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</p> Signup and view all the answers

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

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

    Which of the following standards pertains to financial instrument presentation?

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

    What is the definition of cash under IFRS?

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

    Receivables are classified as which type of assets?

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

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

    <p>A bank account balance</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</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</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</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</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</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</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</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</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.</p> Signup and view all the answers

    Which of the following would be considered cash on hand?

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

    Cash equivalents must have which of the following characteristics?

    <p>High liquidity and short maturity</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.</p> Signup and view all the answers

    Which of the following cash items is typically considered restricted?

    <p>Sinking fund</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.</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.</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.</p> Signup and view all the answers

    Which item is generally not considered restricted cash?

    <p>Change fund</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.</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.</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.</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</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</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</p> Signup and view all the answers

    How are receivables held for trading measured?

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

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

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

    Which accounting method is used for the loan in question?

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

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

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

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

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

    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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