FINANCIAL ACCOUNTING 1: CASH AND CASH EQUIVALENT INTERMEDIATE ACCOUNTING 1: CASH AND CASH EQUIVALENT

1. Intermediate Accounting 1 by Robles and Empleo
Financial Accounting 1 by Valix and Peralta
NO COPYRIGHT INFRINGEMENT INTENDED
FOR REVIEW PURPOSES ONLY

2. • Any item that is acceptable by bank
or other financial institution for
deposit at face value.
• Cash Items
 Cash on Hand
- Includes undeposited collections such as bills and coins,
customer’s checks, manager’s checks, traveler’s checks,
cashier’s checks, bank drafts and money order.
 Cash in Bank
- Includes demand deposit or checking account and
saving deposit which are unrestricted as to withdrawal.
 Cash Fund
-working funds segregated for current purposes such as
petty cash fund, change fund, payroll fund, dividend fund,
tax fund, and interest fund.

3. Cash Items
Unrestricted and
immediately
available for use
in current
operation.
Reported as
“Cash” in the
current asset
section.
Reported as
“Cash” in the
current asset
section.
Restricted and
for use other
than for current
operations.
Reported under
other non
current financial
assets.

4. • Short term highly liquid financial
instruments that are so near their
maturity and that there is insignificant
risk of change in value due to
fluctuation of interest rates.
• Only highly liquid investments that
are acquired three months before
maturity can qualify as cash
equivalents.
• Examples: 3-month BSP Treasury Bill, 3-month
Time deposit, 3-month money market
instrument or commercial paper.

5. CASH EQUIVALENT- matures 3 months
or less from the date of acquisition.
SHORT TERM/TEMPORARY
INVESTMENT- matures less than 1 year
from the date of acquisition.
LONG TERM INVESTMENT- matures
more than 1 year from the date of
acquisition.
“Temporary investments in equity shares are not
included as part of cash equivalents because these
securities do not have maturity dates. Except for
Redeemable Preference share(considered as debt
instrument), it can be reported as cash equivalent if
purchased within 3 months or less before redemption
date.”

6. • Cash is generally measured at face
value, which is its fair value.
• The caption “Cash and Cash
Equivalents” should be shown as the
first item among the current assets.
• Considerations in reporting cash
balance in the balance sheet:
 Foreign Currency- If it is unrestricted, then it
should be translated to Philippine currency using
the exchange rate at the end of the reporting
period. However, if it is restricted as to withdrawal,
then it should be reported as non-current asset.
 Cash in closed banks or in banks having
financial difficulty or in bankruptcy- it should be
reclassifies as receivable and should be written
down to its recoverable amount.

7.  Customer’s Post-dated Checks, NSF (No
Sufficient Fund checks), IOU’s (“I Owe You” notes)-
they should be reported as receivables rather than
cash. NSF checks in the Philippines are often
described as DAIF (Drawn Against Insufficient
Funds) and DAUD (Drawn Against Unclear
Deposits) checks.
Entry:
Receivables xxx
Cash in Bank xxx
 Postage Stamps and expense advances- They
are not cash, but they are reported as prepaid
expenses.

8.  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
deposits (deposits<disbursements). Under PFRS
overdraft should be reported as a liability and it
may be offset against a positive balance in another
bank account with the same bank if a right of
offset exists between the bank and the depositor.
Moreover, an overdraft can also be offset against
the other bank account if the amount is not
material. However, overdrafts are not permitted in
the Philippines.

9. Example:
WASHURPROBLEM Co. had the following cash
balance items listed in its trial balance at
12/31/14:
BDO savings and loan P 50,000
RCBC Bank (5,000)
Metrobank 10,000
• If WASHURPROBLEM Co. reports under PFRS, its
12/13/14 balance sheet would show that cash
balance?
a. (P5,000) c. P55,000
b. P60,000 d. None of the Above
: The credit balance of (P5000) should be recorded
under liabilities.

10.  Undelivered or Unreleased Checks- are the
company’s checks drawn and recorded as
disbursed but are not actually issued or delivered
to the payees as of the reporting date. These
checks should not be deducted from the
company’s cash balance until they have been
mailed or otherwise delivered. Therefore, these
checks should be reverted to the cash balance.
As a result, liabilities that the checks are intended
to liquidate still exist and should be reported as
current payables.
Entry:
Cash in Bank xxx
Accounts Payable xxx

11.  Company’s Postdated Check- are company’s
check which has been recorded as issued and
delivered to payee before or at the end of the
reporting period should be reverted to cash and
the corresponding liability shall continue to be
recognized, because there is no actual payment
yet, as of that date.
Entry:
Cash in Bank xxx
Accounts Payable xxx
 Compensating Balances- are minimum amounts
that a company agrees to maintain in a bank
checking account as support or collateral for a
loan by the depositor.

