CASH AND CASH EQUIVALENTS
“Cash”, Definition
In layman’s term, “cash” is simply “money”, which is the standard medium of exchange in business transactions. This
refers to the currency and coins which are in circulation and legal tender.
In accounting, it is a broad term, which includes money and any other negotiable instrument that is payable in money
and acceptable by the bank for deposit and immediate credit. This means that checks, as long as they are acceptable
by the bank for deposit or encashment, are considered cash.
Standard Related to Cash and Cash Equivalents
There is no specific standard that deals with cash and cash equivalents. The only guidance is found in PAS1 –
Presentation of Financial Statements, which states that “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 at the end of the
reporting period”.
This means that cash items must be unrestricted in use for them to be presented as part of cash and cash equivalents.
Classifications of Cash
Cash on hand – those cash items that are currently held by the entity, including those that are awaiting
deposit.
o Examples: Bills and coins, checks, bank drafts, money orders
Cash in bank – includes savings deposits, and demand deposit or checking account which are unrestricted as
to withdrawal.
Cash fund set aside for current purposes
o Examples: Petty cash fund, payroll fund, dividend fund, tax fund, change fund
“Cash Equivalents”, Definition
PAS7 – Statement of Cash Flows defines cash equivalents as “short-term and highly liquid investments that are readily
convertible into cash and so near their maturity that they present insignificant risk of change in value because of
changes in interest rates”.
In other words, any short-term, highly liquid investments acquired near their maturity are considered cash equivalents.
The standard also mentioned as an example that acquisition of these investments within three months or less before
their maturity date would qualify such investments as cash equivalents.
Examples:
Three-month BSP treasury bill
Five-year BSP treasury bill purchased within three months before maturity date
90-day time deposit
Equity securities normally do not qualify as cash equivalents since they do not have any maturity date; however,
redeemable preference shares may qualify as cash equivalents since its redemption date can be considered as its
“maturity date”. This means that if redeemable preference shares are acquired within three months before its
redemption date, it is considered as cash equivalents.
Illustrative Problem 1
ARROWS Corporation has the following items on December 31, 2020:
Bills and coins – P15,000
Customer’s checks – P68,000
Money order – P1,600
Postage stamps – P800
BDO Savings Account no. 0014 – P575,000
BPI Checking Account no. 11948 – P1,245,000
MB Checking Account no. 151222 – P5,000,000 (restricted for future plant expansion)
Petty cash fund – P10,000
Payroll fund – P85,000
Treasury bills (acquisition date: November 2, 2020; maturity date: January 31, 2021) – P40,000
Treasury bills (acquisition date: July 1, 2020; maturity date: March 31, 2021) – P80,000
90-day time deposit – P200,000
Investment in equity securities – P40,000
How much should be presented as part of cash and cash equivalents as of December 31, 2020?
Solution:
Bills and coins P15,000
, Customer’s checks 68,000
Money order 1,600
BDO Savings Account no. 0014 575,000
BPI Checking Account no. 11948 1,245,000
Petty cash fund 10,000
Payroll fund 85,000
Treasury bills (acquisition date: November 2, 2020; maturity date: January 31,
2021) 40,000
90-day time deposit 200,000
Cash and cash equivalents P2,239,600
Notes:
A postage stamp is a small piece of paper issued by a post office, postal administration, or other authorized
vendors to customers who pay postage, who then affix the stamp to the face or address-side of any item of
mail—an envelope or other postal cover —that they wish to send. Since this is not legal tender, it is not
included as cash.
The MB Checking Account no. 151222 is excluded since it is restricted for a long-term purpose. Note that cash
items must be unrestricted in use.
The treasury bills acquired last July 1, 2020 are excluded since they were not acquired within three months
before maturity date, which is March 31, 2021.
Investment in equity securities are also excluded since equity securities don’t have maturity date.
Measurement
Cash is measured at fair value. As for cash items such as bills and coins, they are measured at their face value.
Cash in foreign currency is measured at the current exchange rate.
Cash held in a bank or financial institution, which is in bankruptcy or financial difficulty, should be measured at their
face value or estimated realizable value, whichever is lower.
Presentation
The caption “Cash and Cash Equivalents” is shown as the first line item under current assets.
Details comprising the cash and cash equivalents must be disclosed in the notes to the financial statements.
Other Considerations Related to Specific Items
Bank Overdraft
Bank overdraft is a credit balance in the cash in bank account, which results from the issuance of checks in excess of
the deposits. For instance, if a company issues a check for P100,000, when its current balance in its checking account
is P80,000, it would result to an overdraft of P20,000.
Generally, overdrafts are not permitted in the Philippines.
Bank overdrafts are classified as current liability and should not be offset against other bank accounts with debit
balances, except when:
the entity has another account in the same bank; or
the amount is insignificant
For instance, an entity maintains the following bank accounts:
Cash in Bank – BDO Account No. 44455; current balance is P500,000
Cash in Bank – BPI Account No. 100001; current balance is P200,000
Cash in Bank – BPI Account No. 100002; current balance is an overdraft of P15,000
Cash in Bank – PNB Account No. 5992344; current balance is an overdraft of P22,000
The presentation would be as follows:
Current Assets:
Cash in Bank
BDO Account No. 44455 P500,000
BPI Account No. 100001 200,000
BPI Account No. 100002 (15,000) P685,000
Current Liabilities:
Bank Overdraft (PNB Account No. 5992344) P22,000
“Cash”, Definition
In layman’s term, “cash” is simply “money”, which is the standard medium of exchange in business transactions. This
refers to the currency and coins which are in circulation and legal tender.
