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Topic 1
CASH AND CASH EQUIVALENTS
By L.J. SZE
CASH
&
Cash Equivalents
CASH
In Laymans term: Cash simply means money. Money is the standard medium of exchange in business transaction. It refers to currency and coins. In Accounting: Cash includes money and any other negotiable instrument that is payable in money and acceptable by bank for deposit and immediate credit. credit.
CASH
Cash includes: Checks Bank drafts Money orders Example: 1. Received check in full settlement of accounts receivables.
Dr. Cash xxx Cr. Accounts Receivable xxx 2. Received postdated check in full settlement of accounts receivables. Postdated checks cannot be considered as cash yet because these checks are unacceptable by the bank for deposit.
CASH
PAS 1 an entity shall classify an asset as current when the asset is cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the end of the reporting period. Accordingly, to be reported as cash, an item must be unrestricted in use. use. Cash must be readily available in the payment of current obligations.
CASH
The following cash items are included in cash: Cash on hand Cash in bank Cash Fund undeposited cash Customers checks Cashiers or managers checks Demand deposit or checking account Saving deposit Set aside for current purposes such as petty cash fund, payroll fund and dividend fund.
CASH EQUIVALENTS PAS 7 cash equivalents as short-term and highly liquid shortinvestments 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.
only highly liquid investments that are acquired three months before maturity can qualify as cash equivalents.
CASH EQUIVALENTS
Equity securities cannot qualify as cash equivalents because shares do not have a maturity date.
Preference shares with specified redemption date and acquired 3 months before redemption date can qualify as cash equivalents. equivalents.
Valuation of Cash
Cash is valued at face value. value. Cash in foreign currency is valued at the current exchange rate. rate.
Financial Statement Presentation The caption cash and cash equivalents should be shown as first item among the current assets.
Cash on hand Cash and cash equivalents Cash in bank Petty cash fund Cash equivalents
Notes to Financial Statement s
Compensating Balance
Minimum checking or demand deposit account balance that must be maintained in connection with borrowing arrangement with a bank. Classification: Not legally restricted
Informal agreement
Cash
Short-term Cash held as compensating balance Noncurrent investment
Legally restricted
Undelivered or unreleased checks Merely drawn and recorded but not given to the payee. Undelivered checks are still subject to entitys control.
No payment when the checks are pending delivery to payees . Adjusting entry is required to restore the cash balance: Dr. Cash Cr. A/P xxx xxx
Postdated checks delivered Means that checks are drawn, recorded and already given to the payees but they bear a date subsequent to the end of reporting period.
The original entry should be reversed as follows: Dr. Cash xxx Cr. Accounts payable xxx
Reason: There is no payment until checks can be presented to the bank for encashment or deposit
Stale checks
When the checks are not encashed by the payee within a relatively long period of time. In banking practice, checks become stale if not encashed within six months from the time of issuance. Immaterial: Dr. Cash xxx Cr. Miscellaneous Income xxx Material: (If liability is expected to continue) Dr. Cash xxx Cr. Miscellaneous Income xxx
Window dressing Is any deliberate misstatement of the assets, liabilities, capital, income and expense.
By recording as of the last day of the accounting period collections made subsequent to the close of the period.
By recording as of the last day of the accounting period payments of accounts made subsequent to the close of the period.
Window dressing
Misappropriating a collection from one customer and concealing by applying subsequent collection made from another customer.
Kiting
Occurs when a check is drawn against a first bank and depositing the same check in a second bank to cover the shortage in the latter bank.
IMPREST SYSTEM
A system of control of cash which requires that all cash receipts should be deposited intact and all cash disbursements should be made by means of check.
Two methods of handling the petty cash: 1. Imprest fund system 2. Fluctuating fund system