Guidelines on how to study IA

Subjects
1. Know the applicable ACCOUNTING STANDARDS
2. Know the SCOPE of the applicable standards
3. Know the important Definition of Terms
4. Know the RECOGNITION (when? Or tuwing kailan?); (a) initial and (b) Subsequent
5. Know the Measurement (e.g., historical cost/fair value/present value (a) initial and (b)
Subsequent .
6. Essential JOURNAL ENTRIES.
7. Know the PRESENTATION
8. Know the requirements (is there any important matters need to be disclosed to the users)
DISCLOSURE
Cash and Cash
Equivalents
SOURCE: ( I N T E R M E D I AT E A C C O U N T I N G 1 A – 2 0 2 2 E D I T I O N ; Z E U S V E R N O N
MILLAN)
APPLICABLE ACCOUNTING
STANDARDS
1. PFRS 9 – PHILIPPINE FINANCIAL REPORTING
STANDARDS 9 (Financial Instruments)
2. Philippine Accounting Standards (PAS) 32 –
Financial Instruments Disclosure and Presentation
3. PAS 1 – Presentation of Financial Statements
4. PAS 7 – Statements of Cash Flows
Definition of Cash
- includes money or its equivalent that Cash includes CASH ON HAND AND CASH IN
is readily available for unrestricted BANK:
use. a) CASH on HAND – refers to undeposited
collections awaited for deposited and other
- other negotiable instruments that funds held as of the reporting date.
can be used to settle obligations and
acceptable by the bank for deposit and
immediate credit. b) CASH in BANK – refers to deposits in banks
that are available for immediate withdrawal
and unrestricted use.
EXAMPLES OF CASH
a. Coins and Currencies – (Cash on Hand) e. Postal Money orders – similar to bank drafts but
are drawn from post offices or other financial
b. Demand deposits (checking or current institutions. – (Cash on Hand)
accounts) and saving accounts – (Cash in
Bank) F. Cash Funds set aside for use in current operations,
such as:
c. Checks – such as cashier’s checks, personal ◦ Petty Cash Fund – for petty expenses
checks, manager’s checks, traveller’s check,
◦ Revolving Fund – use for current and limited purpose
and certified checks received from
customers or other external parties. – (Cash ◦ Payroll Fund – pansweldo?
on Hand) ◦ Change Fund – panukli?
◦ Dividend Fund
d. Bank drafts - guarantees by bank to advance
◦ Tax fund
funds on the demand by party to whom the
draft was directed. (Cash on Hand) ◦ Interest fund
◦ Other imprest bank account
FUNDFORNONCURRENTOPERATIONS

- these are part of noncurrent assets and SHOULD NOT BE

INCLUDED as part of Cash. Examples are as follows (ACIS P2)
FUND FOR NONCURRENT OPERATIONS
Accro. Account Title Definition

A Acquisition of Property, Plant Always noncurrent even if expected to be disbursed

and Equipment next year (12 months after the reporting period)
C Contingent Fund Noncurrent investment
I Insurance Fund Noncurrent investment
S Sinking Fund Noncurrent investment, if the related bonds payable is
current, the fund is included as cash
P Pension Fund Generally, noncurrent investment, but if the related
liability is current, the fund is included as cash
P Preferred Redemption Fund Noncurrent investment, unless otherwise stated, the
preferred share has a mandatory redemption and if
redeemable.
• w/in 1 year from the reporting period – part of
current investment
• w/in 3 months period from the reporting period –
part of current investment
IMPORTANTNOTE!

- classification of cash fund as current or non-current should be

PARALLEL to the classification applied to the related liability.

Thus, an entity should reclassify such non-current asset if the related

liability becomes current.
Examples of items not included as
cash:
a. Post-dated Checks – checks dated at a future date. (receivables)
b. IOUs or Advances to Employees (receivables)
c. Cash funds not available for use in current operations, such as Sinking Fund,
Plant Expansion Fund, Depreciation Fund, Preference Share redemption
Fund, Contingency fund, and Insurance Fund – these are treated as “other
assets” (discuss already on the previous slides)
d. Postage Stamps – these are unused supplies or prepaid supplies
POSTDATED CHECKS RECEIVED:
- do not qualify as cash because post-dated checks are not immediately available for use.
- it will only be available for use at a future date.
- entities normally record check collections on account by debiting “Cash” and crediting “Accounts
Receivable,” regardless of whether the checks received are post-dated or not. Hence, at the reporting
date, an adjustment is necessary to revert back post-dated checks to Accounts Receivable.
Example:
You received customer’s checks totalling P100,000, and at the end of the reporting period, it is
identified that customer’s check of P20,000, that is included in the collection is post-dated
Journal entry upon receipt of check: Journal Entry to revert back post-dated check:
Cash 100,000 Accounts Receivable 20,000
◦ Accounts Receivable 100,000 Cash 20,000
UNUSED CREDIT LINE

Not included as cash, however DISCLOSED only on the NOTES.

