Acctg211n: CASH AND CASH EQUIVALENTS FINANCIAL STATEMENT PRESENTATION

CASH - first item among “Current Assets”; all cash items

 in layman’s term: “money” - details comprising CCE disclosed in “Notes to FS”

*money – standard medium of exchange in business; the INVESTMENT OF EXCESS CASH

currency & coins
- excess cash may be invested in:
 in accounting: money & other negotiable instrument,
time deposits, money market instruments, treasury bills
acceptable by bank for deposit & immediate credit
- such investments are classified as follows:
Ex. checks, bank drafts, money orders
o Cash and cash equivalents – if term is 3 months or less
 main feature: “unrestricted” in use
o Short-term investments – more than 3 months but
 readily available in payment of current obligations
within 1 year
 can be used for any purpose
o Long-term investments – more than 1 year
Cash Items:
FOREIGN CURRENCY
o Cash on Hand – undeposited cash collections awaiting
- must be translated to Philippine pesos using current
for deposit (ex. checks, bank drafts, money orders)
exchange rate
o Cash in Bank – demand deposit (checking account) &
saving deposit – unrestricted as to withdrawal - “cash” – includes deposits in foreign countries not
o Cash Fund – set aside for current purposes subject to any foreign exchange restriction

CASH EQUIVALENTS - “noncurrent assets” – deposits in foreign bank subject

to foreign exchange restriction
 short-term, highly liquid investments
 main feature: “date of purchase” – 3 months or less CASH FUND FOR A CERTAIN PURPOSE
before maturity
o 3-month BSP Treasury Bill “Cash and Cash Equivalent” – cash fund set aside for use
o 3-year BSP Treasury Bill purchased 3 months before in current operations; under current asset
maturity date
 petty cash fund
o 3-month time deposit
 payroll fund
o 3-month money market instrument
 travel fund
Note: “Preference Shares” with specified redemption  interest fund
date and acquired 3 months before it can qualify as cash  dividend fund
equivalents.  tax fund

VALUATION OF CASH IN BALANCE SHEET “Long-term Investment” – for noncurrent purposes;

under non-current asset
 at “face value”
 at “current exchange rate” – cash in foreign currency  sinking fund
 preferred redemption fund
 “estimated realizable value” – if financial institution is
 contingent fund
in bankruptcy or financial difficulty; if amount
 insurance fund
recoverable is estimated to be lower than face value
 fund for acquisition/construction of PPE
 BANK OVERDRAFT
- when cash in bank account has a “credit balance”,
resulting from: issuance of checks in excess of deposits
- “current liability”, not be offset against other bank
accounts with debit balances
- not necessary to adjust and open in ledger
- not permitted in the Philippines
EXCEPTION TO THE RULE ON OVERDRAFT
“Cash, net of bank overdraft” – when the company
maintains 2 or more accounts in 1 bank, and 1 account
results in an overdraft – such overdraft may be offset
against the other bank account with a debit balance
- an overdraft may also be offset against other bank
account if the amount is not material
COMPENSATING BALANCE
- takes the form of minimum checking or demand deposit
account balance that must be maintained in connection
with a borrowing arrangement with a bank
- a source of fund to the bank as partial compensation for
the loan extended
- results in the reduction of amount borrowed
CLASSIFICATION OF COMPENSATING BALANCE
“Cash” – if the deposit is not legally restricted as to
withdrawal by the borrower
“Cash held as compensating balance” – if the deposit is
legally restricted; under short-term or long-term
investment depending on related loan
- in many instances, it is not legally restricted
UNDELIVERED OR UNRELEASED CHECKS
- when checks have been merely drawn & recorded but
not given to the payees
- no payment: when the checks are pending delivery to
the payees on balance sheet date
- still subject to company’s control & may be cancelled
anytime before delivery at the discretion of company
- Adjusting Entry: Dr. Cash, Cr. Accounts payable or
appropriate account
POSTDATED CHECKS DELIVERED
- the checks are drawn, recorded, & given to the payees
but they bear a date subsequent to the BS date
- Original Entry: Dr. Cash, Cr. Accounts payable or
appropriate account
- no payment: until checks can be presented to bank for
encashment or deposit
STALE CHECKS or CHECKS LONG OUTSTANDING
- when checks are not encashed by payees within a
relatively long period of time = “stale”
*Negotiable Instruments Law – does not specify a
definite period with which checks must be presented for
encashment. Reference is made to: usage of trade or
business practice
- In banking practice, checks become stale if: not
encashed within 6 months from the time of issuance
- even after 3 months only, the company may issue “stop
payment order” to bank for cancelation
*“Miscellaneous Income” – if amount of stale check is
immaterial. Entry: Dr. Cash, Cr. MI
- If amount is material & liability is expected: Dr. Cash, Cr.
Accounts payable or appropriate account
WINDOW DRESSING
- any deliberate misstatement of the A-L-C-I-E. When the
statements contain any untruth or falsity = window
dressed
- books left open beyond reporting period to show a
better picture of financial highlights & profit activities:
a) By recording as of the last of the accounting period
collections made subsequent to the close of the
period.
b) By recording as of the last day of the accounting
period payments of accounts made subsequent to the
close of the period.
- above practices are unacceptable & undesirable. Entries
must be reversed to correct the statements.
ACCOUNTING FOR CASH OVERAGE
- “Cash Overage” – when cash count shows MORE than
the balance per book
Entry: Dr. Cash, Cr. Cash short or over

LAPPING - if there’s no claim:

Entry: Dr. Cash short or over, Cr. Miscellaneous Income

- a practice for concealing a cash shortage

- misappropriating a collection from one customer &
concealing this defalcation by applying subsequent
collection made from another customer
- involves a series of postponement of entries for
collection of receivables
KITING
- used to conceal a cash shortage too
- possible when a company maintains current accounts in
different banks, usually employed at the end of the
month
- if properly found to be the money of cashier:
Entry: Dr. Cash short or over, Cr. Payable to cashier
IMPREST SYSTEM
- a system of control of cash which requires that all cash
receipts should be deposited intact & all cash
disbursements should be made by means of check
> 2 methods of handling Petty Cash:
1. Imprest Fund System
- one usually followed in handling petty cash transactions

- when a check is drawn against the 1st bank & depositing > Petty cash fund value: consistent
the same check in a 2nd bank to cover the shortage in the
2. Fluctuating Fund System
latter bank
- checks drawn to replenish the fund do not necessarily
- can be discovered by simultaneous preparation of bank
equal the petty cash disbursements which are
reconciliation statements
immediately recorded
ACCOUNTING FOR CASH SHORTAGE
> Petty cash fund value: changing/fluctuating
“Cash shortage” – where the cash count shows cash LESS
*Replenishment Checks – drawn upon the petty cashier’s
than the balance per book
request
Entry: Dr. Cash short or over, Cr. Cash

*Cash short or over – a temporary/suspense/offsetting

account either in shortage or overage

- if the cashier is held responsible for cash shortage:

Entry: Dr. Due from cashier, Cr. Cash

- if reasonable efforts fail to disclose cause of shortage:

Entry: Dr. Loss from cash shortage, Cr. Cash

- if amount of cash shortage is not material, it can be

debited to Miscellaneous Expense