CASH AND CASH Equivalents PDF

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CASH AND CASH EQUIVALENTSCash – money (currency and coins) and any other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit. Accordingly, cash includes checks, bank drafts and money orders because they are acceptable by the bank for deposit or ...

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CASH AND CASH EQUIVALENTS Cash – money (currency and coins) and any other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit. Accordingly, cash includes checks, bank drafts and money orders because they are acceptable by the bank for deposit or immediate encashment. Cash equivalents – 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 values because of changes in interest rates (PAS 7, paragraph 6). Only highly liquid investments that are acquired three months before maturity can qualify as cash equivalents. Example: 1. Three-month BSP treasury bill 2. Three-year BSP treasury bill purchase three months before date of maturity 3. Three-month time deposit 4. Three-month money market instrument

FINANCIAL STATEMENT PRESENTATION AND CLASSIFICATION The caption “cash and cash equivalents” should be shown as the first 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. The details comprising the cash and cash equivalents should be disclosed in the notes to financial statements.

CLASSIFICATION OF INVESTMENTS IN TIME DEPOSIT, MONEY MARKET INSTRUMENT AND TREASURY BILLS Investments in time deposit, money market instruments and treasury bills should be classified as follows: a. 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”. b. If the term is more than three months but within one year, such investments are classified as short-term or temporary investments and presented separately as current assets. c. If the term is more than one year, such investments are classified as long-term investments. However, if such investments become due within one-year from the end of the reporting period, they are classified as temporary investments.

BANK OVERDRAFT When the cash in bank account has a credit balance, it is said to be an overdraft. The credit balance in the cash in bank account results from the issuance of checks in excess of the deposits. A bank overdraft is classified as a current liability and should not be offset against other bank accounts with debit balances. However, if the entity maintains two or more accounts in one bank and one account results in an overdraft, such overdraft may be offset against the other bank account with a debit balance. Moreover, an overdraft may also be offset against the other bank account if the amount is not material.

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COMPENSATING BALANCE A compensating balance is the minimum checking or demand deposit account balance that must be maintained in connection with a borrowing arrangement with bank. Treatment of compensating balance 1. If the deposit is not legally restricted as to withdrawal by the borrower because of an informal compensating balance agreement, the compensating balance is part of cash. 2. 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.

UNDELIVERED AND POSTDATED 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. The unreleased check shall not be treated as outstanding check. Accordingly, the original entry for the payment shall be reversed so as to restore the cash balance and the related liability account. 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 reporting period. The original entry recording a delivered postdated check shall also be reversed and therefore restored to the cash balance.

BANK RECONCILIATION A bank reconciliation is a statement which brings into agreement the cash balance per book and cash balance per bank. It is usually prepared monthly because the bank provides the depositor with the bank statement at the end of every month. A bank statement is a monthly report of the bank to the depositor showing the cash balance per bank at the beginning, the deposits acknowledged, the checks paid, other charges and credits and the daily cash balance per bank during the month. Actually, the bank statement is an exact copy of the depositor’s ledger in the records of the bank.

Bank Reconciliation Balance per book: Unadjusted balance per book Add: Collected Note Receivable Error Subtotal Less: NSF Service Charge Error Adjusted balance per book

xx xx xx xx (xx) (xx) (xx) xx

Balance per bank: Unadjusted balance per bank Add: Deposit in Transit Error Subtotal Less: Outstanding Checks Error

xx xx xx xx (xx) (xx)

Adjusted balance per bank

xx

Credit Memos – refer to items not representing deposits credited by the bank to the account of the depositor but not yet recorded by the depositor as cash receipts. They have the effect of increasing the bank balance. Page 2...