The Difference between Cash Equivalent and Cash - Research Paper Example

My Position It is important to cash equivalent as quite different from cash. Moreover, cash equivalent are not only short-term securities but they are liquid. For a case of IFRM it was considered that an investment is cash equivalent only when it has a very short term maturity of three months or fewer months from the time it was acquired. Here, borrowing is considered a financing activity and since overdrafts are borrowings for a short time, they are thus added to cash flow statement. Moreover, they are included in cash flow statement because their payment is based on demand from cash management and thus composes what is called cash and cash equivalent. This explains why bank overdrafts are not part of financing activities. Additionally, the information presented on cash flow of IFRS is quick and easy to flow. Each entity is supposed to present cash flow statement in such a way that it gives an appropriate reporting of financing activities, investing, and operating. For instance, during the investing activities, it is expected that the firm acquires and uses the long term assets and other activities in the investment process that are not equivalent to cash flow. Additionally, it outlines investment activities as clearly cut and some of the examples of the investment activities undertaken during this time include paying cash to get the service or good to be used in the long-term service. The good or services involved in this case are the long term and intangible assets. Hence they break down into materials used during self construction, to acquire plant or machinery (Stephen & Norbert). Moreover, cash receipts received after selling an acquired asset should be part of investment activities. It generally involves the sale of a plant, property and equipment. Another thing considered is debt instrument or rather sales equity of entities and the interests acquired through the joint ventures. However, receipts from those entities that are classified as cash equivalent especially if they are held for trading and should be omitted. Furthermore, the advances of loans and cash from other parties are classified in this section together with their cash receipt repayment which includes loans to other parties involved ( AICPA). Other investment activities classifications includes cash gotten from securities like forward, option, future or swap contracts and they should appear on the cash flow statements. It only excludes these securities when the accounts are held for dealing and as a result, the payments are classified in part of financial undertakings. Noting here that, the account may be accounted as a hedge it is therefore classified in this section of the cash flow. In the operation activities just like in IFRS cash flow method, are various methods that are described as the principal revenue producing operation. Therefore, a cash flow from the operation activities may result after transactions or other conditions bring in ways of profit determination or losses determination. Example of these operation activities are cash gotten from the sale of good or after the firm has rendered some services. It includes the cash received from loyalties, commission, fee and other revenues. Besides, it shows payment of cash on behalf of or to the employee. Also, it include activities like refunding of taxes or any other cash payments made by the company unless they are stated to specifically associate with the other cash flow activities. Actually, it is supposed to include cash received, all payments gotten from an investment, loan among other money contracts held during trading purposes and they are classified as inventory specifically acquired for resale (Stephen & Norbert). It is therefore evident that just like in IFRS, when accounting one should show some transaction under operation activities, which includes the firm selling machinery and this result to the firm gaining or loosing. Therefore, cash flows experienced from these transactions are classified to being from investing activities. Inclusively, the method of presenting cash records is supposed to have the following traits of financing activities. Firstly, the operations always results to changes in the composition or size of the borrowings and contributed equity. secondly, the cash flows in this entity include the payments that are made to owners in order to redeem or acquire the entity`s share. Thirdly, cash proceeds after there are equity instruments like shares issuing and cash proceed after issuing debentures, notes, mortgages, loans or other forms of either short term or long-term borrowings. Lastly, cash received when a lease pay to reduce outstanding liabilities that are acquired from relating finance lease. During entering or reporting cash flow in operation activities entity, it is suggested that the cash flow operations can either reported as either direct or indirect. Through the indirect method, the profit or loss has to be adjusted such that it accommodates the effect of non-cash transactions, any accrual or deferral of the past or from the operation activities like cash payments or received and those items in income or where investments associated cash flows are from investments. However, in the direct method, it involves revealing gross or major cash payments (AICPA) According to wikinvest, under the indirect method, it is easy to determine the net cash flow resulting from operation activities. Firstly, it is done through adjusting losses or profits in the effect of changes in inventories, payments and operating receivables or payments. Secondly, they adjust cash and the non-cash item like provision-deferred taxes, income accrued (expenses), depreciation, undistributed profits received from the associates, unrealized gains or losses in foreign currencies. Lastly, they can adjust to have cash effect in relational to financing or investing (wikinvest). On the other hand, under the direct method, various operations discloses net cash flow as being received from disclosing information about the gross or the major cash receipts or repayments. The