UNRELEASED CHECKS
DRAWN & POST-DATED
CHECKS DRAWN
Entities normally record checks drawn by debiting “Accounts
Payable” and crediting “Cash”. However, when checks drawn are
either (a) unreleased or undelivered to the payee or (b) post-dated,
no payment has actually been made. Hence, an adjusting entry is
needed to revert back the unreleased or undelivered check or post-
dated check to Cash and Accounts Payable.
UNRELEASED CHECKS
DRAWN & POST-DATED
CHECKS DRAWN
Example:
You wrote the following checks today.
Check #1 is drawn for P10,000 and dated today but yet to be
delivered to payee Mr. Alampay next year.
Check #2 is drawn for P15,000 and was delivered to payee Mr.
Balancar today but the check is dated 100 years from now.
Accounts Payable – Alampay 10,000
Accounts Payable – Balancar 15,000
Cash in Bank 25,000
#
UNRELEASED CHECKS
DRAWN & POST-DATED
CHECKS DRAWN
If financial statements are prepared today, both the check drawn
should be reverted back to cash and accounts payable because:
There is no way Mr. Alampay can encash check #1 because you still
hold it.
Mr. Balancar holds check #2 but he cannot yet encash it until after
100 years (if he is still alive ).
Cash in Bank 25,000
Accounts Payable – Alampay 10,000
Accounts Payable – Balancar 15,000
#
STALE CHECKS

When checks delivered to payees are not encashed within a

relatively long period of time, normally 6 months or more, the
checks are referred to as “STALE”. It should be noted though that the
period of time before checks become stale can be a matter of
company policy. STALE CHECKS are reverted back to cash.
SUMMARY:
 Cash includes money or its equivalent that is readily available for unrestricted use.

 Post-dated check RECEIVED - Excluded from cash

 Undelivered check DRAWN - Included in cash

 Post-dated check DRAWN - Included in cash

 Stale Checks - Included in cash

CASH EQUIVALENTS

-These are “short-term, highly liquid investments that are readily

convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.“ (PAS 7.6)
-Only debt instruments acquired within 3 months or less before their
maturity date can qualify as cash equivalents.
EXAMPLES OF CASH
EQUIVALENTS
1. Treasury bills, Treasury notes, or Treasury Bonds acquired 3 months
before maturity date.
a. Treasury bill is a short-term obligation issued by the
government at a discount. Normally, it has maturity of 90 days to
less than a year.
b. Treasury notes and Treasury bonds are long-term obligations
issued also by the government. Treasury notes have a
maturity of 1 year to less than 10 years. Treasury bonds have a
maturity of 10 years or more.
EXAMPLES OF CASH
EQUIVALENTS
2. Money Market Instrument or Commercial Paper acquired 3 months
before maturity date.
◦ A. Money Market instrument – investments in portfolios of short-
term securities.
◦ B. Commercial Papers – consist short-term, unsecured, notes payable
issued in large denominations by large companies with high credit
ratings to other companies and institutional investors. It has a normal
maturity date of less than 270 days and is traded in money markets,
hence it is highly liquid. A commercial paper acquired 3 months or
less before its maturity date is cash equivalents
EXAMPLES OF CASH
EQUIVALENTS
3. Three-month time deposit
◦ TIME DEPOSIT- a form of bank deposit normally made in fixed
denomination, bears interest higher than that of regular deposits,
and has a pre-agreed maturity, and it is evidenced by a CERTIFICATE
OF DEPOSIT.
EXAMPLES OF CASH
EQUIVALENTS
ABC Co. holds the following short-term investment as of December 31, 2022:
A. 1-year Treasury bill maturing on March 30, 2023 acquired on July 1, 2022.
(SHORT-TERM INVESTMENT)
B. 1-year treasury bill maturing on March 30, 2023 acquired on December,
31, 2022. (CASH EQUIVALENT)
FINANCIAL STATEMENT
PRESENTATION
Cash and Cash Equivalents are normally presented as CURRENT
ASSETS, unless these are restricted being exchanged or used to settle
a liability for at 12 months after the reporting period.
UNRESTRICTED both CASH and CASH Equivalents are presented in the
Balance Sheet in a single line item “Cash and Cash Equivalents”. The
breakdown of the line item is disclosed in the notes (NOTES to
Financial Statements).
MEASUREMENT OF CASH
GENERALLY, Cash is measured at FACE AMOUNT (FACE VALUE). Cash
denominated in foreign currency is translated at the current exchange rate at
the reporting date.
Cash maintained in a bank undergoing bankruptcy is excluded from cash and
presented as receivable measured at realizable value.
Realizable value – amount expected to be recovered from the deposit and is
determined usually by reference to the insured amount of the deposit. If it is
DEFERRED, realizable value is determined by discounting it at present value.
DEPOSIT IN FOREIGN BANKS
Included as cash at face amount translated at the current exchange
rate as of the reporting date, and it is available for immediate
withdrawal (unrestricted).
COMPENSATING BALANCE
- minimum amount that must be maintained in an entity’s bank
account as support fund borrowed from the bank.
- IF LEGALLY RESTRICTED – not included as cash, but reported as
either current asset or non-current asset depending on the nature of
its restriction.
- IF NOT LEGALLY RESTRICTED – included as cash.
REMEMBER THE FOLLOWING
CONCEPTS!
 Cash Equivalents – debt instruments ACQUIRED 3 MONTHS OR LESS
BEFORE MATURITY DATE.
The line item “CASH and CASH EQUIVALENTS” includes only
unrestricted cash and cash equivalents. Restricted cash is present as
other line item (e.g. receivable or other assets , depending on the
nature of the restricted cash)
ILLUSTRATION - CASH
The books of ABC Co. shows the following
balances at December 31, 2021:
Treasury Bond, purchased 3/1//2021, maturing
Cash on Hand P100,000 2/28/2022, P 500,000.
Cash in Bank – current P350,000 Treasury Note P 200,000
Cash in Bank – Savings P2,000,000 Unused credit line P2,000,000
Cash in Bank – dollar (unrestricted) $ 100,000 Redeemable Preference Shares, purchased
12/1/2021, due on 3/1/2022; P 370,000
Cash in Bank – dollar (restricted) $ 20,000
Treasury Shares, purchased 12/15/2021, to be
Cash in money market account P 250,000 reissued on 3/5/2022; P 50,000
6-month time deposit $ 60,000 Sinking Fund P 200,000
Treasury Bill, Purchased 12/1/2021, maturing
2/28/2022, P 800,000.
ILLUSTRATION – CASH
continuation….
Additional Information:

