Chapter 3: Cash and Cash Equivalents (IAS 7, IFRS 9)
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Questions and Answers

What must be reconciled in the statement of cash flow?

  • Long-term investments
  • Cash and cash equivalents (correct)
  • Trade receivables
  • Total revenues

Which of the following is considered a cash equivalent under IFRS?

  • Short-term highly liquid investments maturing in 90 days (correct)
  • Long-term bonds
  • Real estate holdings
  • Stocks that can be sold quickly

Which statement about bank overdrafts is true under IFRS?

  • They can be offset against cash if there are other funds available. (correct)
  • They are considered liabilities only.
  • They are always excluded from cash calculations.
  • They must be treated as long-term debt.

What is the categorization of receivables in financial assets?

<p>Loans and receivables (A)</p> Signup and view all the answers

What does US GAAP not allow in relation to bank overdrafts?

<p>Offsetting overdrafts against cash accounts (B)</p> Signup and view all the answers

Which of the following standards pertains to financial instrument presentation?

<p>IAS 32 (B)</p> Signup and view all the answers

What is the definition of cash under IFRS?

<p>Cash on hand and cash equivalents (B)</p> Signup and view all the answers

Receivables are classified as which type of assets?

<p>Financial assets (B)</p> Signup and view all the answers

Which of the following best defines a financial instrument?

<p>A contract that gives rise to a financial asset for one entity and a financial liability or equity for another (B)</p> Signup and view all the answers

Which of the following is NOT considered a financial asset under IFRS 9?

<p>Inventory held for sale (B)</p> Signup and view all the answers

What is a characteristic of financial liabilities as defined by IFRS 9?

<p>They represent a contractual obligation to deliver cash or another financial asset (A)</p> Signup and view all the answers

Which of the following would best be classified as a financial asset?

<p>A bank account balance (C)</p> Signup and view all the answers

What does the term 'derivatives' refer to in financial instruments?

<p>Financial contracts whose value is based on the price of underlying assets (A)</p> Signup and view all the answers

In the context of cash and cash equivalents, which of the following statements is true?

<p>They can include highly liquid financial assets such as treasury bills (A)</p> Signup and view all the answers

What is meant by the term 'recognition' in financial reporting?

<p>The acknowledgment of transactions in the financial statements (C)</p> Signup and view all the answers

Which of the following is considered a contractual right associated with financial assets?

<p>Right to receive cash or another financial asset (A)</p> Signup and view all the answers

Which of the following is excluded from cash and cash equivalents?

<p>Equity Investments which do not have the characteristics of cash equivalents (C)</p> Signup and view all the answers

What is the method of measurement for cash held in foreign currencies?

<p>Translated at the exchange rate of the operation date and converted at closing rates (B)</p> Signup and view all the answers

Which type of cash is classified as a non-current asset?

<p>Cash and cash equivalents held by a subsidiary with legal constraints (A)</p> Signup and view all the answers

What defines restricted cash according to the provided content?

<p>Cash that is restricted for use only for specific purposes (C)</p> Signup and view all the answers

Which of the following statements about cash advances is correct?

<p>They are excluded if the entities are not fully consolidated. (D)</p> Signup and view all the answers

Which of the following would be considered cash on hand?

<p>Currency and notes held physically (D)</p> Signup and view all the answers

Cash equivalents must have which of the following characteristics?

<p>High liquidity and short maturity (A)</p> Signup and view all the answers

Which of the following is true regarding bank overdrafts?

<p>They can be cash equivalents if payable on demand. (C)</p> Signup and view all the answers

Which of the following cash items is typically considered restricted?

<p>Sinking fund (A), Payroll Fund (B)</p> Signup and view all the answers

What should be reported regarding cash debit and credit accounts with the same financial entity?

<p>They should not be reported net unless contractual agreements provide for it. (C)</p> Signup and view all the answers

How can cash overdrafts be reported according to the guidelines?

<p>They can be offset against cash accounts provided they are payable on demand. (A)</p> Signup and view all the answers

Which of the following statements is true regarding cash in foreign currencies?

<p>It is initially translated at the exchange rate on the closing date. (C)</p> Signup and view all the answers

Which item is generally not considered restricted cash?

<p>Change fund (D)</p> Signup and view all the answers

What is a common reason for classifying cash as restricted?

