chapter7_notes - Chapter 7 Cash Receivables Financial Asset...

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Chapter 7: Cash Receivables Financial Asset: Any asset that is: (i) cash; (ii) a contractual right to receive cash or another financial asset from another party; (iii) a contractual right to exchange financial instruments with another party under conditions that are potentially favourable to the entity; or (iv) an equity instrument of another entity” CICA Handbook, Section 3855.19 Section 1 – Cash: What is Cash?: Cash is reported as a current asset if it is readily available to pay current obligations and is free of restrictions Cash consists of coins, currency, available funds on deposit at the bank, and petty cash Also includes money orders, certified cheques, cashier’s cheques, personal cheques, bank drafts, and usually savings accounts Post-dated cheques, travel advances, and stamps on hand are not classified as cash Management and Control of Cash: There are many risks associated with cash Since cash is the most liquid asset, effective internal control of cash is imperative Internal controls need to prevent unauthorized use of cash Management must have all necessary information to properly manage cash Reporting of Cash: Reporting cash needs special attention of the following: 1. Restricted cash 2. Cash in foreign currencies 3. Bank overdrafts 4. Cash equivalents Restricted Cash: Compensating balances: minimum cash balances maintained by a corporation in support of existing borrowings These funds are not available for use by the corporation, but the bank can use the restricted cash Petty cash, special payroll, and dividend accounts are examples of cash set aside for a special purpose (usually not material) If the compensating balance is material, must be segregated from Cash as follows: -Classified as current assets if they relate to short-term loans -Classified as non-current assets if set aside for investment or financing purposes (e.g. plant expansion) Note disclosure of restricted cash is required Foreign Currencies: Amount held in foreign currencies is reported in Canadian dollars at the balance sheet date
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The exchange rate on the balance sheet date is used to translate foreign currencies into Canadian dollars If restrictions exist on the foreign funds, those funds are reported as restricted Bank Overdrafts: Overdrafts represent cheques written in excess of the cash account balance Overdrafts are reported as current liabilities (often reported as accounts payable) In general, bank overdrafts should not be offset against the Cash account However, bank overdrafts may be offset against available cash in another account if both accounts are at the same bank Cash Equivalents: Defined as “short-term, highly liquid investments that are readily convertible to known amounts of cash…subject to an insignificant risk of change in value.” Original maturity is generally three months or less Excludes equity securities Examples: treasury bills, money-market funds, commercial paper
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chapter7_notes - Chapter 7 Cash Receivables Financial Asset...

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