 Cash on hand includes a P20,000 customer check  The Cash in Bank – peso saving deposit includes
dated January 10, 2022. a deposit in escrow account amounting to
P340,000 and a compensating balance of
During December 2021, checks amounting to
P250,000 which is legally restricted.
P60,000 and P40,000 were drawn against the
cash in bank – current account. The P60,000  The Cash in Bank – dollar deposit (unrestricted)
check is dated January 15, 2022. The P40,00 is account includes interest of $2,000, net of tax,
dated December 31, 2021, but it was delivered to directly credited to ABC Co.’s account. The
the payee only on January 18, 2022. exchange rate at year-end is $1:P52.
ILLUSTRATION – CASH (Solution)
Compute for the amount of cash and cash equivalents to be reported in 2021 Financial Statements:
Cash on Hand (100k - 20k postdated customer check) 80,000
Cash in Bank - current acct (350K + 60k postdated company check + 40k undelivered Check 450,000
Cash in Bank - savings (2M - 340K deposit in escrow* - 250k restricted compensating) 1,410,000
Cash in Bank - dollar deposit ($100K x P52) 5,200,000
Cash in money-market account 250,000
Treasury bills, purchased 12/1/2021, maturing 2/28/2022 800,000
Redeemable preference shares, purchased 12/1/2021, due on 3/1/2022 370,000
Cash and Cash Equivalents – Adjusted Balance P 8,560,000
BANK OVERDRAFT (Cash
Overdraft)
- a negative (credit) balance in the cash in bank accounting resulting from
overpayment of checks in excess of the amount of deposit.
- occur only in checking accounts, but not in savings and time deposits.
- payable in demand; thus, these are presented as CURRENT LIABILITIES, except in
cases where offsetting is permitted.
- if overdraft is repayable on demand and form an integral part of the entity’s cash
management, it is included as component of cash and cash equivalents as
deduction or offset (PAS7).
- when two or more bank accounts are maintained in the same bank and one
account results to an overdraft, the overdraft may be offset or deducted from other
bank account with positive balance (provided this balance is not restricted)
BANK OVERDRAFT (Continuation)
…
It should be noted that offsetting of assets and liabilities is
appropriate only when permitted by PFRS. Financial Assets and
Financial Liabilities may be offset if the entity has both:

◦ Legal right of setoff

◦ Intention to settle the amounts on a net basis or simultaneously.

BANK OVERDRAFT (Illustration)…
The cash balance of ABC Co. comprises the following:
Cash on Hand 100,000
Cash in bank – saving BPI 200,000
Cash in bank – current BPI (80,000)
Cash in bank – escrow – Metro Bank 100,000
Cash in bank – current – Metro bank (20,000)
Cash in Bank – BDO (current) (30,000)
Total P270,000
Additional Information:
a. Cash on Hand includes undeposited collections of P20,000
b. The cash in bank – savings maintained at BPI includes a P50,000 compensating balance which
not restricted.
BANK OVERDRAFT (Illustration - solution)…
Solution:

Cash on Hand 100,000

Cash in bank – Savings BPI 200,000
Cash in bank – current BPI (80,000)
ADJUSTED BALANCE of cash 220,000