<p>It is reserved for a specific use or purpose. (C)</p> Signup and view all the answers

In the balance sheet, how should a debit balance in one checking account and a credit balance in an overdraft be handled?

<p>Net the balances and report as one figure. (D)</p> Signup and view all the answers

According to International Financial Reporting Standards, how are cash accounts supposed to be managed?

<p>Offsetting cash accounts is strictly forbidden. (D)</p> Signup and view all the answers

What is the primary objective of the business model mentioned?

<p>To buy and resell loans and advances (C)</p> Signup and view all the answers

How should receivables be initially measured when the effect of time is not significant?

<p>At cost on an undiscounted basis (B)</p> Signup and view all the answers

What should be included in the initial measurement of a receivable?

<p>Nominal value plus VAT and similar taxes (D)</p> Signup and view all the answers

How are receivables held for trading measured?

<p>At fair value (A)</p> Signup and view all the answers

What is the initial measurement for receivables that are originated by the entity?

<p>Cost minus impairment (B)</p> Signup and view all the answers

In which scenario should receivables be measured at a discounted value?

<p>When the passage of time is significant (B)</p> Signup and view all the answers

What is the carrying amount of a receivable after accounting for impairments and discounts?

<p>Carrying amount plus discount accumulation (A)</p> Signup and view all the answers

In the example provided, when was the working capital loan provided to the borrowers?

<p>1st February 2015 (C)</p> Signup and view all the answers

Which accounting method is used for the loan in question?

<p>Amortized cost (B)</p> Signup and view all the answers

What was the recorded value of the loan on 1st of February 2015?

<p>ETB 2m (B)</p> Signup and view all the answers

As of 30 June 2015, what should the loan be reported if there were no impairments?

<p>ETB 2m (C)</p> Signup and view all the answers

What is the loan loss provision calculated on the loan of ETB 2m?

<p>ETB 400,000 (D)</p> Signup and view all the answers

What is the net loan receivable as of 30 June 2016 after accounting for bad debt expense?

<p>ETB 1.6m (B)</p> Signup and view all the answers

What must be included in the profit and loss statement related to foreign currency receivables?

<p>Exchange fluctuations shown separately (B)</p> Signup and view all the answers

What specific disclosures are required for receivables under IFRS 7?

<p>Movements in account receivables and allowances for doubtful accounts (A)</p> Signup and view all the answers

What happens to receivables in foreign currencies at the closing date?

<p>They are translated at the closing date exchange rate (B)</p> Signup and view all the answers

Flashcards

Financial Asset

Assets like cash, equity, rights to receive cash, or exchange financial assets favorably.

Financial Instrument

A contract creating a financial asset for one entity and a liability or equity for another.

Financial Liability

Obligations to deliver cash or financial assets, or exchange assets unfavorably.

Cash

Most liquid asset that is readily available.

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Trade Receivables

Amounts owed to a business for goods or services sold on credit.

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Investment in Shares

Ownership in another company.

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Contractual Obligation

A legally binding agreement to deliver or perform.

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Physical Asset

Tangible items owned by a business.

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Cash and Cash Equivalents Exclusions

Cash and cash equivalents do not include cash advances for entities not fully or proportionally consolidated, and equity investments that are not substantially cash equivalents (e.g., a preferred stock with no short redemption date).

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Cash Equivalents Characteristics

Items that are readily convertible into known amounts of cash and have a very short maturity date.

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Cash Valuation

Cash is recorded at its face value, which is the same as its fair value.

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Foreign Currency Cash Translation

Foreign currency cash and cash equivalents are translated using the exchange rate of the transaction date and converted to the reporting currency using closing rates on the reporting date.

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Restricted Cash Classification

Cash restricted from general operations, such as sinking funds or funds for specific purposes, is classified as a non-current asset.

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Current Cash Classification

Cash assets that are not restricted and can be used within a year are classified as current assets.

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Cash Held by Subsidiary

Cash held by a subsidiary subject to exchange controls or legal constraints, is restricted cash and is classified as a non-current asset.

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Exceptions to Cash Definition

Cash does not include cash advances to unconsolidated entities, equity investments lacking cash characteristics, and investments with long maturities.

