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Cash and Cash Equivalentsxx

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  Cash and Cash Equivalents Ref:FAR by Valix et’al   CASH AND CASH EQUIVALENTS Cash ã   includes money and any other negotiable instrument that is payable in money and acceptable by banks for deposit and immediate credit. ã   Must be unrestricted in use ã   PAS 1, par. 66: “an entity shall classify an asset as current when the asset is cash or a cash equivalent unless it is restricted to settle a liability for more than twelve months after the end of the reporting period ”   Cash Equivalents ã   PAS 7, par. 6: “shor t term and highly liquid investments that are readily convertible into cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rate”   ã   Limited only to highly liquid investments that are acquired three months before maturity   ã   Can equity securities can qualify as cash equivalents?   o   General Rule: No, equity securities have no maturity date   o   Exception: Preference Shares with specified redemption date and acquired three months before redemption can qualify as cash equivalents   ã   DATE OF PURCHASE TO DATE OF MATURITY: NO reclassification  Classifications of investment of excess cash ã   Term =/< three months = Cash Equivalents   ã   Term >three months<12 months= Short Term financial assets/temporary investments   ã   Term > 12 months   o   General Rule: Noncurrent or Long-Term Investments   o   Exception: If becomes due within 1 year=Reclassify to current/temporary investments  Cash Fund For a certain purpose ã   Cash fund for use in current operations or payment of current liability=Cash and Cash Equivalents   ã   Cash fund for use in noncurrent purposes or payment of long-term debt=Long Term Investment   ã   Classifications as current or noncurrent should parallel the classification of related liability   ã   Cash fund set aside for acquisition of noncurrent asset shall be classified as non current regardless of the year of disbursement  Bank Overdraft ã   General Rule: Current liability and should not be offset against other bank accounts ã   Exceptions: o   When an entity has 2 accounts in the same bank o   When the amount of overdraft is immaterial ã   No need t to open a new account to account overdraft ã   OVERDRAFTS ARE NOT PERMITTED IN THE PHILIPPINES Compensating Balance ã   Minimum checking or demand deposit account balance that must be maintained in connection with a borrowing arrangement with a bank   ã   Results in a reduction of the amount borrowed   ã   Classification   o   Not legally restricted(informal agreement)=Part of cash   o   Legally Restricted(formal agreement)=cash held as compensating balance   ▪   Short Term Loan=Current investment   ▪   Long Term Loan=Noncurrent investment  Undelivered or Unreleased Checks ã   Drawn and recorded but not given to the payee BEFORE THE END OF REPORTING PERIOD    ã   No payment occurred   ã   Adjusting entry is required EXCEPT when amount is immaterial  Postdated check delivered ã   Drawn, recorded and already delivered to the payee but bears a date SUBSEQUENT TO THE END OF REPORTING PERIOD  Stale Check or check long outstanding ã   Check not encashed by the payee within a relatively long period of time ã   Banking Practice: 6 months Petty Cash Fund ã   Imprest Fund: ã   Fluctuating Fund: BANK RECONCILIATION ã   A statement which brings into agreement the cash balance per book and the cash balance per bank  Forms of Bank Reconciliation ã   Adjusted Balance Method-the book balance and the bank balance are brought to a correct cash balance that must appear on the balance sheet   ã   Book to Bank Method-the book balance is reconciled with the bank balance   ã   Bank to Book Method- the bank balance is reconciled with the book balance  Reconciling Items ã   Book Reconciling Items   o   Credit Memos   ▪   refer to items not representing deposits credited by the bank to account of the depositor but not yet recorded by the depositor   ▪   have the effect of increasing the bank balance ▪   Examples: ã   Notes Receivable collected by bank in favor of the depositor ã   Proceeds of bank loans ã   Matured time deposits o   Debit Memos ▪   Refer to items not representing checks paid by bank which are charged or debited by the bank to the account of the depositor but not yet recorded by the depositor as a cash disbursement ▪   Have the effect of decreasing the bank balance ▪   Examples: ã   No Sufficient Fund (NSF) Checks-checks deposited but returned by the bank because of insufficiency of fund ã   Technically defective checks-checks deposited but returned by the bank because of technical defects such as: o   Absence of signature or countersignature o   Erasures not countersigned o   Mutilated checks o   Conflict between amount in words and in figures ã   Bank Service Charges o   Bank charges for interest, collection, checkbook and penalty ã   Reduction of Loan- pertains to amount deducted from the current account of the depositor in payment for loan which the depositor owes to the bank and which has already matured ã   Bank Reconciling Items o   Deposits in Transit ▪   Collections already recorded by the depositor as cash receipts but not yet reflected on the bank statement ▪   Includes: ã   Collections already forwarded to the bank for deposit but too late too appear in the bank statement  ã   Undeposited collections or those