Cash & Cash Equivalents:

1. Cash: unrestricted; includes coins, currency, petty cash, cash in bank, negotiable instruments (ordinary checks,
cashiers checks, certified checks, money orders); does not change with inflation (has a fixed nominal/stated
value)

2. NOT cash: certificates of deposit, legally restricted compensating balances, restricted funds b/c they are either
not available immediately, or managements intent to use resources for specific purposes; bond sinking funds
are noncurrent assets because they are restricted funds and they are set aside for specific purpose

3. Cash equivalents: security with fixed maturity amount of 3 months or less; includes US treasury obligations
(bills, notes, and bonds), commercial paper, money market funds

4. Bank account overdraft: checks honored by bank > balance in account (current liability)

5. Minimum compensating balance: balance that must be maintained by a company in relation to borrowing (this
balance increases the effective rate of interest on the borrowing and reduces risk to the lender)

If the balance relates to ST liability: compensating balance = current asset + part of restricted cash
If the balance relates to LT liability: compensating balance = non-current asset

A firm borrows $10,000 for one year at 6% but must maintain a $700 compensating balance in an account with the
lender financial institution. The $700 is not included in the cash account but is rather reported in restricted cash, a
current asset. The annual effective interest rate is 6.45% [($10,000 x (.06)/$9,300]. The net loan is only $9,300
($10,000 - $700).

6. Internal control measures over cash include 1) separation of duties (custody, recording, authorization) and 2)
bank reconciliations

The main difference between U.S. GAAP and IFRS is that bank overdrafts can be subtracted from cash,
rather than classified as liabilities

Current assets = cash, cash equivalents, A/R, inventory, marketable securities, prepaid expenses, other liquid
assets ready to convert
Non-current assets = PPE, investments in other companies, intangible assets

7. Bank reconciliations:
a. Enable a periodic comparison of the bank account balance and cash balance.
b. Help identify errors in the firm's records or bank records.
c. Establish the correct ending cash balance.
d. Provide information for adjusting entries.
e. Help reduce cash theft by employees if the reconciler does not have access to cash records or does
not have access to cash (authorization to make disbursements, or cash custody)

Bank and book to true balance: (where bank and book balances are separately reconciled):

Balance per bank: Balance per book:

+ Deposits in transit + Interest earned on checking account
+ Cash on hand + Note collected (principal and interest added)
- Outstanding checks - Service charges
+/- Errors made by bank - NSF check (non-sufficient funds)
True cash +/- Errors made in firms record
True cash
A/R

1. Accounts receivable: (or trade receivable) relates to customer transactions, claims are usually 30 90 days and
does not include an interest element

2. Notes receivable: (or non-trade receivable) sales of non-cash assets, lending transactions, conversion of
receivables, usually longer than 90 days, includes interest element; notes provide increased security for the
seller firm (negotiable and converted to cash with a third party more easily than A/R)

3. Receivables are valued at NRV, which means net of any quantity or sales discounts, returns and allowances,
and uncollectible accounts

4. Methods include 1) gross (before discounts) and 2) net (after discounts)

The main difference in the recognition criteria between U.S. GAAP and IFRS is that IFRS defines
revenue from a balance sheet point of view and is based on the inflow of economic benefits during the
ordinary course of business. This means that accounts receivable (and revenue) can be recognized if
there is a firm sales commitment and the recognition criteria have been met. The revenue and asset
are recognized when:

a. Probable future economic benefits

b. Revenue and costs can be measured reliably
c. Significant risk and rewards of ownership are transferred
d. Managerial involvement is not retained as to ownership or control

5. Bad debt expense: or uncollectible accounts expense; is a cost of doing business rather than a sales
adjustment

a. Direct write-off method: records only when specific A/R is considered uncollectible and is written
off, only used when firm is unable to estimate it reliably (not used often); this method makes A/R
over-valued on the B/S and is NOT GAAP, but more simpler and practical method without causing
material misstatements

b. Allowance method: GAAP method if uncollectible accounts are probable and estimable, records an
estimate of bad debt expense at the end of each year in an AJE, and both income and net A/R are
reduced; this method allows companies to value A/R at NRV on the B/S