Cash & cash equivalents

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<ul><li> 1. "Rather fail with honor than succeed by fraud." --Sophocles (496-406 BC)</li></ul><p> 2. CASH - belongs to broad category of assets called financial assetsFINANCIAL ASSET - cash or contractual right to receive cash or another financial instrument in the future other example: *receivables * investments in debt and securities 3. CASH ITEM - any item used as standard medium of exchange- for a limited viewpoint, it refers to currency and coins in the circulation - for accounting purposes, an item is considered cash if it is acceptable by bank or other financial institution for deposit at face value 4. - not all cash items qualify for reporting as part of the account title cash or Cash on Hand and in Banks on the statement of financial position - the cash item must be unrestricted and must be immediately available for use in current operations to qualify for presentation as part of Cash on the statement of financial position 5. CASH ITEMS Unrestricted and immediately available for use in current operationsFor use other than for current operationsFor payment of operating expenses For payment of current liabilitiesFor acquisition of current assetCASH in the current asset sectionOther non-current financial asset 6. CASH ON HAND a. Undeposited cash collections currencies such as bills and coins b. Cash items awaiting deposit customers checks, travelers checks, bank drafts, money orders.CASH IN BANK includes demand deposits. There are unrestricted funds deposited in a bank that can be withdrawn upon demand such as amounts in checking and savings account. 7. WORKING FUNDS cash segregated for current use in the ordinary conduct of business. a. Petty cash fundb. Change fund c. Payroll fund d. Dividend funde. Tax fund f. Interest fund 8. CASH EQUIVALENTS These are 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 Maturity dates start from the date of acquisition of the instrument and not from the date indicated on the face of the instrument. 9. TEMPORARY INVESTMENTS These are not included as part of cash equivalents because these equity securities do not have maturity dates. Redeemable preference shares that are to be reacquired by the issuing corporation at a determined redemption date, qualify to be reported as cash equivalents if purchased within three months or less before redemption date. 10. Although cash equivalents are not cash, they are generally presented on the statement of financial position together with cash using the account title Cash and Cash Equivalents 11. CASH is generally measured at face value, which is its fair value. DEMAND DEPOSITS are measured using the exchange rate in effect on the reporting date. Not necessary to classify cash to distinguish between currencies on hand, cash in banks, or deposits at various locations. 12. FOREIGN CURRENCY should be translated to Philippine currency using exchange rate at the reporting date.CASH IN CLOSED BANKS OR BANKS HAVING FINANCIAL DIFFICULTY OR IN BANKRUPTCY should be reclassified as receivable and should be written down to its recoverable amount. 13. CUSTOMERS POST-DATED CHECKS AND NSF CHECKS AND IOUS should be reported as receivables rather than cash. EXPENSE ADVANCES such as advances for employee travel, and postage stamps should be reported as prepaid expenses and not as cash.BANK OVERDRAFTS should be reported as a current liability, except when the depositor has sufficient funds in another account with the same bank. 14. UNDELIVERED OR UNRELEASED CHECKS are the companys checks drawn and recorded but are not actually issued or delivered to the payees as of the reporting date. COMPANYS POSTDATED CHECK which has been recorded as issued and delivered to payees before or at the reporting date should be reverted to cash. 15. COMPENSATING BALANCES are minimum amounts that a company agrees to maintain in bank checking account as support or collateral for a loan by the depositor. CASH SET ASIDE FOR LONG-TERM SPECIFIC PURPOSE is reported as non-current financial asset. 16. Segregation of duties for handling cash and recording cash transactions. Imprest system Voucher system Internal audits at irregular intervals Periodic reconciliation of bank statement balance and cash balance in the companys accounting records. 