422648315-CHAPTER-7-CASH-AND-CASH-EQUIVALENTS-pptx.pptx

CASH-AND-CASH-EQUIVALENTS

1. CASH AND CASH EQUIVALENTS LEARNING OBJECTIVES TO UNDERSTAND THE CONCEPT OF CASH TO UNDERSTAND THE CONCEPT OF CASH EQUIVALENTS TO IDENTIFY ITEMS CONSIDERED AS CASH TO IDENTIFY ITEMS CONSIDERED AS CASH EQUIVALENTS TO UNDERSTAND THE OMPREST SYSTEMS OF INTERNAL CONTROL TO KNOW ACCOUNTING FOR PETTY CASH FUND

2. CASH INCLUDES MONEY AND ANY OTHER NEGOTIABLE INSTRUMENT THAT IS PAYABLE IN MONEY AND ACCEPTABLE BY BANK FOR DEPOSIT AND IMMEDIATE CREDIT. ACCORDINGLY, CASH INCLUDES CHECKS, BANK DRAFTS AND MONEY ORDERS BECAUSE THESE ARE ACCEPTABLE BY THE BANK FOR DEPOSIT OR IMMEDIATE ENCASHMENT. BUT POSTDATED CHECKS RECEIVED CANNOT BE CONSIDERED AS CASH YET BECAUSE THESE CHECKS ARE UNACCEPTABLE BY THE BANK FOR DEPOSIT AND IMMEDIATE CREDIT OR OUTRIGHT ENCASHMENT.

3. UNRESTRICTED CASH THERE IS NO SPECIFIC STANDARD DEALING WITH “CASH.’’ THE ONLY GUIDANCE IS FOUND IN PAS 1, PARAGRAPH 66, WHICH PROVIDES THAT AN “ENTITY SHALL CLASSIFY AN ASSET AS CURRENT WHEN THE ASSET IS CASH OR A CASH EQUIVALENT UNLESS IT IS RESTRICTED TO SETTLE A LIABILITY FOR MORE THAN TWELVE MONTHS AFTER THE END OF THE REPORTING PERIOD.” ACCORDINGLY, TO BE REPORTED AS “CASH”, AN ITEM MUST BE UNRESTRICTED IN USE.

4. CASH ITEMS INCLUDED IN CASH CASH ON HAND —THIS INCLUDES UNDEPOSITED CASH COLLECTIONS AND OTHER CASH ITEMS AWAITING DEPOSIT SUCH AS CUSTOMERS’ CHECKS, CASHIER’S OR MANAGER’S CHECKS, TRAVELER’S CHECKS, BANK DRAFTS AND MONEY ORDERS. CASH IN BANK —THIS INCLUDES DEMAND DEPOSITS OR CHECKING ACCOUNT AND SAVINGS DEPOSIT WHICH ARE UNRESTRICTED AS TO WITHDRAWAL. CASH FUND SET ASIDE FOR CURRENT PURPOSES SUCH AS PETTY CASH FUND, PAYROLL FUND AND DIVIDEND FUND.

5. CASH EQUIVALENTS PAS 7, PAR 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. THE STANDARD FURTHER STATES THAT “ONLY HIGHLY LIQUID INVESTMENTS THAT ARE ACQUIRED THREE MONTHS BEFORE MATURITY CAN QUALIFY AS CASH EQUIVALENTS”

6. EXAMPLES OF CASH EQUIVALENTS ARE : THREE-MONTH BSP TREASURY BILL THREE-YEAR BSP TREASURY BILL PURCHASED THREE MONTHS BEFORE DATE OF MATURITY THREE-MONTH TIME DEPOSIT THREE-MONTH MONEY MARKET INSTRUMENT OR COMMERCIAL PAPER EQUITY SECURITIES CANNOT QUALIFY AS CASH EQUIVALENTS BECAUSE SHARES DO NOT HAVE A MATURITY DATE.

7. HOWEVER, PREFERENCE SHARES WITH SPECIFIED REDEMPTION DATE AND ACQUIRED THREE MONTHS BEFORE REDEMPTION DATE CAN QUALIFY AS CASH EQUIVALENTS. NOTE THAT WHAT IS IMPORTANT IS THE DATE OF PURCHASE WHICH SHOULD BE THREE MONTHS OR LESS BEFORE MATURITY. INVESTMENT OF EXCESS CASH ESCESS CASH MAY BE INVESTED IN TIME DEPOSITS, MONEY MARKET INSTRUMENTS AND TREASURY BILLS FOR THE PURPOSE OF EARNING INTEREST INCOME.

