Financial Accounting and Reporting

of financial position reduces either an asset, liability or equity account. Contra accounts provide
some flexibility in presenting the financial information. An adjunct account increases either an
asset, liability or equity account.
IAS No.1 indicates that it is important that assets and liabilities, and income and expenses be
reported separately.
As part of comparability, the Conceptual Framework indicates that companies should follow
consistent principles and methods from one period to the next. As a result, accounting policies
must be consistently applied for similar transactions and events unless an IFRS requires a
different policy.
Companies must present fairly the financial position, financial performance, and cash flows of
the company. Fair presentation means the faithful representation of transactions and events
using the definitions and recognition criteria in the Conceptual Framework.
Chapter 7 – Cash and receivables
Cash is a financial asset – it is also a financial instrument. A financial instrument is defined as any
contract that gives rise to a financial asset of one entity and financial liability or equity interest of
another entity. Examples of financial and non-financial assets are shown in Illustration 7-1.
Cash, the most liquid of assets, is the standard medium of exchange and the basis for measuring
and accounting for all other items.
Although the reporting of cash is relatively straightforward, a number of issues merit special
attention. These issues relate to the reporting of:
1. Cash equivalents → Cash equivalents are short-term, highly liquid investments that are both (a)
readily convertible to known amounts of cash, and (b) so near their maturity that they present
insignificant risk of changes in value due to changes in interest rates. Generally, only investments
with original maturities of three months or less qualify under these definitions.
2. Restricted cash → Petty cash, payroll, and dividend funds are examples of cash set aside for a
particular purpose. when material in amount, companies segregate restricted cash from regular
cash for reporting purposes. Companies classify restricted cash either in the current assets or in
the non-current assets section, depending on the date of availability or disbursement.
Classification in the current section is appropriate if using the cash for payment of existing or
maturing obligations. On the other hand, companies show the restricted cash in the non-current
section of the statement of financial position if holding the cash for a longer period of time.
Banks and other lending institutions often require customers to maintain minimum cash
balances in checking or saving accounts. These minimum balances, called compensating
balances, are that portion of any demand deposit maintained by a corporation which constitutes
support of existing borrowing arrangements of the corporation with a lending institution.
3. Bank overdrafts → Bank overdrafts occur when a company writes a check for more than the
amount in its cash account. Companies should report bank overdrafts in the current liabilities
section, adding them to the amount reported as accounts payable.
Receivables are also financial assets – they are also a financial instrument. Receivables are claims
held against customers and others for money, goods, or services. For financial statement
purposes, companies classify receivables as either current or non-current. Companies expect to
collect current receivables within a year or during the current operating cycle, whichever is
longer. They classify all other receivables as non-current. Customers often owe a company
amounts for goods bought or services rendered. A company may subclassify these trade
receivables, usually the most significant item in its current assets, into accounts receivable and
notes receivable. Accounts receivable are oral promises of the purchaser to pay for goods and
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