17. Under this system of cash control, all cash receipts are deposited intact and all cash payments should be made by means of checks.However, an enterprise considers it inconvenient and impractical to write checks for such small items as taxi fares, newspaper delivery charges, postage, express charges, and minor supplies.A company usually pays for these kinds of items from aAn imprest petty cash fund is established for a fixed amount and allows a company to effectively control small amounts of cash fairly simply.petty cash fund. 18. A responsible employee is designated as petty cashier. A check drawn payable to petty cash is encashed, and the petty cashier places the money in the petty cash fund (which is often kept in a locked box or petty cash drawer). The check, which establishes the fund, is usually for an amount that the company estimates will last from two to four weeks. Journal entry for the establishment of the petty cash fund is as follows: Petty Cash Fund Cash in Bankxxx xxx 19. As time passes, the petty cashier disburses money from the fund, but only upon authorization of a responsible officer designated to authorize payment from the fund. To request payment from the petty cash fund, a petty cash voucher must be prepared by the petty cash custodian for payment. Upon payment, the petty cashier keeps the petty cash voucher, and he shall have it signed by the person receiving cash. Any receipt or invoice supporting the payment must be attached to the signed voucher. Ideally at anytime, the remaining bills and coins and the total amount of the paid petty cash fund was established. 20. When the amount of cash in the fund is low, the petty cashier submits the signed petty cash vouchers and accompanying receipts and invoices to the general cashier to request for reimbursement. Reimbursement is made equal in amount to the sum of the petty cash vouchers submitted. The reimbursement, therefore, is for an amount that will increase the amount of bills and coins remaining in the fund to its original amount. The replenishment of the fund is recorded as:Expenses Cash in Bankxxx xxx 21. At year-end, prior to the preparation of financial statements, an adjusting entry is made to recognize the payments from the fund that are not replenished. This adjustment likewise updates and brings the petty cash fund general ledger account to an amount equal to actual cash items in the petty cash fund as of the reporting date. This avoids understatement of expenses and overstatement of cash. This adjustment is usually reversed at the beginning of the ensuring period. Year-end adjustment is recorded as follows: Expenses Petty Cash Fundxxx xxx 22. In instances that the amount in the petty cash fund may be deemed inadequate to satisfy the companys needs, the fund balance is increased and the following journal entry is made: Petty Cash Fund Cash in Bankxxx xxx 23. Is a nominal account that is debited for shortages and credited for overages in the petty cash fund. Such shortages and overages usually result from errors in making change or failure to obtain receipts for very small amounts. In addition, receipts may have been written for an incorrect amount, or money from the fund may have been lost or stolen. 24. Petty Cash Fund10 000Cash in Bank10 000*Establishment of petty cash fundTransportation Expense2 300Representation Expense3 400Office Supplies Expense4 200Cash in Bank *Replenishment9 900 25. Transportation Expense1500Office Supplies Expense2500Advances to Employees3000Representation Expense720Cash Short and Over Petty Cash Fund*Adjusting Entry80 7800 26. The balances of the bank statement and the bank account in the cash book rarely agree because of the timing difference, omissions and errors made by the bank or the firm itself. 27. Bank reconciliation statements can be used to explain the reasons for the differences and to identify errors and omissions in both documents, so that corrections can be made as soon as possible. 28. DEPOSIT IN TRANSIT or UNDEPOSITED COLLECTION These are amounts already received and recorded by the company, but are not yet recorded by the bank, either because it is not yet received by the bank as of cutoff time (deposit in transit) or it has not yet been deposited as of the end of the month (undeposited collection) * It understates the bank balance. 29. OUTSTANDING CHECKS These are checks that have been written and recorded in the company's Cash account, but have not yet cleared the bank account. Checks written during the last few days of the month plus a few older checks are likely to be among the outstanding checks. * It overstates the bank balance. 30. BANK ERRORS These are mistakes made by the bank. Bank errors could include the bank recording an incorrect amount, entering an amount that does not belong on a company's bank statement, or omitting an amount from a company's bank statement. The company should notify the bank of its errors. Depending on the error, the correction could increase or decrease the balance shown on the bank statement. * (Since the company did not make the error, the company's records are not changed.) 31. Balance per bank statement on Sept. 30, 2011 Adjustments: Add: Deposits in transit Deduct: Outstanding checks Add or Deduct: Bank errorsAdjusted/corrected balance per bank 32. DEBIT MEMOS BANK SERVICE CHARGE These are fees deducted from the bank statement for the bank's processing of the checking account activity (accepting deposits, posting checks, mailing the bank statement, etc.) The bank might deduct these charges or fees on the bank statement without notifying the company. When that occurs the company usually learns of the amounts only after receiving its bank statement. 