Cash and Cash Equivalents

Question 1

What is Cash according to ASC 305.

Answer 1

Cash is the most liquid asset of an enterprise, thus it is usually the first item presented in the current assets section of the balance sheet.

Question 2

What is the definition of Current Assets and Current Liabilities.

Answer 2

Current Assets are assets that will be used up or converted into cash within one year or the operating cycle, whichever is Longer.

(Examples: Cash, temporary trading securities, A/R, N/R, inventories, and prepaid expenses)

Current Liabilities are liabilities that will be settled within one year or the operating cycle, which is Longer.

(Examples: AP, accrued expenses, dividends payable, income taxes payable, current portion of LTD)

Question 3

What is a cash equivalent?

Answer 3

A Cash Equivalent is a security that is easily converted into cash with an original maturity of 90 days or less. A cash equivalent is a financial instrument that is both:

1. Easily convertible into a known amount of cash (highly liquid) and
2. Original maturity of 3 months or less from the date of purchase. Since it is so close to maturity, this presents verly little risk of change in value, due to changes in interest reates. (For example: Treasury bills, commercial paper, and money market funds)

Question 4

What are some examples of cash and cash equivalents?

Answer 4

• Coin and currency on hand (petty cash)
• Money market accounts
• Unmailed checks
• Savings Accounts
• CDs with an original maturity of 3 months or less
• Negotiable paper (bank checks, traveler checks, money orders

An investment which as a total term > 3 months, such as a 5 year US Treasury Note, will not be considered a cash equivalent unless the investor acquies the investment on the open market when its remaining time to maturity is under 3 months. An investment that has been excluded from cash equivalents becasue of term > 3 months will NOT be reclassified to cash equivalents as it approaches its maturity date.

Question 5

What are some items that are excluded from cash?

Answer 5

• Compensating balances - legally restricted deposits that are either a current asset or a non-current asset, but not considered part of cash. If funds are NOT legally restricted, present them along with cash.
• Post dated checks or NSF (non-sufficient funds) are receivables.
• Overdraft protection
  
  • if in same bank, net them, if positive then show it as cash, if negative, show it as current liability
  • if in different banks, show the positive as an asset, and the negative as a current liability
• Restricted Cash
  
  • Current - restricted for a current asset or liability (segregated from cash)
  • Non-current - restricted for a noncurrent asset or liability (either other assets or investments)
• Postage Stamps are considered supplies (prepaid expense)

Question 6

What is a bank reconciliation?

Answer 6

Question 7

An example of a GAAP Balance Sheet and classifications

Answer 7

Question 8

Statement of Earnings and Comprehensive Income

(ON-TIDe-N-OC)

Answer 8

As part of a simplification initative, the concept of extraordinary gains and losses was eliminated. This change was made in order to align GAAP more closely to IAS 1, Presentation of Financial Statements.

like to go surfing ON the TIDe N OC

Operating Income

Non-operating income

Taxes

Income from operations

De -discontinued component unit

Net Income

Other Comprehensive Income(OCI)

Comprehensive Income

Question 9

Monetary CA and CL under IFRS

Answer 9

Normally assets/liabilities are reported as current and noncurrent on the balance sheet. If a liquidity presentation provides more relevant and reliable information, then balance sheet items may be reported based on their liquidity without segregation. –>