FINANCIAL ACCOUNTING AND REPORTING

CASH AND CASH EQUIVALENT

Cash - In accounting, cash includes money in the form of currency and coins, negotiable instruments in the form of
checks, bank drafts and money orders acceptable by the bank for immediate credit and bank deposits whether in a
savings or current account.

 Unrestricted Cash means cash must be readily available in the payment of current obligations
and not be subject to any restrictions.

It includes Cash On Hand as well as current and other accounts maintained with banks:
a. Undeposited currency and coins
b. Petty cash- cash items that are kept on hand to pay for minor expenditures.
c. Demand deposits- amounts on deposit in checking and savings account, respectively.
d. Undeposited negotiable checks- are checks payable to the company or bearer but not yet presented
to the banks for payment.
e. Foreign currencies- converted to their peso values are also included in the cash.
f. Bank drafts- are commitments by banking institutions to advance funds on demand by the party to
whom the draft was directed.
g. Money orders- are similar financial instruments to banks drafts but are drawn generally from
authorized post offices or other financial institutions.
h. Other short-term funds for current operations

CASH EQUIVALENTS – Under PAS 7, cash equivalents are short-term and highly liquid investment 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.

 Only highly liquid investments that are acquired 3-months before maturity can qualify as cash equivalents
such as;
a. 3-months commercial paper or money market instruments
b. 3-months time deposits
c. 3-months treasury bills
d. 3 years BSP treasury bill purchased 3mos before maturity date.
** Treasury bonds are usually for Long-term investments.
** Equity Securities no maturity date, therefore cannot qualify as CE
** Preference Shares with specified redemption date qualify as CE if purchased 3mos or less before maturity date.

MEASUREMENT OF CASH
1. At Face Value
2. At Current Exchange Rate if in foreign currency
3. At Estimated realizable value (if amount recoverable is est. lower than Face Value) if the entity is in
bankruptcy or financial difficulty.

Classification of investment of excess cash in time deposit, money market instruments and treasury bills:
a. If term is ≤ 3mos, CE
b. If term is > 3mos but ≤ 1yr, Short-term Investment (CA)
c. If term is >1yr, Long-term Investment (NCA)
 However, when the investments become due within 1yr from the end of the reporting periods,
reclassify as Current or temporary investment.

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Treatment of Foreign Currency:

a. If not subject to any foreign exchange restriction, Cash
b. If subject to any foreign exchange restriction, NCA if material.

Classification of Cash Fund as Current or Non Current is parallel to the classification of liability.
a. Cash fund set aside for use in current operations or for payment of current obligation, CCE (CA)
 Petty Cash Fund, Payroll fund, Travel fund, Interest fund, Dividend Fund and Tax Fund
b. Cash fund set aside for non-current purpose or payment of non-current obligations, LTI (NCA)
 Sinking fund, Preference Share Redemption Fund, Contigent Fund, Insurance Fund, Cash
Surrender Value and Fund for acquisition or construction of PPE.

Bank overdraft- Credit Balance in the CIB from the issuance of checks in excess of the deposit. CL
- General rule: It can’t be offset against other bank accounts except when the entity maintains 2 or
more account in 1 bank, to show “Cash, net of bank overdraft”. Moreover an overdraft can also be
offset against the other bank account if amount is immaterial.

Compensating Balance- is a form of minimum checking or demand deposit account balance that must be
maintained in connection with a borrowing arrangement with a bank.
 Informal compensating balance agreement: If deposit is not legally restricted as to withdrawal,
compensating balance is part of CASH.
 Formal compensating balance agreement: If deposit is legally restricted, the compensating balance
is classified separately as CASH HELD AS COMPENSATING BALANCE under:
a) The related loan is short-term: The compensating balance shall be part of current assets but separately
from cash.
b) The related loan is long-term: The compensating balance is part of noncurrent assets as an
investment.

Undelivered or Unreleased check- checks merely drawn and recorded but not given to the payee before
the end of the reporting period. Since the check is still pending for delivery to the payee (no payment
made), an adjusting entry is required to restore the cash balance and set up the liablility by;
Cash P xxx
Payable P xxx

Postdated check delivered- is a check drawn, recorded and already given to the payee with a date
subsequent to the end of the reporting period. (eg. Delivery date: Nov. 30, 2018 ; Date of the instrument:
Feb 2, 2019) Since there’s no payment until the check can be presented to the bank for encashment or
deposit the adjusting entry to restore cash balance:
Cash P xxx
Payable P xxx

Stale check- are checks not encashed by the payee within 6mos from the time of issuance.
 If amount is Immaterial:
Cash P xxx
Miscellaneous Income P xxx
 If material: Cash P xxx
Payable P xxx

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Window Dressing- practice of opening the books of account beyond the closing period to show better
financial position and performance.
- Deliverate misstatement of the assets, liabilities, equity, income and expenses. (falsity, untruth)
It is done by:
a. Recording as of the last day of the reporting period, the collection in the subsequent year.
b. Recording as of the last day of the reporting period, the payment in the subsequent year.

GENERAL RULE: Books of the entity should be closed at the end of the reporting period to show that the
FS are fairly presented.

Lapping- practice used for concealing cash shortage. It consists of misappropriation of a collection from 1
customer and concealing this defalcation by applying subsequent collection made from another customer.
This also involves a series of postponement of the entries for the collections of AR and indicates poor
internal control (bookkeeper and the cashier are one).

Kitting
Imprest system of internal control
Petty cash Fund
Methods of accounting for petty cash fund

NOTE: Unused Postage Stamp and Travel Advances are PREPAID ITEMS. Certificate of Deposit are
SHORT-TERM INVESTMENTS issued by the bank.

In the absence of agreement time deposits are CA (Cash Equivalents)

Check book balance is the same with bank statement balances, if both are given use the BSB otherwise
the Checkbook balance.

PROOF OF CASH

COMPUTATION OF BOOK BALANCES:

Cash In Bank
Beg. Balance Cash Disbursement (Book CR)
Cash Receipts (Book DR) End. Balance

COMPUTATION OF BANK BALANCES:

Cash In Bank
Checks paid by the bank/DR memos (Bank DR) Beg. Balance
End. Balance Deposits/CR memos (Bank CR)

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COMPUTATION OF DEPOSIT IN TRANSIT:

Beg. DIT Xxx
ADD: Cash receipts deposited during the mo Xxx
Total Deposits acknowledged by the bank Xxx
LESS: Deposits acknowledged by the bank during the mo (xxx)
End. DIT Xxx

COMPUTATION OF OUTSTANDING CHECKS:

Beg. OC Xxx
ADD: Checks drawn by the depositor during the mo Xxx
Total Checks ro be paid by the bank Xxx
LESS: Checks paid by the bank during the mo (xxx)
End. OC Xxx

PROOF OF CASH is an expanded reconciliation for the current period that includes proof of receipts and
disbursement.

 3 Forms of PROOF OF CASH

a. Adjusted Balance Method
b. Book to Bank Method
c. Bank to Book Method

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