still in the hands of the depositor o   Outstanding Checks ▪   Checks already recorded by depositor as cash disbursement but not yet reflected on the bank statement ▪   Includes: ã   Checks drawn and delivered to payees but not yet presented to the bank for payment ã   Certified Checks o   deducted if included in Total Outstanding Checks because they are already not outstanding for bank reconciliation purposes o   Immediately debited to the depositors account to insure the eventual payment of the check ã   Errors-reconciling item of the party who committed them PROOF OF CASH Two-date bank reconciliation ã   Book Balance   Balance Per Book, beginning xxx Add: Book Debits/Cash Receipts Xxx Less: Book Credits/Cash Disbursements Xxx Balance Per Book, ending Xxx ã   Bank Balance   Balance Per Bank, beginning xxx Add: Bank Credits/Cash Receipts Xxx Less: Bank Debits/Cash Disbursements Xxx Balance Per Bank, ending Xxx ã   Deposit In Transit   Deposits In Transit, beginning xxx Add: Cash receipts deposited during the month 1   Xxx Less: Deposits acknowledge by bank during the month 2   Xxx Balance Per Book, ending Xxx Note: 1.  All items debited to the cash in bank account which do not represent deposits should be deducted from the book debits to arrive at cash receipts deposited. PRESUMPTION: Book debits are assumed to be cash receipts deposited. Note:   2. All items credited to the depositor’s account which do not represent deposits should be deducted from the bank credits to determine the deposits acknowledged by bank. PRESUMPTION: Bank credits are assumed to be deposits acknowledged by bank.   ã   Outstanding Checks   Outstanding Checks, Beginning xxx Add: Checks drawn by depositor during the month Xxx Less: Checks paid by bank during the month Xxx Outstanding Checks, ending Xxx Note: 1.  All items not representing checks credited to the cash in bank account should be deducted from the book credits total to arrive at the checks drawn by the depositor. PRESUMPTION: All book credits are assumed to be checks issued. Note:  2. All items debited to the account of the depositor should be deducted from the bank debits total to arrive at the checks paid by bank. PRESUMPTION: All bank debits are assumed to be checks paid by bank. Forms of Proof of Cash 1.   Adjusted Balance Method ã   General Notes o   The 2 dates columns represent the usual reconciliation o   Proof of cash is a reconciliation of the receipts and disbursements of the CURRENT PERIOD o   Receipts and disbursements as per book and bank are adjusted to equal a correct balance ã   Book Items o   Credit Memos ▪   Previous Month ã   Do not affect the bank receipts for the current month ã   Increase the book receipts for the current month  ã   Book receipts for the current month are overstated ã   Deducted in the book receipts for the current month ▪   Current Month ã   Increased the bank receipts for the current month ã   No effect on the book receipts for the current month ã   Book receipts of the current month are understated ã   Added to the book receipts for the current month o   Debit Memos ▪   Previous Month ã   Do not affect the bank disbursements for the current month ã   Increased bank receipts for the current month ã   Books disbursements for the current month are overstated ã   Deducted from the book disbursements ▪   Current Month ã   Increased bank disbursement for the current month ã   No effect on the book disbursements on the current month ã   Book disbursements are understated ã   Added to the book disbursements ã   Bank Items o   Deposits in Transit ▪   Previous Month ã   Do not affect the book receipts for the current month ã   Increased bank receipts for the current month ã   Bank receipts for the current month are overstated ã   Deducted from the bank receipts for the current month ▪   Current Month ã   Already increased book receipts ã   No effect for the bank receipts for the current month ã   Bank receipts for the current month are understated ã   Added to the bank receipts for the current month o   Outstanding Checks ▪   Previous Month ã   Do not affect the book disbursements ã   Increased the bank disbursements for the current month ã   Bank disbursements for the current month is overstated ã   Deducted from the bank disbursement for the current month ▪   Current Month ã   Increased the book disbursements for the current month ã   No effect on the bank disbursements for the current month ã   Bank disbursements for the current month are understated ã   Added to bank disbursements of the current month 2.   Book to Bank Method   ã   Book Items- treated in the same manner following the adjusted balance method ã   Bank Items- treated in reverse manner following the adjusted balance method o   Deposits in Transit ▪   Previous Month ã   Do not effect the book receipts for the current month ã   Increased the bank receipts for the current month ã   Book receipts for the current month are understated in relation to bank receipts for the current month ã   Added to the book receipts for the current month ▪   Current Month ã   Increased the book receipts for the current Month ã   No effect on the bank receipts for the current month ã   Books receipts for the current month are overstated in relation the bank receipts for the current month ã   Deducted form the book receipts for the current month o   Outstanding Checks
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