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I. Definition of Cash

II. Composition

A. Cash on Hand

B. Cash in Bank

C. Cash Funds

III. Definition of Cash Equivalents (IAS 7)

Par 7. Cash equivalents are held for the purpose of meeting short-term cash commitments
rather than for investment or other purposes. For an investment to qualify as a cash
equivalent it must be readily convertible to a known amount of cash and be subject
to an insignificant risk of changes in value. Therefore, an investment normally
qualifies as a cash equivalent only when it has a short maturity of, say, three
months or less from the date of acquisition. Equity investments are excluded from
cash equivalents unless they are, in substance, cash equivalents, for example in the case
of preferred shares acquired within a short period of their maturity and with a specified
redemption date.

Par 9. Cash flows exclude movements between items that constitute cash or cash equivalents
because these components are part of the cash management of an entity rather than part
of its operating, investing and financing activities. Cash management includes the
investment of excess cash in cash equivalents.

IV. Special Cases

Definition/Examples Valuation/Presentation
1. Foreign Currency
not subject to foreign
currency restriction

2. Foreign Currency
subject to foreign
exchange restrictions

3. Cash in a bank or
financial institution which
is in bankruptcy or
financial difficulty

4. Time Deposits/Money
Market Instruments/
Treasury Bills

< 3 months

> 3 months but < 1 year

> 1 year

5. Cash Funds
set aside for use in
current operations or the
payment of current

6. Cash Funds
set aside for non current
purpose or payment of
non current obligation

7. Bank overdraft

8. Compensating Balance
not legally restricted

9. Compensating Balance
legally restricted


11.Postdated Checks

12.Stale Checks

Answer Exercise 1

V. Internal Controls over Cash

A. Cash Receipts
B. Cash Disbursements

VI. Petty Cash Fund

Answer Exercise 2

VII. Bank Reconciliation

A. Basic Format (What are the typical reconciling items?)

B. Formulas

a. Book Balance
Balance per book, beginning XXX
+ Book Debits XXX
- Book Credits XXX
Balance per book, ending XXX

b. Bank Balance
Balance per bank, beginning XXX
+ Bank Credits XXX
- Bank Debits XXX
Balance per bank, ending XXX

c. Deposits in Transit
DIT, beginning XXX
+ Cash Receipts deposited during the month XXX
- Deposits Acknowledged by the bank during
the month XXX
DIT, ending XXX

d. Outstanding Checks
OC, beginning XXX
+ Checks drawn during the month XXX
- Checks paid by the bank during the month XXX
OC, ending XXX

C. Proof of Cash

Expanded bank reconciliation and includes proof of receipts and


Answer Exercise 3