8. CLASSIFICATION OF INVESTMENT OF EXCESS CASH INVESTMENTS IN TIME DEPOSIT, MONEY MARKET INSTRUMENTS AND TREASURY BILLS SHOULD BE CLASSIFIED AS FOLLOWS: IF THE TERM IS THREE MONTHS OR LESS , SUCH INSTRUMENTS ARE CLASSIFIED AS CASH EQUIVALENTS AND THEREFORE INCLUDED IN THE CAPTION “CASH AND CASH EQUIVALENTS” IF THE TERM IS MORE THAN THREE MONTHS BUT WITHIN ONE YEAR , SUCH INVESTMENTS ARE CLASSIFIED AS SHORT-TERM FINANCIAL ASSETS OR TEMPORARY INVESTMENTS AND PRESENTED SEPARATELY AS CURRENT ASSETS.

9. IF THE TERM IS MORE THAN A YEAR , SUCH INVESTMENTS ARE CLASSIFIED AS NONCURRENT OR LONG-TERM INVESTMENTS . HOWEVER, IF SUCH INVESTMENTS BECOME DUE WITHIN ONE YEAR FROM THE END OF THE REPORTING PERIOD, THEY ARE RECLASSFIED AS CURRENT OR TEMPORARY INVESTMENTS. MEASUREMENT OF CASH CASH IS MEASURED AT FACE VALUE . CASH IN FOREIGN CURRENCY IS MEASURED AT THE CURRENT EXCHANGE RATE.

10. FINANCIAL STATEMENT PRESENTATION THE CAPTION “ CASH AND CASH EQUIVALENTS ” SHOULD BE SHOWN AS THE FIRST LINE ITEM AMONG THE CURRENT ASSETS. THIS CAPTION INCLUDES ALL CASH ITEMS, SUCH AS CASH ON HAND, CASH IN BANK, PETTY CASH FUND AND CASH EQUIVALENTS WHICH ARE UNRESTRICTED IN USE FOR CURRENT OPERATIONS. HOWEVER, THE DETAILS COMPRISING THE “CASH AND CASH EQUIVALENTS” SHOULD BE DISCLOSED IN THE NOTES TO FINANCIAL STATEMENTS.

11. FOREIGN CURRENCY CASH IN FOREIGN CURRENCY SHOULD BE TRANSLATED TO PHILIPPINE PESOS USING THE CURRENT EXCHANGE RATE. DEPOSITS IN FOREIGN COUNTIRES WHICH ARE NOT SUBJECT TO ANY FOREIGN EXHANGE RESTRICTION ARE INCLUDED IN “CASH”. DEPOSITS IN FOREIGN BANK WHICH ARE SUBJECT TO FOREIGN EXCHANGE RESTRICTION, IF MATERIAL, SHOULD BE CLASSIFIED SEPARATELY AMONG NONCURRENT ASSETS AND THE RESTRICTION CLEARLY INDICATED.

12. CASH FUND FOR A CERTAIN PURPOSE IF THE CASH FUND IS SET ASIDE FOR USE IN CURRENT OPERATIONS OR FOR PAYMENT OF CURRENT OBLIGATIONS, IT IS A CURRENT ASSET. IT IS INCLUDED AS PART OF CASH AND CASHF EQUIVALENTS. EXAMPLES OF THIS FUND ARE PETTY CASH FUND, PAYROLL FUND, TRAVEL FUND, INTEREST FUND, DIVIDEND FUND AND TAX FUND. ON THE OTHER HAND, IF THE CASH FUND IS SET ASIDE FOR NONCURRENT PURPOSE OR PAYMENT OF NONCURRENT

13. OBLIGATION, IT IS SHOWN AS LONG-TERM INVESTMENT. EXAMPLES OF THIS FUND ARE SINKING FUND, PREFERENCE SHARE REDEMPTION FUND, CONTINGENT FUND, INSURANCE FUND AND FUND FOR ACQUISITION OR CONSTRUCTION OF PROPERTY, PLANT AND EQUIPMENT. CLASSIFICATION OF CASH FUND THE CLASSIFICATION OF A CASH FUND AS CURRENT OR NONCURRENT SHOULD PARALLEL THE CLASSIFICATION OF THE RELATED LIABILITY.

