Accounting for Cash and Cash Equivalents Definition

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Questions and Answers

Which of the following is NOT considered as part of cash and cash equivalents?

Postdated checks

Time deposits (correct)

Manager’s check

Bank drafts

What is the key characteristic that differentiates cash from other negotiable instruments as per the text?

Unrestricted use (correct)

Availability for immediate credit

Negotiability

Acceptance by the bank

Which of the following is a criterion for an item to be reported as cash in financial statements?

Linked to long-term obligations

Available for future investments

Unrestricted in use (correct)

Subject to contractual restrictions

When translating cash in foreign currency to Philippine currency in financial statements, what exchange rate should be used according to the text?

Closing rate Signup and view all the answers

Which of the following investments is considered a cash equivalent based on the PAS 7 definition?

Money market instruments near maturity Signup and view all the answers

What term best describes investments that are so near maturity that they present insignificant risk of changes in value due to interest rate changes?

Cash equivalents Signup and view all the answers

Why can't equity securities qualify as cash equivalents?

They are considered long-term investments. Signup and view all the answers

When should cash be written down to estimated realizable value?

When the bank is in financial difficulty. Signup and view all the answers

Why are preference shares with specific redemption dates eligible to be classified as cash equivalents?

Because they have maturity dates like treasury bills. Signup and view all the answers

How is foreign currency translated when calculating cash equivalents?

Using current exchange rates. Signup and view all the answers

Which of the following is NOT included in cash and cash equivalents?

Investments in equity securities. Signup and view all the answers

Under what time period would short-term financial assets or temporary investments fall?

More than 3 months but within a year. Signup and view all the answers

In accordance with the text, how should deposits in foreign countries subject to foreign exchange restrictions be classified?

As noncurrent assets with clear indication of the restriction Signup and view all the answers

How should cash funds designated for payment of current obligations be classified?

As current assets Signup and view all the answers

How should compensating balances be accounted for in the financial statements?

Reported as part of cash and cash equivalents Signup and view all the answers

What is the classification of customers' postdated checks and NSF checks?

Classified as receivables Signup and view all the answers

How should bank overdrafts be classified according to the text?

As current liabilities Signup and view all the answers

What is the treatment of cash in closed banks or banks facing financial difficulties?

Classified as receivables and valued at historical cost Signup and view all the answers

Study Notes

Cash and Cash Equivalents

Cash includes money, negotiable instruments (payable in money and acceptable by banks for deposit and immediate credit), and unrestricted funds.
Examples of cash include cash on hand, cash in banks, cash funds, checks, bank drafts, and money orders.

Characteristics of Cash

Unrestricted in use and readily available for payment of current obligations.
Not subject to contractual or other restrictions.

Presentation and Measurement of Cash in the Balance Sheet

Cash items include petty cash fund, cash in bank, postal money order, manager's check, traveler's check, undelivered or unreleased checks, and compensating balances.
Cash set aside for current operations and foreign currency (translated to Philippine currency using the exchange rate at the balance sheet date).

Cash Equivalents

Short-term investments purchased 3 months or less before maturity.
Examples of cash equivalents include 3-month BSP treasury bill, 3-year BSP treasury bill purchased 3 months before maturity, and 3-month time deposit.
Measured at face value, with foreign currency translated to Philippine peso using current exchange rates.

Classification of Investments

Investments in time deposits, money market instruments, and treasury bills:
- 3 months or less: Cash and cash equivalents.
- More than 3 months but within the year: Short-term financial assets or temporary investments (current assets).
- More than 1 year: Long-term investment.

Important Notes

Equity securities cannot qualify as cash equivalents because shares do not have maturity.
Preference shares with specific redemption date and acquired 3 months before redemption date can qualify as cash equivalents.
Deposits in foreign countries with foreign exchange restrictions are classified separately as noncurrent assets.
Cash fund for certain purposes:
- For operations or payment of current obligations: Current assets.
- For non-current purpose or payment of non-current obligations: Long-term investment.

Accounting for Specific Items

Bank overdraft: Current liability, not offset against other bank accounts with debit balances.
Compensating balance: Classified as current asset.
Undelivered checks or unreleased checks: Classified as cash.
Post-dated checks: Do not qualify as cash.
Stale checks or long outstanding checks: Classified as receivables.
Window dressing, lapping, and kiting: Not acceptable accounting practices.
Cash in closed banks/banks having financial difficulty: Classified as receivable and written down to recoverable value.
Customer's post-dated checks and NSF checks: Classified as receivables.
DAUD and DAIF expense advances: Classified as prepaid expense.

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Description

Learn about the definition and components of cash and cash equivalents in accounting. Understand the criteria for an item to be classified as unrestricted cash and be reported as such. Gain insights into what constitutes cash in banks, cash fund, checks, and money orders.