Summary
Highlights
This video introduces Intermediate Accounting 1, focusing on cash and cash equivalents. The objectives are to define these terms and identify their inclusions and exclusions. Cash and cash equivalents are classified as current assets according to IAS 1, paragraph 66.
Cash items are measured at face value and must be unrestricted for use in operations. Inclusions are cash on hand, undeposited collections, customers' and managers' checks, bank drafts, money orders, cash in bank with unrestricted withdrawals, and working funds like petty cash and change funds, despite their specific operational purposes.
Cash equivalents are short-term, highly liquid investments readily convertible to cash. The 'three-month rule' applies, meaning the investment must be purchased three months or less before its maturity date. Examples include three-month time deposits, commercial papers, and BSP treasury bills adhering to this rule.
Excess cash invested by an entity is classified based on its term. If the term is three months or less, it's a cash equivalent. If it's more than three months but less than a year, it's a short-term investment (current asset, but not cash or cash equivalent). If it's more than one year, it's a long-term investment (non-current asset).
Compensating balances, if unrestricted, are cash. If legally restricted, their classification depends on the related loan: short-term loans lead to current assets ('cash held as compensating balance'), and long-term loans lead to long-term investments. Post-dated checks issued by the company are reverted to cash in the current period, as payment is effective next period. Post-dated checks received are not included in the current cash balance.
Cash shortages occur when the physical count is less than recorded cash; overages occur when it's greater. These are initially recorded in a temporary 'cash short or over' account. Shortages become a loss/expense, and overages become revenue/income if the cause isn't found. If the cause is found, the shortage/overage is adjusted to the appropriate account.
The impress system is an internal control for cash, requiring all cash receipts to be deposited intact and all payments to be made by check. Petty cash funds are an exception for small, impracticable-to-check payments, managed by either the impressed fund system or the fluctuating fund system.
The video includes a series of practice questions to classify various items as cash, cash equivalent, other current asset, non-current asset, or current liability. These problems reinforce the rules for including and excluding items based on their nature, restrictions, and maturity dates, addressing scenarios like bank overdrafts and funds set aside for specific purposes.
This problem requires calculating the total cash to be reported. It includes cash on hand, unrestricted cash in bank accounts, payroll fund, change fund, dividend fund, and petty cash fund. A three-month BSP treasury bill is excluded as the question specifically asks for 'cash' and not 'cash and cash equivalents'.
This problem asks for total cash and cash equivalents. It involves applying the netting rule for bank overdrafts in the same bank, including change funds and payroll funds, and excluding funds set aside for non-current asset purchases (equipment, plant expansion). The three-month treasury bill is included here as it's a cash equivalent.
This problem presents a more complex scenario, requiring adjustments for issued post-dated checks (re-add to cash), exclusion of received post-dated checks, and proper classification of postal money orders. It also reiterates the netting of balances in the same bank with an overdraft and including the 60-day BSP treasury bill as a cash equivalent.