14. FOR EXAMPLE, A SINKING FUND THAT IS SET ASIDE TO PAY A BOND PAYABLE SHALL BE CLASSIFIED AS CURRENT ASSET WHEN THE BOND PAYABLE IS ALREADY DUE WITHIN ONE YEAR AFTER THE END OF REPORTING PERIOD. HOWEVER, CASH FUND SET ASIDE FOR THE ACQUISITION OF A NONCURRENT ASSET SHOULD BE CLASSIFIED AS NONCURRENT REGARDLESS OF THE YEAR OF DISBURSEMENT. BANK OVERDRAFT WHEN THE CASH IN BANK ACCOUNT HAS A CREDIT BALANCE, IT IS SAID TO BE AN OVERDRAFT.

15. A BANK OVERDRAFT IS CLASSIFIED AS A CURRENT LIABILITY AND SHOULD NOT BE OFFSET AGAINST OTHER BANK ACCOUNTS WITH DEBIT BALANCES. EXCEPTION TO THE RULE ON OVERDRAFT AS STATED EARLIER, A BANK OVRDRAFT SHOULD NOT BE OFFSET AGAINST OTHER BANK ACCOUNTS WITH DEBIT BALANCES. THIS RULE, HOWEVER, IS NOT WITHOUT AN EXCEPTION. WHEN AN ENTITY MAINTAINS TWO OR MORE ACCOUNTS IN ONE BANK AND ONE ACCOUNT RESULTS IN AN OVERDRAFT, SUCH OVERDRAFT CAN BE OFFSET AGAINST THE OTHER BANK

16. THE OTHER BANK ACCOUNT WITH DEBIT BALANCE IN ORDER TO SHOW “ CASH, NET OF BANK OVERDRAFT ” OR “ BANK OVERDRAFT, NET OF OTHER BANK ACCOUNT .” MOREOVER, AN OVERDRAFT CAN ALSO BE OFFSET AGAINST THE OTHER BANK ACCOUNT IF THE AMOUNT IS NOT MATERIAL . COMPENSATING BALANCE A COMPENSATING BALANCE GENERALLY TAKES THE FORM OF MINIMUM CHECKING OR DEMAND DEPOSIT ACCOUNT BALANCE THAT MUST BE MAINTAINED IN CONNECTION WITH A BORROWING ARRANGEMENT WITH A BANK.

17. CLASSIFICATION OF COMPENSATING BALANCE IF THE DEPOSIT IS NOT LEGALLY RESTRICTED AS TO WITHDRAWAL BECAUSE OF AN INFORMAL COMPENSATING BALANCE AGREEMENT, THE COMPENSATING BALANCE IS PART OF CASH . IF THE DEPOSIT IS LEGALLY RESTRICTED BECAUSE OF A FORMAL COMPENSATING BALANCE AGREEMENT, THE COMPENSATING BALANCE IS CLASSIFIED SEPARATELY AS “ CASH HELD AS COMPENSATING BALANCE ” UNDER CURRENT ASSETS IF THE RELATED LOAN IS SHORT-TERM. IF THE RELATED LOAN IS LONG-TERM, THE COMPENSATING BALANCE IS CLASSIFIED AS NONCURRENT INVESTMENT

18. UNDELIVERED OR UNRELEASED CHECK AN UNDELIVERED OR UNRELEASED CHECK IS ONE THAT IS MERELY DRAWN AND RECORDED BUT NOT GIVEN TO THE PAYEE BEFORE THE END OF REPORTING PERIOD. ACCORDINGLY, AN ADJUSTING ENTRY IS REQUIRED TO RESTORE THE CASH BALANCE AND SET UP THE LIABILITY. POSTDATED CHECK DELIVERED A POSTDATED CHECK DELIVERED IS A CHECK DRAWN, RECORDED AND ALREADY GIVEN TO THE PAYEE BUT IT BEARS A DATE SUBSEQUENT TO THE END OF THE ACCOUNTING PERIOD.

19. THE ORIGINAL ENTRY RECORDING A DELIVERED POSDATED CHECK SHALL ALSO BE REVERSED AND THEREFORE RESTORED TO THE CASH BALANCE AS FOLLOWS: CASH XX ACCOUNTS PAYABLE OR APPROPRIATE ACCT XX THE REASON IS THAT THERE IS NO PAYMENT UNTIL THE CHECK CAN BE PRESENTED TO THE BANK FOR ENCASHMENT OR DEPOSIT. STALE CHECK OR CHECK LONG OUTSTANDING A STALE CHECK IS A CHECK NOT ENCASHED BY THE PAYEE WITHIN A RELATIVELY LONG PERIOD OF TIME.