In accounting, it is a broad term, which includes money and any other negotiable instrument that is payable in money
and acceptable by the bank for deposit and immediate credit. This means that checks, as long as they are acceptable
by the bank for deposit or encashment, are considered cash.
Standard Related to Cash and Cash Equivalents
There is no specific standard that deals with cash and cash equivalents. The only guidance is found in PAS1 –
Presentation of Financial Statements, which states that “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 at the end of the
reporting period”.
This means that cash items must be unrestricted in use for them to be presented as part of cash and cash equivalents.
Classifications of Cash
Cash on hand – those cash items that are currently held by the entity, including those that are awaiting
deposit.
o Examples: Bills and coins, checks, bank drafts, money orders
Cash in bank – includes savings deposits, and demand deposit or checking account which are unrestricted as
to withdrawal.
Cash fund set aside for current purposes
o Examples: Petty cash fund, payroll fund, dividend fund, tax fund, change fund
“Cash Equivalents”, Definition
PAS7 – Statement of Cash Flows defines cash equivalents as “short-term and highly liquid investments that are readily
convertible into cash and so near their maturity that they present insignificant risk of change in value because of
changes in interest rates”.
In other words, any short-term, highly liquid investments acquired near their maturity are considered cash equivalents.
The standard also mentioned as an example that acquisition of these investments within three months or less before
their maturity date would qualify such investments as cash equivalents.
Examples:
Three-month BSP treasury bill
Five-year BSP treasury bill purchased within three months before maturity date
90-day time deposit
Equity securities normally do not qualify as cash equivalents since they do not have any maturity date; however,
redeemable preference shares may qualify as cash equivalents since its redemption date can be considered as its
“maturity date”. This means that if redeemable preference shares are acquired within three months before its
redemption date, it is considered as cash equivalents.
Illustrative Problem 1
ARROWS Corporation has the following items on December 31, 2020:
Bills and coins – P15,000
Customer’s checks – P68,000
Money order – P1,600
Postage stamps – P800
BDO Savings Account no. 0014 – P575,000
BPI Checking Account no. 11948 – P1,245,000
MB Checking Account no. 151222 – P5,000,000 (restricted for future plant expansion)
Petty cash fund – P10,000
Payroll fund – P85,000
Treasury bills (acquisition date: November 2, 2020; maturity date: January 31, 2021) – P40,000
Treasury bills (acquisition date: July 1, 2020; maturity date: March 31, 2021) – P80,000
90-day time deposit – P200,000
Investment in equity securities – P40,000
How much should be presented as part of cash and cash equivalents as of December 31, 2020?
Solution:
Bills and coins P15,000
, Customer’s checks 68,000
Money order 1,600
BDO Savings Account no. 0014 575,000
BPI Checking Account no. 11948 1,245,000
Petty cash fund 10,000
Payroll fund 85,000
Treasury bills (acquisition date: November 2, 2020; maturity date: January 31,
2021) 40,000
90-day time deposit 200,000
Cash and cash equivalents P2,239,600
Notes:
A postage stamp is a small piece of paper issued by a post office, postal administration, or other authorized
vendors to customers who pay postage, who then affix the stamp to the face or address-side of any item of
mail—an envelope or other postal cover —that they wish to send. Since this is not legal tender, it is not
included as cash.
The MB Checking Account no. 151222 is excluded since it is restricted for a long-term purpose. Note that cash
items must be unrestricted in use.
The treasury bills acquired last July 1, 2020 are excluded since they were not acquired within three months
before maturity date, which is March 31, 2021.
Investment in equity securities are also excluded since equity securities don’t have maturity date.
Measurement
Cash is measured at fair value. As for cash items such as bills and coins, they are measured at their face value.
Cash in foreign currency is measured at the current exchange rate.
Cash held in a bank or financial institution, which is in bankruptcy or financial difficulty, should be measured at their
face value or estimated realizable value, whichever is lower.
Presentation
The caption “Cash and Cash Equivalents” is shown as the first line item under current assets.
Details comprising the cash and cash equivalents must be disclosed in the notes to the financial statements.
Other Considerations Related to Specific Items
Bank Overdraft
Bank overdraft is a credit balance in the cash in bank account, which results from the issuance of checks in excess of
the deposits. For instance, if a company issues a check for P100,000, when its current balance in its checking account
is P80,000, it would result to an overdraft of P20,000.
Generally, overdrafts are not permitted in the Philippines.
Bank overdrafts are classified as current liability and should not be offset against other bank accounts with debit
balances, except when:
the entity has another account in the same bank; or
the amount is insignificant
For instance, an entity maintains the following bank accounts:
Cash in Bank – BDO Account No. 44455; current balance is P500,000
Cash in Bank – BPI Account No. 100001; current balance is P200,000
Cash in Bank – BPI Account No. 100002; current balance is an overdraft of P15,000
Cash in Bank – PNB Account No. 5992344; current balance is an overdraft of P22,000
The presentation would be as follows:
Current Assets:
Cash in Bank
BDO Account No. 44455 P500,000
BPI Account No. 100001 200,000
BPI Account No. 100002 (15,000) P685,000
Current Liabilities:
Bank Overdraft (PNB Account No. 5992344) P22,000