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Restricted Cash

Cash that is not available for general use due to external constraints or internal agreements

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Offsetting Cash Accounts

Combining a debit balance with a credit balance, often between accounts with different attributes in a company, can only be done due to legal contractual agreements.

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Cash and Cash Equivalents

Highly liquid assets readily convertible to known amounts of cash.

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Exchange Controls

Government regulations controlling the exchange of one currency for another. This can impact cash held internationally

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Bank Overdraft

A short-term borrowing facility where a company can withdraw more funds from their account than currently available.

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Cash Measurement

How cash is determined and reported on a company's balance sheet to ensure accounting accuracy.

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Foreign Currency Translation

Converting foreign currency cash to the reporting currency on the balance sheet based on the closing date exchange rate.

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Offsetting Prohibition (IFRS)

International Financial Reporting Standards often do not allow combining debit and credit cash balances from different accounts without legal agreements (contractual agreements).

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Loan Reselling Business Model

A business model focused on acquiring and reselling loans and advances from various financial institutions.

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Receivable Initial Measurement (undiscounted)

When the passage of time's effect isn't significant, receivables are measured at their nominal value (cost), including taxes.

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Receivable Initial Measurement (discounted)

When the passage of time is significant, receivables are measured at a discounted value.

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Receivable Subsequent Measurement (Originated)

Initially recognized at cost, then adjusted for impairment or uncollectability, and potentially measured at discounted value plus or minus accumulation and impairments/uncollectibility.

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Receivable Subsequent Measurement (Held for Trading)

Measured at fair value.

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Nominal Value (Receivables)

The face value of a receivable, including taxes.

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Impairment/Uncollectability

Loss in value of a receivable.

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Discounted Value

The present value of a future receivable considering time value of money.

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Cash Equivalents (IFRS)

Short-term, highly liquid investments quickly convertible to cash, with maturity within 90 days and minimal risk.

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Bank Overdrafts (IFRS)

Bank overdrafts included in cash & cash equivalents if payable on demand and part of cash management.

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Receivables Definition

Debts, unsettled transactions, or obligations owed to a company by customers or debtors.

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Cash Reporting

Details cash movements, categorizes cash types (bank, hand, deposits), and reconciles cash flow and balance sheet.

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IFRS vs. US GAAP (Cash)

Both standards include cash on hand, but US GAAP does NOT offset bank overdrafts and IFRS does if payable on demand.

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Receivables Standards

IFRS 15, IAS 32, and IFRS 9 govern how revenue, financial instruments (presentation), and recognition & measurement are handled in relation to receivables.

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Receivables Category

Receivables fall under the Loans and Receivables category of financial assets.

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Restricted Cash

Cash restricted by purpose, such as sinking funds, reported as non-current asset.

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Loan Measurement

Determining the value at which a loan is recorded and reported on financial statements.

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Amortized Cost

Method used to account for a loan, where its value is tracked over its life, typically not changing substantially by the maturity date, based on the loan’s original terms.

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Fair Value

Current market value of an asset; if the loan market value differs from the initial amount, it must be adjusted to current market price.

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Loan Impairment

Reduction in the value of a loan due to the possibility of not being repaid completely.

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Loan Loss Provision

Estimated amount set aside to cover potential loan losses.

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Foreign Currency Receivables

Loans or accounts receivable denominated in a foreign currency.

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Exchange Rate

The rate at which one currency is exchanged for another currency at a point in time; the rate used for accounting purposes.

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Reporting Disclosures for Receivables

Details required to be shown in financial statements to give context about changes in Account Receivables, allowances for doubtful accounts and their movements during the year.

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Study Notes

Chapter 3: Cash and Cash Equivalents (IAS 7 and IFRS 9)

