I’m studying and need help with a Accounting question to help me learn.
In business today, the end result is often to generate cash flows that the company can use for future growth to meet current and long-term obligations or to return to owners. Under current GAAP standards, the balance sheet has assets listed in order of liquidity. Under IFRS, cash is listed last because it is considered the result of being in business, which follows the income statement mentality. In your opinion, which location is the better location for reporting cash on the balance sheet? Why did you select that location?
Just do response each posted # 1 to 3 Down below only.
When we think about the creditors and investors as the main users of the Financial Statements, we need to consider what they first want to see in the balance sheet. According to Kieso, Weygandt and Warfield (2018), creditors want to check if the company have enough resources to pay its current and maturing liabilities (ratio of cash to short-term liabilities). At the same time, the investors check for liquidity to evaluate potential payments of dividends for the shareholders. That means that liquidity is a key element for their analysis.
The cash balance may also give an idea about the Company’s investment policy, since we could see if the company prefers to keep cash on hand instead of investing it in long-term investments. At the same time, an unusual and elevated amount of cash on hand could also indicate that the Company is getting prepared for some extraordinary cash outflow in the upcoming future (relevant acquisition of assets or payment of some unexpected liabilities, etc.).
Therefore, considering that cash represents the best asset in terms of liquidity, it should be listed first, like in the US GAAP. The other assets should also be listed just below, following a decreasing order in terms of liquidity (from the more to less liquids).
One curious thing is that the Brazilian accounting standards are based on IFRS (considered a full IFRS country), but the balance sheet is presented like in the US GAAP, with the cash and cash equivalents listed first. That maybe indicates that even IFRS countries agree about the importance of having cash listed at the top of the balance sheet.
Everyone knows that cash is the most liquid of all assets, so does it really matter if it is listed as the first asset or the last on the balance sheet? In undergrad I was taught GAAP, so that is what is familiar to me. However, upon studying IFRS through this course, I started thinking which makes more sense, not just what is familiar?
IASB requires the statement of cash flows be prepared. The statement helps investors, creditors, and others know what is happening to a company’s most liquid resource.1 The fact that there is a statement specifically to report changes in cash, tells us that cash is a very important part of financial reports. Because of its’ importance, I still believe GAAP’s positioning of cash at the top of the Statement of Financial Position is the best location.
Whatever IASB and FASB decide, the good news is, the common reader of the Statement of Financial Position will know the value of cash and that it is liquid no matter where it is located.
1 Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2018). Chapter 5: Statement of Financial Position and Statement of Cash Flows. In Intermediate accounting IFRS edition (pp. 5-16-5-17). Hoboken, NJ: Wiley.
We have heard the old adage “cash is king” since forever. IFRS calls for cash to be listed last while GAAP calls for cash to be listed first based on liquidity. In my opinion, the GAAP guidance is preferred. I agree that cash should be listed first on the balance sheet. Reporting the amount of cash is important because it is the most “liquid” of current assets. It tells an investor how much cash is on hand to cover current and non-current liabilities. It also tells an investor how likely it is that the company can pay out dividends. It is included in certain liquidity and coverage ratios, including current cash debt coverage and and cash debt coverage. Current cash debt coverage measures a company’s ability to pay off its current liabilities in any given year solely from operations. In other words, if there is insufficient cash, a company may have to take out loans or distribute stock to raise cash to pay its current obligations. Cash debt coverage measures a company’s ability to repay total liabilities. Having enough cash on hand lets an investor or creditor know that a company has flexibility – flexibility to purchase assets to expand the business and flexibility to pay off obligations in a timely manner. It can also show whether a company is a good steward of monies provided by investors and creditors. A company with enough cash on hand can also react to emergencies such as pandemics and recessions. (Vardi, 2020).
Cash is the most liquid asset on the balance sheet, and it’s value is the best determined and most easily calculated. It simply is what it is. Current assets are listed as current because they can be converted to cash in a year or less. Cash is already converted and can be used immediately. In my opinion, cash is the most important item on a company’s balance sheet and should be reported first.