Cash and Receivables

Cash consists of:
- Coin
- Currency
- Available funds on deposit at the bank
- Negotiable instruments such as money orders, certified checks, cashier’s checks, personal checks
Financial instruments that can be readily converted to cash through cash equivalents are also considered cash.
Cash equivalents are short-term, highly liquid investments that:
1. Are readily convertible to known amounts of cash.
2. Are so near their maturity that they present insignificant risk of changes in value because of changes in interest rates.
Examples of cash equivalents:
- Short-term investments (original maturities less than 3 months)
- Treasury bills
- Certificates of deposit
- Commercial paper
- Money market funds

Receivables represent claims held against customers and other parties for money, goods, or services rendered, often referred to as loans and receivables.
Examples:
- Loan example: Bank lending money to a company e.g., BMO lending money to Harley-Davidson.
- Receivable example: Best Buy recording an accounts receivable when selling a flat-screen TV on account.
Classification:
- Current (expected to be collected within a year or during the operating cycle)
- Non-current (all other receivables)
Accounts receivable can be categorized as:
- Trade receivables (amounts owed from customers)
- Nontrade receivables (amounts owed from various transactions outside normal operations)

Liquidity: Cash & receivables indicate the ability of a company to meet its financial obligations.
Investment decisions: Investors and creditors assess whether a company has excess cash or is efficiently collecting receivables, impacting their perception of investment opportunities.
Trapped cash: Example with Apple Inc.'s cash balance of $98 billion, with $34 billion in the U.S. and $64 billion in foreign accounts affecting liquidity decisions.

Must report at net amount expected to be collected.
Estimating uncollectible receivables necessary for valuation:
- Report receivables with appropriate offset accounts (Allowance for Doubtful Accounts).
- Classify as current or noncurrent in the balance sheet.

Examples of cash classification:
- Post-dated checks (treated as receivables until deposit is possible).
- Travel advances (not reimbursed treated as prepaid expense).
- Certificates of deposits (less than 3 months as cash equivalents, more as long-term investments).
Restricted Cash: Cash set aside for specific purposes.
- Petty cash, payroll, or dividend funds that may be considered restricted on the balance sheet.

Not available for immediate general use, often reported separately when material.

Occur when checks exceed account balance.
Reported as current liabilities, typically not offset against cash unless allowed.

Requires methodical estimates of bad debts based on historical data and projections.

Preferred method under GAAP to account for estimates of uncollectibles.
- Debits Bad Debt Expense & credits Allowance for Doubtful Accounts; applicable in periods of credit deterioration.

Formal agreements where the maker promises to pay a specific sum at a future date.

Types of notes:
- Interest-bearing (defined interest rate)
- Zero-interest bearing (interests included in face amount).

Recorded at present value for long-term notes, cash expected to be collected discounted at current interest rates.

Sale of receivables either with recourse (retaining some responsibility for collection) or without (absolving sellers of ultimate collection risks).

Proper separation, valuation accounts, current and noncurrent classification must be disclosed.
Only companies dealing with significant amounts of similar receivables must disclose concentrated credit risks.

Proper management of cash and receivables is critical for liquidity and overall business health. Effective policies thrive on regular assessment, reconciliation, and strategic financial management.