  • This chapter covers accounting for cash and cash equivalents, focusing on IAS 7 and IFRS 9.
  • Learning objectives include an overview of financial instruments, cash and internal control, reporting cash and disclosure requirements, recognition and valuation of accounts receivable, notes receivable, and DE recognition of receivables. Reporting and disclosure of receivables are also covered.
  • Financial instruments are contracts that create a financial asset for one entity and a financial liability or equity instrument for another. Types of financial instruments include financial assets, financial liabilities, equity instruments, and derivatives.
  • Financial assets include cash, equity instruments of another entity, a contractual right to receive cash or another financial asset, and a contractual right to exchange financial assets or liabilities on potentially favorable terms. Examples include cash, trade receivables and investments in shares.
  • Financial liabilities are any liability that involves a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or liabilities on potentially unfavorable terms. Examples include trade payables, debentures (loans), loans payable, redeemable (repaid after a period) preference shares (non-equity).
  • Equity instruments represent a residual interest in an entity's assets after deducting its liabilities. Examples include common stock and preferred stock.
  • Cash and cash equivalents presenting accounting for measurement, classification, presentation and reporting.
  • Key questions about cash and cash equivalents include what they are, what constitutes them, how to measure and classify them, and how to report them.
  • Applicable standards for Cash and Cash Equivalents include IAS 7 (Statement of Cash Flows) and IFRS 9 (Financial Instruments).
  • Cash comprises cash on hand and demand deposits, held in the form of currencies and notes that are generally acceptable as a means of exchange, and includes physical currency notes and coins comprising foreign currency, and bank overdrafts if payable on demand.
  • Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash, subject to insignificant risk of changes in value, and convertible to physical cash within 90 days with minimal transaction costs (e.g., commercial paper).
  • Exclusions from cash and cash equivalents include cash advances to entities that are neither fully nor proportionally consolidated in the financial statements, and equity investments unless they are, in substance, cash equivalents such as preferred stock with a short redemption date.
  • Cash and cash equivalents include all the options except Equity investments that do not meet cash-equivalent characteristics.
  • Cash is carried at its face value (equivalent to fair value). Foreign currency cash and cash equivalents are translated at the exchange rate of the operation date and converted to reporting currency at closing rates.
  • Cash is classified as either current (available for general operations) or non-current (restricted). Restricted cash is used for specific purposes. Examples include cash held by a subsidiary with exchange controls, sinking funds, or construction mortgage proceeds.
  • Cash debit and credit accounts within the same financial entity are not reported net unless it is as a result of a contractual agreement (e.g., overdraft against a cash account is offset if payable on demand).
  • Reporting includes movements of cash and cash equivalents during the period, categorized accordingly (e.g., cash at bank, cash on hand, short-term deposits). Reconciliation of cash and cash equivalents in the statement of cash flow to the statement of financial position, and amount of cash subject to restrictions need to be reported.
  • Similarities between IFRS and US GAAP regarding cash and cash equivalents include the inclusion of cash on hand and demand deposits. IAS 7 defines cash equivalents as short-term, highly liquid investments readily convertible to cash within 90 days.
  • Differences between IFRS and US GAAP include offsetting bank overdrafts which is allowed in IFRS but not US GAAP.
  • Trade and other receivables include bills receivables, staff advances and prepayments, government receivables (VAT, taxes), and accounts receivables related to special transactions with government or international organizations.
  • Exclusions from receivables include accounts receivable from associate undertakings, receivables on disposals of fixed assets or marketable securities, accrued interest on loans and receivables (and investments), and other accounts receivable (including accrued income). Reductions from trade and other receivables are advances, prepayments from customers, rebates, and discounts, and accounts payable on packaging, containers, and materials.
  • A trade receivable arises upon fulfillment of conditions required for revenue recognition of a sale of goods and services (IFRS 15).
  • Measurement rules depend on classification as originating from the entity or held for trading.
  • Receivables measured at initial cost (nominal value) if passage of time is not significant or discounted if time passage is significant. Subsequently, originated receivables are measured at cost less impairment; receivables held for trading are measured at fair value.
  • Various examples of identifying whether cases necessitate classification of receivables as held for trading or held to collect cash flows are provided.
  • Measurement timing for receivables includes initial measurement and subsequent measurement. Initial measurement can include non-discounted value or discounted value. Subsequent measurement is determined by whether the receivables originated from the entity or were held for trading.
  • Reporting and disclosure of receivables includes movements in receivables balances, allowances for doubtful accounts, movements during the year, receivables pledged or otherwise restricted, age analysis of receivables, and receivables transferred and other relevant disclosures.

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IFA-I Chapter 3 Cash and Cash Equivalents (IAS 7 and IFRS 9) PDF

Description

Explore the principles of accounting for cash and cash equivalents as outlined in IAS 7 and IFRS 9. This quiz covers financial instruments, internal controls, and the recognition and valuation of receivables. Understand the importance of reporting and disclosure requirements in financial accounting.

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