12. • Not legally restricted- the amount is reported
as part of Cash. The nature of the arrangement
is disclosed in the notes of the financial
statements.
• Legally Restricted- the amount should be
classified separately either as current asset or
non-current asset depending on the nature
of the loan.
 Cash set aside for long-term specific purpose
or acquisition of a non-current asset (Bond
Sinking Fund and Plant expansion Fund)-
reported as non-current asset.
 Stale Check or Check Long Outstanding- is a
check not encashed by the payee within six
months from the time of issuance. Thus, even
after three months only, the entity may issue a
“stop payment order” to the bank for the
cancelation of a previously issued check.

13. Entries:
• If the amount of stale check is immaterial
Cash xxx
Miscellaneous Income xxx
• If the amount is material and liability is
expected to continue
Cash xxx
Accounts Payable xxx

14. • Effective cash management requires
controls to protect cash from loss
through theft or fraud. The following are
some characteristics of a system of cash
control:
 Segregation of duties for handling cash and
recording cash transactions
 Imprest System- characterized by daily deposit of
all cash receipt intact to the bank and making
disbursements through issuance of checks.
Expenditures involving small amounts are made
from Petty Cash Fund.
 Voucher System- all disbursements must be
supported by properly approved vouchers, which
must be recorded in the voucher register.
 Internal Audits at irregular intervals
 Periodic Bank Reconciliation

15. • Is a practice of opening the books of
accounts beyond the close of the
reporting period for the purpose of
showing a better financial position
and performance.
• Window dressing is usually
accomplished as follows:
a. By recording as of the last day of the
reporting period collections made
subsequent to the close of the period.
b. By recording as of the last day of the
reporting period payments of accounts
made subsequent to the close period.

16. • Such practices are unacceptable and
undesirable. The entries made to
window dress must be reversed to
correct the statements.
• In a very broad sense, window
dressing is any deliberate
misstatement of the assets, liabilities,
equity, income, and expenses.
• When the statements contain any
untruth or falsity, the statements are
said to be window dressed.

17. • Is a practice used for concealing cash
shortage.
• Consists of misappropriating a
collection from one customer and
concealing this defalcation by
applying a subsequent collection
made from another customer.
• Involves a series of postponements of
the entries for the collection of
receivables.

18. • Is another device used to conceal a
cash shortage.
• It is possible when an entity maintains
current accounts in different banks.
Kiting is usually employed at the end
of the month.
• It 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.
No entry is made for both the
drawing and deposit of the check.

19. • Entry when cash count shows cash is
less than the balance per book:
Cash short or over xxx
Cash xxx
(The Cash short or over account is only a
temporary or suspense account. It means
that when financial statements are prepared
the same should be adjusted.)

20. • Adjustment entry if the cashier or
cash custodian is held responsible for
cash shortage:
Due from cashier xxx
Cash short or over xxx
• Adjustment entry if reasonable efforts
fail to disclose the cause of the
shortage:
Loss from cash shortage xxx
Cash short or over xxx
(If the cash shortage is not material, it can
be debited to miscellaneous expense.)

21. • Entry when cash count shows cash which is
more than the balance per book:
Cash xxx
Cash short or over xxx
• Adjusted entry if the cash overage is found
to be the money of the cashier:
Cash short or over xxx
Payable to cashier xxx
• Adjusted entry if the cash overage has no
claim:
Cash short or over xxx
Miscellaneous expense xxx

22. • A system of cash control which
requires all cash receipts should be
deposited intact and all cash
disbursements should be made by
means of check.
• However, an enterprise considers it
impractical to write checks for small
items such as taxi fares, postage,
express charges, and minor supplies.
A company usually pays for these
kind of items from a petty cash fund.
• It provides simple but effective
control over small amounts of
expenditure.

23. • Is money set aside to pay small
expenses which cannot be paid
conveniently by means of check.
• Two methods of handling the petty
cash:
a. Imprest Fund System- is the one
usually followed by many.
b. Fluctuating Fund System

24. • Entry for establishment of PCF:
Petty Cash Fund xxx
Cash In Bank xxx
• Entry for payment of expenses out of
the fund:
NO ENTRY
• Entry for replenishment of petty cash
payments:
Various Expenses xxx
Cash In Bank xxx

25. • Adjusting entry for the unreplenished
expenses at the end of the accounting
period:
Various Expenses xxx
Petty Cash Fund xxx
• Entry for increase in fund:
Petty Cash Fund xxx
Cash in Bank xxx
• Entry for decrease in fund:
Cash In Bank xxx
Petty Cash Fund xxx

26. • Entry for establishment of PCF:
Petty Cash Fund xxx
Cash In Bank xxx
• Entry for payment of expenses out of
the fund:
Various Expenses xxx
Petty Cash Fund xxx
• Entry for replenishment of petty cash
payments:
Petty Cash Fund xxx
Cash In Bank xxx

27. • Adjusting entry for the unreplenished
expenses at the end of the accounting
period:
NO ENTRY
(No adjustment necessary because the
petty cash expenses are recorded
outright.)
• Entry for increase in fund:
Petty Cash Fund xxx
Cash in Bank xxx
• Entry for decrease in fund:
Cash In Bank xxx
Petty Cash Fund xxx