33. DEBIT MEMOS NSF, DAIF, DAUD These are checks that were not honored by the bank of the person or company writing the check because that account did not have a sufficient balance. As a result, the check is returned without being honored or paid. When the NSF check comes back to the bank in which it was deposited, the bank will decrease the checking account of the company that had deposited the check. The amount charged will be the amount of the check plus a bank fee. 34. DEBIT MEMOS CHECK PRINTING CHARGES This occurs when a company arranges for its bank to handle the reordering of its checks. The cost of the printed checks will automatically be deducted from the company's checking account. 35. CREDIT MEMOS INTEREST EARNED It will appear on the bank statement when a bank gives a company interest on its account balances. The amount is added to the checking account balance and is automatically on the bank statement. Hence there is no need to adjust the balance per the bank statement. However, the amount of interest earned will increase the balance in the company's Cash account on its books. 36. CREDIT MEMOS NOTES RECEIVABLE These are assets of a company. When notes come due, the company might ask its bank to collect the notes receivable. For this service the bank will charge a fee. The bank will increase the company's checking account for the amount it collected (principal and interest) and will decrease the account by the collection fee it charges. 37. ERRORS It is in the company's Cash account result from the company entering an incorrect amount, entering a transaction that does not belong in the account, or omitting a transaction that should be in the account. Since the company made these errors, the correction of the error will be either an increase or a decrease to the balance in the Cash account on the company's books. 38. Balance per books on Sept. 30, 2011 Adjustments: Deduct: Bank service charges Deduct: NSF , DAIF, DAUD checks &amp; fees Deduct: Check printing chargesAdd: Interest earned Add: Notes receivable collected by bank Add or Deduct: Errors in company's cash account Adjusted/corrected balance per books 39. CASH BOOK DEBITCREDITIt represents an increaseIt represent a decrease 40. BANK STATEMENTDEBITIt represents a decreaseCREDIT BALANCEIt represent an increaseIt represents the amount owed to the clients 41. Company A's bank statement dated Dec 31, 2011 shows a balance of $24,594.72. The company's cash records on the same date show a balance of $23,196.79. Following additional information is available: 1.Following checks issued by the company to its customers are still outstanding: No. 846 issued on Nov 29 No. 875 issued on Dec 26 No. 878 issued on Dec 29 No. 881 issued on Dec 31$320.00 49.21 275.00 186.50 42. 2.A deposit of $400.00 made on Dec 31 does not appear on bank statement. 3.An NSF check of $850 was returned by the bank with the bank statement. 4.The bank charged $50 as service fee. 5.Interest income earned on the company's average cash balance at bank was $1,250. 6.The bank collected a note receivable on behalf of the company. Amount received by the bank on the note was $550. This includes $50 interest income. The bank charged a collection fee of $10. 7.A deposit of $430 was incorrectly entered as $340 in the company's cash records. 43. Company A Bank Reconciliation December 31, 2011 Balance as per Bank, Dec 31 Add: Deposit in Transit Less: Outstanding Checks: No. 846 issued on Nov 29 No. 875 issued on Dec 26 No. 878 issued on Dec 29 No. 881 issued on Dec 31 Adjusted Bank Balance$24,594.72 400.00 $24,994.72 $320.00 49.21 275.00 186.50830.71 $24,164.01 44. Balance as per Books, Dec 31 Add: Interest Income from Bank Note Receivable Collected by Bank Interest Income from Note Receivable Deposit Understated$23,196.79 $1,237.22 500.00 50.00 90.00 1,877.22 $25,074.01Less: NSF Check Bank Service Fee Bank Collection FeeAdjusted Book Balance850.00 50.00 10.00 910.00 $24,164.01 45. A PROOF OF CASH is essentially a roll forward of each line item in a bank reconciliation from one accounting period to the next, incorporating separate columns for cash receipts and cash disbursements. The columns (and formula) used for a proof of cash are: Beginning balance + Cash receipts in the period - Cash disbursements in the period = Ending balance 46. When used for each line item in a bank reconciliation, the proof of cash highlights areas in which there are discrepancies, and which may therefore require further investigation, and probably some adjusting entries.A proof of cash would be used in situations where controls over cash are weak. It essentially combines two bank reconciliations, reconciling all transactions that occurred during the period to the clients Cash Receipts Journal and Cash Di...</p>