20. THE QUESTION IS HOW LONG A TIME MUST THE CHECK REMAIN OUTSTANDING? THE NEGOTIABLE INSTRUMENTS LAW PROVIDES THAT WHERE THE INSTRUMENT IS PAYABLE ON DEMAND AND THIS INCLUDE CHECKS, PRESENTMENT MUST BE WITHIN A “REASONABLE TIME” AFTER ITS ISSUE. IN DETERMINING THE “REASONABLE TIME” , CONSIDERATION SHOULD BE MADE REGARDING THE NATURE OF THE INSTRUMENT, THE USAGE OF TRADE OR BUSINESS, IF ANY, WITH RESPECT TO SUCH INSTRUMENT AND THE FACTS OF THE PARTICULAR CASE.

21. IN BANKING PRACTICE, A CHECK BECOMES STALE IF NOT ENCASHED WITHIN SIX MONTHS FROM THE TIME OF ISSUANCE. IF THE AMOUNT OF CHECK IS IMMATERIAL, IT IS SIMPLY ACCOUNTED FOR AS MISCELLANEOUS INCOME AS FOLLOWS: CASH XX MISCELLANEOUS INCOME XX HOWEVER, IF THE AMOUNT IS MATERIAL AND LIABILITY IS EXPECTED TO CONTINUE, THE CASH IS RESTORED AND THE LIABILITY IS AGAIN SET UP. THE JOURNAL ENTRY AS FOLLOWS: CASH XX ACCOUNTS PAYABLE OR APPROPRIATE ACCT XX

22. ACCOUNTING FOR CASH SHORTAGEOR OVER WHERE THE CASH COUNT SHOWS CASH WHICH IS LESS THAN THE BALANCE PER BOOK, THERE IS A CASH SHORTAGE TO BE RECORDED AS FOLLOWS: CASH SHORT OR OVER XX CASH XX THE CASH SHORT OR OVER ACCOUNT IS ONLY TEMPORARY OR SUSPENSE ACCOUNT. WHEN FINANCIAL STATEMENTS ARE PREPARED THE SAME SHOULD BE ADJUSTED. WHEN FINANCIAL STATEMENTS ARE PREPARED THE SAME SHOULD BE ADJUSTED.

23. HENCE IF THE CASHIER OR CASH CUSTODIAN IS HELD RESPONSIBLE FOR THE CASH SHORTAGE, THE ADJUSTMENT SHOULE BE: DUE FROM CASHIER XXX CASH SHORT OR OVER XXX HOWEVER, IF REASONABLE EFFORTS FAIL TO DISCLOSE THE CAUSE OF THE SHORTAGE, THE ADJUSTMENT IS: LOSS FROM CASH SHORTAGE XXX CASH SHORT OR OVER XXX

24. ACCOUNTING FOR CASH OVERAGE WHERE THE CASH COUNT SHOWS CASH WHICH IS MORE THAN THE BALANCE PER BOOK, THERE IS A CASH OVERAGE TO BE RECORDED AS FOLLOWS: CASH XXX CASH SHORT OR OVER XXX NOTE THAT WHETHER IT IS A CASH SHORTAGE OR CASH OVERAGE, THE OFFSETTING ACCOUNT IS CASH SHORT OR OVER ACCOUNT. SUCH ACCOUNT SHOULD BE ADJUSTED WHEN STATEMENTS ARE MADE.

25. THE CASH OVERAGE IS TREATED AS MISCELLANEOUS INCOME IF THERE IS NO CLAIM ON THE SAME. CASH XXX MISCELLANEOUS INCOME XXX BUT WHERE THE CASH OVERAGE IS PROPERLY FOUND TO BE THE MONEY OF THE CASHIER, THE JOURNAL ENTRY IS: CASH SHORT OR OVER XXX PAYABLE TO CASHIER XXX

26. IMPREST SYSTEM THE IMPREST SYSTEM IS 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. WHILE INTERNAL CONTROL IDEALLY REQUIRES THAT ALL PAYMENTS SHOULD BE MADE BY MEANS OF CHECK, THIS IS SOMETIMES IMPOSSIBLE. PETTY CASH FUND THE PETTY CASH FUND IS MONEY SET ASIDE TO PAY SMALL

27. EXPENSES WHICH CANNOT BE PAID CONVENIENTLY BY MEANS OF CHECK. THERE ARE TWO METHODS OF HANDLING THE PETTY CASH, NAMELY: IMPREST FUND SYSTEM FLUCTUATING FUND SYSTEM IMPREST FUND SYSTEM THE IMPREST FUND SYSTEM IS THE ONE USUALLY FOLLOWED IN HANDLING PETTY CASH TRANSACTIONS.

