the General rule: - If 2 or more accounts with the same bank, then offset Bank Overdraft from other bank account (take note: It should be the same bank) - If bank overdraft is immaterial, then offset Bank overdraft from other cash accounts. CASH NOTE! Classification of cash fund as current or noncurrent should be parallel to the classification applied to the related liability. Therefore, an entity should reclassify such noncurrent asset if the related liability becomes current. CASH ON HAND CASH IN BANK If asset acquisition is current asset, then it is still considered as cash. CASH FUND For asset acquisition If asset acquisition is noncurrent asset, then it is not considered cash but long-term investment. For Current Operation For Operation For Noncurrent Operation For settlement of liabilities If settlement is for current liabilities, then considered cash. If settlement is for noncurrent liabilities, then it is not considered cash nut long-term investment. 1. 2. 3. 4. Change fund Payroll fund Purchasing fund Revolving fund 4. Pension fund 5. Preferred redemption fund 6. Acquisition of Property, Plant and Equipment 5. 6. 7. 8. Interest fund Petty cash fund Dividend fund Travel fund 1. Contingent Fund 2. Insurance fund 3. Sinking fund CASH EQUIVALENTS PAS 7, paragraph 6. Defines cash equivalents 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. DEBT INSTRUMENTS Recognizing Cash Equivalents NOTE! If the problem is silent Treasury note and Treasury bonds are assumed noncurrent investment. Cash in money market account is assumed cash and cash equivalents. Time deposit is assumed cash and cash equivalents. EQUITY INSTRUMENTS Equity instruments cannot qualify as cash and cash equivalents because shares do not have maturity dates. NOTE! If an item cannot be included as cash equivalents because it did not qualify the 3-months cut-off period, it will always be classified as Investment (Short-term or Long-term). “Only highly liquid investments that are debt instruments acquired 3 months or less before their maturity date can qualify as cash equivalents.” Time Deposit Money Market instrument Treasury Bills, Treasury Notes, Treasury Bonds Redeemable preference shares with mandatory redemption period If the debt instrument is Originally acquired for more than 3 months before maturity date, then classify it as Investment (Short-term if within one year; Long-term if more than 1 year) If the debt instrument is Originally acquired for less than or equal to 3 months before maturity date, then classify it as Cash equivalents. ACCOUNTING FOR PETTY CASH FUND PETTY CASH – A small amount of cash kept on hand to cover minor or incidental expenses, such as the small change or bills kept in a cash register or lockbox. Imprest Fund system is used if problem is silent. IMPREST FUND SYSTEM FLUCTUATING FUND SYSTEM An internal control device for cash which requires that all cash receipts should be deposited intact, and all cash payments should be made by means of check. Petty cash expenses are immediately recorded. The amount of replenishment may be equal to, more or less than, the petty cash disbursement. ESTABLISHMENT PAYMENT OF EXPENSE REPLENISHMENT ADJUSTING ENTRY FOR UNREPLENISHED INCREASE IN FUND DECREASE IN FUND BANK RECONCILIATION The process of accounting for the difference between cash balance per book of the company and cash balance per bank statement. Cash balance of the bank statement from the bank is the source document for reconciliation. Prepared at the beginning of the following month. Adjusted Balance method FORMS Book to Bank method Bank to Book method BOOK RECONCILING ITEMS Credit Memo these are collections of the bank for the company but not yet recorded by the company. Debit Memo these are deductions made by bank to the account of company but not yet recorded by the company. Errors by company that must be corrected. The Adjusted balance of Book should be equal to the Adjusted balance of the Bank. Examples of Credit Memo: 1. Collection made by the bank in behalf of the company. 2. Interest income credited to the account of the company. 3. Proceeds of Bank loan Examples of Debit Memo: 1. Bank service charge 2. Not sufficient Fund (or DAID DAUD) 3. Payment of loan BANK RECONCILING ITEMS Outstanding Checks are checks that have been issued but not yet presented for payment or cleared by the bank. They represent pending transactions where the funds have not yet been deducted from the company’s account. Deposit in transit these are deposits already recorded in the company’s book but were taken by the bank only in the next period Errors by bank that must be corrected. ILLUSTRATIVE EXAMPLE (BANK RECONCILIATION) SOLUTION: The adjusted balance between Book and Bank should be equal. Since bank statement is the source document, it is then called Bank reconciliation. This is a Bank error. A check reduces the cash account of a Company. Instead of reducing the account for Z, the bank erroneously reduced the amount in Company A’s account. To correct this bank error, P27,300 should be added back to the bank balance. This is a Book error. Cash receipt is an increase in the book balance. Company A overstated the received recorded amount, P8,179 should only be P6,829. Therefore, the cash book balance is overstated by P1,350. To correct this error, reduce the overstated book balance by P1,350. PROOF OF CASH Proof of cash is expanded reconciliation that includes proof of receipt and disbursement. It is a bank reconciliation that includes not only otherwise known as Two-date Bank Reconciliation the prior period and current period but also reconciles the book receipts otherwise known as Four column Bank Reconciliation and disbursements for the periods with bank statement.