Intermediate Accounting: Cash and Cash Equivalents

Jul 12, 2024

Intermediate Accounting 1: Cash and Cash Equivalents (Part 1)

Introduction

  • Topic: Cash and Cash Equivalents
  • Goals: Define and determine inclusions and exclusions on Cash and Cash Equivalents
  • Video: Part 1 of Discussion

Overview

  • Current Assets: Focus on cash and cash equivalents
  • Standards: International Accounting Standard (IAS) 1 - Presentation of Financial Statements
  • Criteria for Classification as Current Asset:
    • Realized or consumed in normal operating cycle
    • For trading purposes
    • Realized within 12 months
    • Cash and cash equivalents (unless restricted for more than 12 months)

Cash Items

  • Measured at Face Value: No special techniques needed
  • Unrestricted Use: Cash must be unrestricted for operational activities
  • Inclusions:
    • Cash on hand
    • Undeposited collections
    • Checks, bank drafts, money orders
    • Cash in bank (no withdrawal restrictions)
    • Working funds (e.g., petty cash fund, change fund)

Cash Equivalents

  • Definition: Short-term, highly liquid investments readily convertible to cash
  • Three-Month Rule: Maturity within 3 months from purchase
  • Examples:
    • Three-month time deposits
    • Commercial papers
    • BSP Treasury bills (purchased within 3 months of maturity)

Reporting Excess Cash Investments

  • Classifications:
    • 3 months or less: Cash equivalent
    • More than 3 months, less than 1 year: Short-term investment
    • More than 1 year: Long-term investment (non-current asset)

Handling Borrowings and Compensating Balances

  • No Legal Restrictions: Report as cash
  • With Legal Restrictions:
    • Short-term loan: Cash held as compensating balance (current asset)
    • Long-term loan: Long-term investment

Other Items

  • Post-Dated Checks: Revert to cash at the end of the reporting period
  • Cash Shortage/Overage:
    • Shortage: Debit reason (e.g., loss), credit Cash Short or Over
    • Overage: Credit reason (e.g., miscellaneous revenue), debit Cash Short or Over
  • Internal Control: Impress system for managing cash

Practical Examples and Problems

  • Example Problems: Include problems related to identification and classification of cash and cash equivalents, and handling various scenarios like bank overdrafts and restricted funds.

Conclusion

  • Upcoming Topic: Bank reconciliation statement and proof of cash
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