Cash, equivalents and overdrafts

Learning objectives

• Determine whether an investment is a cash equivalent (readily convertible, known amount, insignificant risk, short maturity from the date of acquisition, the case of equity investments).L1, L2, L3
• Analyse whether a bank overdraft forms an integral part of cash management and must be included in cash and cash equivalents.L2, L3
• Calculate opening and closing cash and cash equivalents from a list of balances, excluding internal movements.L1, L2, L3

Normative references

• IAS 7 §6Definitions: cash comprises cash on hand and demand deposits; cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value; cash flows are inflows and outflows of cash and cash equivalents; operating activities are the principal revenue-producing activities and other activities that are not investing or financing activities; investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents; financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.
• IAS 7 §7Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes; an investment must be readily convertible to a known amount of cash and subject to an insignificant risk of changes in value, which normally means only investments with a short maturity of, say, three months or less from the date of acquisition qualify; equity investments are excluded unless they are, in substance, cash equivalents (for example preferred shares acquired within a short period of their maturity and with a specified redemption date).
• IAS 7 §8Bank borrowings are generally considered to be financing activities; however, where bank overdrafts that are repayable on demand form an integral part of an entity's cash management, they are included as a component of cash and cash equivalents; a characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn.
• IAS 7 §9Movements between items that constitute cash or cash equivalents are not cash flows: they are part of the entity's cash management (for example the investment of excess cash in cash equivalents) rather than part of its operating, investing or financing activities.
• IAS 7 §46In view of the variety of cash management practices and banking arrangements, an entity discloses the policy that it adopts in determining the composition of cash and cash equivalents.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

22 questions

• To be a cash equivalent, an investment must notably be readily convertible to a known amount of cash and subject to an insignificant risk of changes in value.L1
• Highly liquid listed shares that can be sold within a day are normally cash equivalents.L1
• Transferring funds from a current account to a deposit qualifying as a cash equivalent is presented as an investing outflow.L2
• From which date is the short maturity (about three months) of a cash equivalent normally assessed?L1
• In which case can an equity instrument be a cash equivalent?L1
• Which indicator does the standard give of a bank overdraft that forms an integral part of cash management?L2
• Why must the entity disclose the policy it adopts in determining the composition of its cash and cash equivalents?L2
• At 31 December, Lommira holds the following investments. Which of them can, in principle, be cash equivalents?L2
• Which of the following statements about Calrane's cash are correct?L3
• At 31 December, Saldral holds: cash on hand {cash_on_hand}; demand accounts {demand_deposits}; 2-month term deposit taken out on 1 December {short_deposit}; 6-month term deposit taken out on 1 November {long_deposit}; listed shares {listed_shares}. Compute closing cash and cash equivalents.L1
• Fenrel has a 30 June reporting date. At that date it holds: cash on hand {cash_on_hand}; demand deposits {demand_deposits}; 3-month certificate of deposit acquired on 10 June {short_deposit}; 5-year government bonds acquired 58 months ago {long_deposit}; equity fund units {listed_shares}. What is the amount of cash and cash equivalents?L2
• At Isvio, cash and cash equivalents amounted to {opening_cash} at the start of the year. During the year, Isvio transferred {internal_transfer} from its current account to a one-month deposit (a cash equivalent), generated net operating cash flows of {operating_net} and paid {capex} for a machine. Compute the net change in cash presented and closing cash.L2
• At 31 December, Ulvelle reports: current accounts in credit {positive_accounts}; overdraft repayable on demand on its main account, which alternates every month between positive and overdrawn balances {fluctuating_overdraft}; overdraft on a second account, overdrawn without interruption for three years and renegotiated as a funding line {structural_overdraft} (case data). Compute closing cash and cash equivalents.L3
• Rostis classifies as a cash equivalent an 18-month savings certificate acquired 16 months ago, on the ground that it matures in 2 months. What is the error?L2
• Kerbane's overdraft, repayable on demand, is overdrawn on some days and positive on others, depending on customer receipts; it is used for day-to-day management. Kerbane nevertheless presents it as a borrowing and classifies its changes as financing cash flows. What is the error?L3
• In its statement, Brabris presents an investing outflow “1-month placements” of 300,000 and an investing inflow “repayment of 1-month placements” of 300,000; these placements qualify as cash equivalents. What is the error?L3
• On 20 November, Salnore places 500,000 in a 3-month term account with its bank; early withdrawal is possible at any time, with a penalty limited to a few days of interest (case data). How should this placement be qualified at 31 December?L2
• Norzane's main account, repayable on demand, was in credit for eight months of the year and overdrawn for four months; it is overdrawn by 40,000 at the reporting date. How should it be presented?L2
• For four years Delquine has used a bank facility that is permanently overdrawn, around 900,000, to finance its inventories; the bank has attached an annual reduction schedule to it (case data). How should it be presented?L3
• On 5 December, Vervora buys preferred shares of a top-tier issuer, redeemable on the following 15 January at a contractually fixed price (case data). How should they be qualified at 31 December?L3
• Ralrane's treasurer proposes to include in cash and cash equivalents: (1) a 4-month term deposit taken out on 1 December; (2) a money market fund whose net asset value varies very little, redeemable daily (case data); (3) a 2-year credit line fully drawn. Write a reasoned analysis of each item.L3
• The Osttara group plans to define its policy on the composition of cash: whether to include its subsidiaries’ overdrafts, some fluctuating, others permanent, and term accounts of 1 to 6 months. Write a reasoned accounting policy memo.L3