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Section 1:

Cash and Cash Equivalents: Issues
• Cash
• various items comprise cash

• Management and control of cash

• the importance of internal control of cash

• Reporting of cash in the balance sheet

Items comprising “Cash”
• Cash must be readily available and be free of restrictions
• Cash consists of coins, currency and available funds
• Deposits (CDs) and short-term paper are classified as temporary
• Postdated cheques, travel advances and stamps on hand are not
classified as cash
Management and Control of Cash

• Since cash is the most liquid asset, internal control

of cash is imperative
• Controls must prevent unauthorized use of cash
• Management must have necessary information for
proper use of cash
Reporting of Cash
• The reporting of cash depends upon whether it is:
1. restricted cash
2. cash in foreign currencies
3. bank overdraft
4. cash equivalent
Restricted Cash
Compensating balances:
• Cash balance amounts maintained by a corporation in support of existing
borrowing arrangements

• Give the bank use of the restricted balance (funds are not available for use
by the corporation)

• Classified as current assets separate from cash, if they relate to short-term


• Classified as non-current assets separate from cash, if they relate to long-

term loans

• Note disclosure includes the nature of the financial arrangement and cash
Foreign Currencies
• Amount held is reported in Canadian dollars
• Exchange rate used is the rate in effect on balance
sheet date
• If restrictions exist on the foreign funds, those
funds are reported as restricted
Bank Overdrafts
• Overdrafts represent cheques written in excess of cash account
• Overdrafts are reported as current liabilities
• Overdrafts may be offset against available cash in another account in
the same bank
• Otherwise, such offsetting is not allowed
Cash Equivalents
• Short-term, highly liquid investments
• Can be converted to a known amount of cash
• Maturity date is generally three months or less
• Examples:
• Treasury bills
• Commercial paper
• Money market funds