28. ACCOUNTING PROCEDURES A CHECK IS DRAWN TO ESTABLISH THE FUND PETTY CASH FUND XXX CASH IN BANK XXX PAYMENT OF EXPENSES OUT OF THE FUND NO FORMAL JOURNAL ENTRIES ARE MADE. THE PETTY FUND CASHIER GENERALLY REQUIRES A SIGNED PETTY CASH VOUCHER FOR SUCH PAYMENTS AND SIMPLY PREPARES MEMORANDUM ENTRIES IN THE PETTY CASH JOURNAL.

29. c. REPLENISHMENT OF PETTY CASH PAYMENTS WHENEVER THE PETTY CASH FUND RUNS LOW, A CHECK IS DRAWN TO REPLENISH THE FUND. THE REPLENISHMENT CHECK IS USUALLY EQUAL TO THE PETTY CASH DISBURSEMENTS. IT IS AT THIS TIME THAT THE PETTY CASH DISBURSEMENTS ARE RECORDED AS FOLLOWS: EXPENSES XXX CASH IN BANK XXX IT IS TO BE POINTED OUT THAT THE PETTY CASH DISBURSEMENTS SHOULD BE REPLENISHED ONLY BY CHECK AND NOT FROM UNDEPOSITED COLLECTIONS .

30. d. AT THE END OF THE ACCOUNTING PERIOD, IT IS NECESSARY TO ADJUST THE UNREPLENISHED EXPENSES IN ORDER TO STATE THE CORRECT PETTY CASH BALANCE AS FOLLOWS: EXPENSES XXX PETTY CASH FUND XXX THE ADJUSTMENT IS TO BE REVERSED AT THE BEGINNING OF THE NEXT ACCOUNTING PERIOD. THE REVERSAL IS MADE IN ORDER THAT THE NORMAL REPLENISHMENT PROCEDURE MAY BE FOLLOWED BY SIMPLY DEBITING EXPENSES AND CREDITING CASH IN BANK WITHOUT DISTINGUISHING WHETHER THE EXPENSES PERTAIN TO THE CURRENT PERIOD OR PRIOR PERIOD.

31. e. AN INCREASE IN THE FUND IS RECORDED AS FOLLOWS: PETTY CASH FUND XXX CASH IN BANK XXX f. A DECREASE IN FUND IS RECORDED AS FOLLOWS: CASH IN BANK XXX PETTY CASH FUND XXX FLUCTUATING FUND SYSTEM THE SYSTEM IS CALLED “ FLUCTUATING FUND SYSTEM” BECAUSE THE CHECKS DRAWN TO REPLENISH THE FUND DO NOT NECESSARILY EQUAL THE PETTY CASH DISBURSEMENTS.

32. THE REPLENISHMENT CHECKS ARE SIMPLY DRAWN UPON THE REQUEST OF THE PETTY CASH FUND CASHIER. MOREOVER, PETTY CASH DISBURSEMENTS ARE IMMEDIATELY RECORDED THUS RESULTING IN A FLUCTUATING PETTY CASH BALANCE PER BOOK FROM TIME TO TIME. ESTABLISHMENT OF THE FUND PETTY CASH FUND XXX CASH IN BANK XXX

33. PAYMENT OF EXPENSES OUT OF THE PETTY CASH FUND EXPENSES XXX PETTY CASH FUND XXX UNDER THIS SYSTEM, THE DISBURSEMENTS ARE IMMEDIATELY RECORDED IN CONTRADISTINCTION WITH THE IMPREST FUND SYSTEM WHERE DISBURSEMENTS ARE RECORDED UPON THE REPLENISHMENT OF THE FUND. REPLENISHMENT OR INCREASE OF THE FUND PETTY CASH FUND XXX CASH IN BANK XXX THE REPLENISHMENT MAY OR MAY NOT BE THE SAME AS THE PETTY CASH DISBURSEMENTS.

34. AT THE END OF THE REPORTING PERIOD, NO ADJUSTMENT IS NECESSARY BECAUSE THE PETTY CASH EXPENSES ARE RECORDED OUTRIGHT. DECREASE OF THE FUND IS RECORDED AS FOLLOWS: CASH IN BANK XXX PETTY CASH FUND XXX