BU387 Lecture Notes - Lecture 8: Debits And Credits, Effective Interest Rate, Accounts Receivable
Document Summary
Restricted cash is separately disclosed and reported in the current assets section or is classified separately in the long-term assets section, depending on the date of availability or of the expected disbursements. It should not be classified in current assets if there are restrictions that prevent it from being used for current purposes, unless the restricted cash offsets a current liability. Cash that is classified in the long-term section has often been set aside for investment or financing purposes, such as for a plant expansion, long-term debt retirement, or as collateral for a loan. Compensating balances are minimum balances defined as the portion of any demand deposit that a corporation keeps as support for its existing or maturing obligations with a lending institution. By requiring a compensating balance, the bank gets an effective interest rate on its loan that is higher than the stated rate because it can use the restricted amount that must remain on deposit.
