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MGT220H5 Study Guide - Final Guide: Perpetual Inventory, Effective Interest Rate, Petty Cash

Course Code
Randolph Christopher Small
Study Guide

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Understanding Cash and Accounts Receivable
Managing and controlling cash and accounts receivable are critical objectives for many
Key concerns relating to management and control of cash include:
o Implementing appropriate internal controls, including regular bank
o Minimizing idle cash
Key concerns relating to management and control of accounts receivable include:
o Implementing appropriate internal controls, including appropriate credit
o Speeding up the collection cycle
Financial Asset
Any asset that is:
(i) cash;
(ii) a contractual right to receive cash or another financial asset from another party;
(iii) a contractual right to exchange financial instruments with another party under conditions
that are potentially favourable to the entity; or
(iv) an equity instrument of another entity
What is Cash?
Cash is reported as a current asset if it is readily available to pay current obligations
and is free of restrictions
Cash consists of coins, currency, available funds on deposit at the bank, and petty cash
Also includes money orders, certified cheques, cashier’s cheques, personal cheques,
bank drafts, and usually savings accounts
Post-dated cheques, travel advances, and stamps on hand are not classified as cash
Reporting of Cash
Reporting cash needs special attention in the case of the following:
1. Restricted cash
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2. Cash in foreign currencies
3. Bank overdrafts
4. Cash equivalents
Restricted Cash
Compensating balances: minimum cash balances maintained by a corporation in
support of existing borrowings
These funds are not available for use by the corporation, but the bank can use the
restricted cash
Petty cash, special payroll, and dividend accounts are examples of cash set aside for a
special purpose (usually not material)
If the restricted cash balance is material, must be segregated from regular cash for
reporting purposes
Classified as current or non-current assets depending on date of availability or
expected disbursement
Note disclosure of restricted cash is required
Foreign Currencies
Amount held in foreign currencies is reported in Canadian dollars on the date of the
statement of financial position (i.e. balance sheet date)
The exchange rate on the date of the statement of financial position is used to
translate foreign currencies into Canadian dollars
If restrictions exist on the foreign funds, those funds are reported as restricted
Bank Overdrafts
Overdrafts represent cheques written in excess of the cash account balance
Overdrafts are reported as current liabilities (often reported as accounts payable)
In general, bank overdrafts should not be offset against the Cash account
However, bank overdrafts may be offset against available cash in another account if
both accounts are at the same bank
Cash Equivalents
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Defined as short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in
Original maturity is generally three months or less
Typical examples: treasury bills, money-market funds, commercial paper
ASPE excludes equity securities
Under IFRS, some equity instruments can be classified as cash equivalents (for
example, preferred shares acquired within a short time of their maturity date)
Cash equivalents are reported at fair value
Receivables: Introduction
Loans and receivables are specific claims against customers and other parties for cash
(or other assets)
Receivables are classified as either current (short-term) or noncurrent (long-term)
Classified as current receivables if there is the expectation to collect within one year or
operating cycle (whichever is longer)
Receivables can be classified as either trade receivables or nontrade receivables
Accounts Receivable: Issues
Trade receivables include:
o Accounts receivable (verbal promise to pay, normally within 30 to 60 days)
o Notes receivable (written promises with specified terms, e.g. interest rate and
due date)
Nontrade receivables include the following:
1. Advances to employees or other officers
2. Receivables from the government (e.g. GST recoverable, income tax receivable)
3. Dividends and interest receivable
4. Amounts owing by insurance companies
Accounts Receivable: Trade Discounts vs. Cash Discounts
Trade discounts are discounts given to customers often for different quantities
purchased (often quoted as a percentage)
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