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Hi there,
They did actually ask in my FA exam to workout the cash & cash equivalent which I had no idea you had to take the = cash less the bank overdraft.
Just a heads up for if it reflects in your FA exams
Hi.
Cash equivalents refer to any asset that is ‘immediately convertible to cash’. For FA exam purposes, these include cash in hand, cash at bank and bank overdraft (which is a short-term liability).
As you may know, businesses constantly need cash to pay off their short term liabilities, including inventory purchases, supplier payments, small miscellaneous expenses, etc. Due to the constant inflow and outflow of cash into and out of company’s bank account, it is expected that circumstances will arise where company may not have sufficient cash (or no cash at all!) to pay off a debt that requires immediate settlement.
Therefore, arrangements are made with the bank to allow the company to “overdraw’ (beyond the available balance) from the bank account if such circumstances arise. This overdrawn amount will be immediately repayable when an inflow occurs into the account, or when the bank demands the company for repayment. This is why bank overdraft is part of cash equivalents.
I hope this helps.
I havent understood kindly..if it part of cash and cash equivalent why is it then being subtracted instead of being added
A bank overdraft is a negative cash balance, as is explained in our free lectures on bank reconciliations.
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