Chapter 1
Wednesday, October 6, 2021
11:13 PM
Definition of cash
Cash from the point of view of a:
A. Layman (simply means money)
o Money is the standard medium of exchange in business transactions.
o Money refers to the currency and coins which are in circulation and legal tender.
B. Accounting Parlace (has a special and broader meaning)
o As contemplated in accounting, cash includes money and any other negotiable instrument
that is payable in money and acceptable by the bank for deposit and immediate credit.
o Cash includes checks, bank drafts and money orders are acceptable by the bank for
deposit or immediate encashment.
For example, when checks are received in full settlement of an account receivable, cash
is immediately debited.
But postdated checks received cannot be considered as cash yet because these checks
are unacceptable by the bank for deposit and immediate credit or outright encashment.
Unrestricted cash
The only guidance is found in PAS 1, paragraph 66, which provides 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 after the end of the reporting period.
Cash items included in cash
a. Cash on hand — This includes undeposited cash collections and other cash items awaiting deposit
such as customers' checks, cashier's or manager's checks, traveler's checks, bank drafts and
money orders.
b. Cash in bank — This includes demand deposit or checking account and saving deposit which
are unrestricted as to withdrawal.
c. Cash fund set aside for current purposes such as petty cash fund, payroll fund and dividend fund.
Cash equivalents
PAS 7, paragraph 6, 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 changes in
value because of changes in interest rates.
The standard further states that only highly liquid investments that are acquired three months before
maturity can qualify as cash equivalents.
Examples of cash equivalents are:
a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before date of maturity
c. Three-month time deposit
d. Three-month money market instrument or commercial paper
Equity securities cannot qualify as cash equivalents because shares do not have a maturity date.
However, preference shares with specified redemption date and acquired three months before redemption
date can qualify as cash equivalents.
, Note that what is important is the date of purchase which should be three months or less before
maturity.
Thus, a BSP treasury bill that was purchased one year ago cannot qualify as cash equivalent even if the
remaining maturity is three months or less.
Investment of excess cash
The control and proper use of cash is an important aspect of cash management. Basically, the entity must
maintain sufficient cash for use in current operations.
Any cash accumulated in excess of that needed for current operations should be invested even temporarily in
some type of revenue earning investment.
Accordingly, excess cash may be invested in time deposits, money market instruments and treasury bills for
the purpose of earning interest income.
Classifications of investment of excess cash
Investments in time deposit, money market instruments and treasury bills should be classified as follows:
a. If the term is three months or less, such instruments are classified as cash equivalents and therefore
included in the caption "cash and cash equivalents".
b. If the term is more than three months but within one year, such investments are classified as short-
term financial assets or temporary investments and presented separately as current assets.
c. If the term is more than one year, such investments are classified as noncurrent or long-term
investments.
However, if such investments become due within one year from the end of the reporting period, they
are reclassified as current or temporary investments.
Measurement of cash
Cash is measured at face value.
Cash in foreign currency is measured at the current exchange rate.
If a bank or financial institution holding the funds of an entity is in bankruptcy or financial difficulty,
cash should be written down to estimated realizable value if the amount recoverable is estimated to be
lower than the face value.
Financial statement presentation
The caption cash and cash equivalents should be shown as the first line item under current assets.
This caption includes all cash items, such as cash on hand, cash in bank, petty cash fund and cash
equivalents which are unrestricted in use for current operations.
However, the details comprising the cash and cash equivalents should be disclosed in the notes to
financial statements.
Foreign currency
Cash in foreign currency should be translated to Philippine pesos using the current exchange rate.
Deposits in foreign countries which are not subject to any foreign exchange restriction are included in
"cash".
Wednesday, October 6, 2021
11:13 PM
Definition of cash
Cash from the point of view of a:
A. Layman (simply means money)
o Money is the standard medium of exchange in business transactions.
o Money refers to the currency and coins which are in circulation and legal tender.
B. Accounting Parlace (has a special and broader meaning)
o As contemplated in accounting, cash includes money and any other negotiable instrument
that is payable in money and acceptable by the bank for deposit and immediate credit.
o Cash includes checks, bank drafts and money orders are acceptable by the bank for
deposit or immediate encashment.
For example, when checks are received in full settlement of an account receivable, cash
is immediately debited.
But postdated checks received cannot be considered as cash yet because these checks
are unacceptable by the bank for deposit and immediate credit or outright encashment.
Unrestricted cash
The only guidance is found in PAS 1, paragraph 66, which provides 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 after the end of the reporting period.
Cash items included in cash
a. Cash on hand — This includes undeposited cash collections and other cash items awaiting deposit
such as customers' checks, cashier's or manager's checks, traveler's checks, bank drafts and
money orders.
b. Cash in bank — This includes demand deposit or checking account and saving deposit which
are unrestricted as to withdrawal.
c. Cash fund set aside for current purposes such as petty cash fund, payroll fund and dividend fund.
Cash equivalents
PAS 7, paragraph 6, 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 changes in
value because of changes in interest rates.
The standard further states that only highly liquid investments that are acquired three months before
maturity can qualify as cash equivalents.
Examples of cash equivalents are:
a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before date of maturity
c. Three-month time deposit
d. Three-month money market instrument or commercial paper
Equity securities cannot qualify as cash equivalents because shares do not have a maturity date.
However, preference shares with specified redemption date and acquired three months before redemption
date can qualify as cash equivalents.
, Note that what is important is the date of purchase which should be three months or less before
maturity.
Thus, a BSP treasury bill that was purchased one year ago cannot qualify as cash equivalent even if the
remaining maturity is three months or less.
Investment of excess cash
The control and proper use of cash is an important aspect of cash management. Basically, the entity must
maintain sufficient cash for use in current operations.
Any cash accumulated in excess of that needed for current operations should be invested even temporarily in
some type of revenue earning investment.
Accordingly, excess cash may be invested in time deposits, money market instruments and treasury bills for
the purpose of earning interest income.
Classifications of investment of excess cash
Investments in time deposit, money market instruments and treasury bills should be classified as follows:
a. If the term is three months or less, such instruments are classified as cash equivalents and therefore
included in the caption "cash and cash equivalents".
b. If the term is more than three months but within one year, such investments are classified as short-
term financial assets or temporary investments and presented separately as current assets.
c. If the term is more than one year, such investments are classified as noncurrent or long-term
investments.
However, if such investments become due within one year from the end of the reporting period, they
are reclassified as current or temporary investments.
Measurement of cash
Cash is measured at face value.
Cash in foreign currency is measured at the current exchange rate.
If a bank or financial institution holding the funds of an entity is in bankruptcy or financial difficulty,
cash should be written down to estimated realizable value if the amount recoverable is estimated to be
lower than the face value.
Financial statement presentation
The caption cash and cash equivalents should be shown as the first line item under current assets.
This caption includes all cash items, such as cash on hand, cash in bank, petty cash fund and cash
equivalents which are unrestricted in use for current operations.
However, the details comprising the cash and cash equivalents should be disclosed in the notes to
financial statements.
Foreign currency
Cash in foreign currency should be translated to Philippine pesos using the current exchange rate.
Deposits in foreign countries which are not subject to any foreign exchange restriction are included in
"cash".
