Cash and Cash Equivalents Flashcards
What does cash represent?
Cash represents unrestricted cash -> readily available for withdrawal on demand without any legal or contractual restriction.
Restricted cash amounts are NOT included in the Cash account shown in the current asset section of the balance sheet. Instead, restricted cash is classified depending on the purpose of the restriction.
What is included in cash?
- Coin and currency
- Petty cash
- Cash in bank
- Negotiable instruments (Ordinary/Cashier’s/Certified checks and Money orders)
What is excluded from cash?
- CDs
- Marketable securities
- Legally restricted compensating balances
- Restricted cash funds (e.g. bond sinking fund)
- Post-dated checks (a receivable)
- Advances to employees (a receivable)
- Postage stamps (prepaid expense)
What are cash equivalents?
ST, highly liquid investments that are readily convertible to known amounts of cash (has a fixed maturity amount) and so near maturity that it presents negligible risks of changes in value.
Maturity of no more than 3 months from the date of purchase.
What are examples of cash equivalents?
- US Treasury obligations
- Commercial paper
- Money-market funds
How are bank overdrafts treated as per US GAAP and IFRS?
Overdrafts may be offset against other cash accounts within the same bank. Otherwise, classify as a CL.
IFRS permits bank overdrafts to be offset against other cash accounts with other banks.
On December 31, a Company had the following balances at First State Bank:
- Checking account 101
- Checking account 102
- Money market account
- 90-day CD
- 180-day CD
Which accounts would be included in cash and cash equivalents?
- Checking account 101
- Checking account 102
- Money market account
- 90-day CD.
What is restricted cash and how is it presented?
Cash held for a specific purpose and is not readily available for use. Can be short-term or long-term.
B/S presentation: Usually a separate line item.
SOCF presentation: Included in the explanation of the changes in cash on the balance sheet.
Give examples of restricted cash.
- CD (restricted as to maturity)
- Compensating balances (restricted as to use)
- Bond sinking fund (restricted to be used to retire bond).
- Other funds that are restricted for specific purposes (escrow accounts)
What is a compensating balance and what’s its effect?
Compensating balance: the minimum balance that must be maintained by the firm in relation to a borrowing. Increases the effective interest rate for the borrower and reduces the lender’s risk.
What disclosures are required with respect to cash and cash equivalents?
- Policy in designating which items are classified as cash equivalents (note disclosure)
- Nature of restriction for all restricted cash.
On October 31, Dingo Inc. had a cash account segregated solely for a November 15 payment into a bond sinking fund. How is this reported in Dingo’s classified balance sheet?
As a noncurrent asset.
Gold Corp’s June 30 trial balance shows the following:
Cash ($10,000)
Land held for resale $100,000
Additional information:
- Checks amounting to $30,000 were written to vendors and recorded on June 29 resulting in a cash overdraft of $10,000. The checks were mailed on July 9.
- Land held for resale was sold for cash on July 15.
- Gold issued its financial statements on July 31.
How should gold report these assets in its June 30 balance sheet?
Cash balance is $20,000 because the checks were not sent as of the balance sheet date.
Land held for resale of $100,000 is a current asset because it is expected to be sold within the year.
Are equity securities included in cash equivalents?
No because equity securities are not convertible to a known amount of cash. Cash equivalents are ST, highly liquid investments that are readily convertible to known amounts of cash.
Cash in banks totaling $2,250,000 includes $600,000 of compensating balances against short-term borrowing arrangements. The compensating balances are not legally restricted as to withdrawal. How is this reported on the balance sheet?
Total cash balance = $2,250,000 because the compensating balance would be considered part of cash that’s unrestricted since there’s no legal restriction.
