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The amount of cash and cash equivalents a company holds is very important and is a large component of a company's overall
operating strategy. For instance, companies with high amounts of cash and cash equivalents are better able to get through hard
times when sales are low or expenses are particularly high. High cash reserves can also signal that the company is "saving up"
to make some significant acquisition.
However, companies with a lot of cash on hand are often takeover targets because their excess cash essentially helps buyers
finance their purchase. High cash reserves can also indicate that management has not figured out how to best deploy the cash.
It is important to note that there is an opportunity cost to holding cash; that cost is the return on equity that company could have
earned by investing the cash in a new product or expanding business.
Cash includes legal tender, bills, coins, checks received but not deposited, and checking and savings accounts. Cash
equivalents are any short-term investment securities that have maturity periods of 90 days or less. These include bank
certificates of deposit, banker’s acceptances, Treasury bills, commercial paper, and other money market instruments.
Cash and its equivalents differ from other current assets like marketable securities and accounts receivable, based on
their nature.
Banker’s acceptance
Commercial paper
Treasury bills
Other liquid investments that mature within 3 months.
The term cash and cash equivalents includes: currency, coins, checks received but not yet deposited, checking accounts, petty
cash, savings accounts, money market accounts, and short-term, highly liquid investments with a maturity of three months or
less at the time of purchase such as U.S. treasury bills and commercial paper. The items included as cash and cash equivalents
must also be unrestricted.
The amount of cash and cash equivalents will be reported on the balance sheet as the first item in the listing of current assets.
The change in the amount of cash and cash equivalents during an accounting period is explained by the statement of cash flows.
A checking account is a bank account in which a company deposits money and can subsequently withdraw the money by writing
a check, by using a debit card, arranging for electronic transfers, etc. Except for the uncollected funds associated with recently
deposited checks, the money in a checking account is available on demand. (Hence, a bank will refer to the amounts in its
customers' checking accounts as demand deposits.)
Grain comp. ledger showed a balnce of P2,205,600 in its “cash” account on dec. 31,2009 . included in this balance are the ff.
items:
DAIF checks returned by bank P20,000
Saving account P750000
IOUs P1,200
postage stamps 600
bank draft 10,000
cash on hand 30,000
cash in sinking fund 500,000
customers’check dated jan.2010 5,400
travel advances 4,000
travel’s check 8,000
determine the total amt. that should be in cash balance at dec.31,2009
Sabi, “included in this cash balance”. So ibig sabihin the enumerated amounts are incorporated dun sa P2,205,600. So, dapat
alam natin kung ano ang cash at kung ano ang hindi. Isa isahin natin:
DAIF CHECKS: deduct the 20,000 from the balance. Bakit? Kasi tumalbog yung check ng customer, therefore balik sya sa
receivables dahil wala naman tayo nakolekta.
Savings Account: do nothing. It’s cash and it’s already included in the cash balance.
IOU’s: deduct the P1,200. Bakit? kasi pautang natin to sa mga tao kaya nga “I owe you”, meaning to say, somebody owes us
money, therefore must be classified as AR and not Cash.
Postage Stamp: deduct the 600. Bakit? Dahil, uulitin ko, hindi ka makakabili ng kendi sa tindahan ni aling Nena na bayad mo ay
Stamp, baka batuhin ka pa ng bote ng suka, hahaha. Prepaid Expense ang Stamps, hindi cash.
Bank Draft: do nothing. Ano ba ang bank draft? Cash equivalent yan. Para yang cashier’s check. Pay to cash. Kunyari, bibili ka
ng worth $2,000,000 na inventory. Magdadala ka ba ng cash worth 2M? or credit card? Syempre hindi. You may pay either
through a check or a bank draft. So good as cash to.
Cash on hand: obvious, do nothing.
Cash in Sinking Fund: deduct the 500,000. Bakit? Though it’s cash, but it’s restricted for long term purposes. Following the
principle of “Res Perit Domino”, meaning “thing follows it’s master”, it’s also considered as a Long Term Asset
Customers’ Check dated Jan. 2010: Syempre, deduct the 5,400. Bakit? Kasi post dated ang check. Hindi pa sya readily
convertible into cash. Therefore, still considered as an AR.
Travel Advances: deduct the 4.000. Syempre, hindi naman to cash kasi nga “advances” meaning binigay mo yung pera for travel
purposes at ibabalik sayo, thus, it’s an AR.
Traveler’s Check (not travel’s check): syempre included as cash to. Usually eto yung cheke na ginagamit ng mga nangingibang
bansa para maiwasan ang hassle ng pagpapapalit ng foreign currency.
Therefore:
2,205,600 unadjusted ending cash balance
(20,000) DAIF
(1,200) IOU
(600) Postages
(500,000) Sinking Fund
(5,400) Postdated Checks
(4,000) Travel Advances
__________
1,674,400 is the correct Cash Balance