information involved is obtained from those changes occurring in inventories, operation receivables or payments, non-cash items, and from other item from which cash effects can only be from a financial or investing cash flow. Cash from investment or financing activities has to be reported. Every entity is supposed to separately present those major classes of major cash receipts and major cash payments that may arise from financing or investing activities. Since, for acquaintance of the cash flow, one needs to derive and aggregate of acquisitions and disposals of business and its subsidiaries, this information is arranged separately under the classification of investing activities (Earnest and young). For the case of foreign currency cash flows, an entity presents records showing transactions are in foreign currency under functional currency through applying the foreign currency exchange rates between the various functionalities involved –according to foreign currency and functional currency at the date of transaction. Incase of unrealized gains or losses due to change in the exchange rates; they are not put under cash flow. However, it reconciles the cash equivalent and cash at the beginning and end of the period through ensuring that the effects of exchange rates on cash equivalent and cash traded in foreign currency are presented in a statement of cash flow. This helps the entity to remember the amount of cash equivalent or cash traded during the time of reporting. It hence gives a concise picture of the foreign currency amounts and the foreign banks holding them by the end of exchange. It shows results of unrealized gains and losses separately at cash flow in line with operating, financing, and investing activities. When determining interests and dividends, the entity presents cash flow from dividend and interest as in whether paid or received. The cash flows are then supposed to bear either in class of operating, investing or financing according to various activities followed in cash flows. Interests paid or dividends received can be classified as under operating cash flow because of their involvement in profit and loss. Alternatively, they can be classified under financing depending on the cost of obtaining the financial resources needed and the return from the business. Lastly, they are classified as operating cash flow due to them being paid out of operation activities (Earnest and young). In classifying tax and the cash flows resulting from income tax, they can be put under the class of operating activities not unless stated otherwise or given specific identities of being a financing or investing activity. In case the tax is in more than one allocation, its entity shall disclose the summation of the amount of tax paid. For the case of non cash transaction, the entity is supposed to be excluded in the statements of cash flow. These statements do not have any reference to the cash or cash equivalents and can only be disclosed somewhere else during the writing of the financial statement and it is done in a way it gives the reporting about investment or financing message as intended. This is especially so because many financial and investment activities do not have any effect to the current cash flow, however they influences the capital and asset states of the entity. Hence, statements like assets acquisition, methods like leasing or any other financial liabilities, equity shares, and conversion of debt into equity are not expected to feature in cash flow statements. Cash and a cash equivalent, should therefore have some component that presents a reconciliation method between the presented amount in the cash flow statements to the equivalence items as stated in statements of financial position. However, it is logic that decision not to give the final financial position of the firm if the two entities are not equal is worth. According to AICPA, In order to disclose the amount held by entity in relation to the cash and cash equivalent balance without it being available for use through a management commentary statement. The cash not available for entity use for instances may be under legal restrictions or foreign exchange regulations, and the management is supposed to briefly comment accordingly. Summary Through the two available accounting, methods are usable; it is good to have their comparisons as above. To check their agreement with the easiest and the most logical basics concerning the statements of cash flow during the time of financial activities, when in operation and investing. From the various ways the two methods differs, as an accountant one can take position concerning how each section of the cash flow statement should be written. Basically, to give my position, I directly link it to definition, logic and practical reality of every differing section in GAAP and IFRS. Since history repeat itself, my choice would be preferably be the type of cash flow that would generally lead to recur of history. It would be worthy to use intangible assets, plant equipments, property and other assets used in investment in order to determine the fair revalue. Therefore, it would be wise to have a project that will add financial and biological instruments involved in the revaluing the project. As stated in Differencebetween.net, and from the above difference gotten, the position taken was IFRS as the best method of analyzing cash flow. This can be explained through the various information expected to be displayed in a cash flow statement. Since it is evident that cash flow statements give details concerning how cash equivalent and cash has changed at restricted time. Changes noted should be reported in reference to section of cash flow statement, which includes investing activities, operating activities and financing activities (differencebetween.net). Moreover, there should be some reconciliation between the first time adoptions of the project. This virtue make IFRS the best method because at the time the first date of an entity reporting through it, it ensures a retrospective usage of all IFRS measures in the financial statements though with some exceptions that are optional. It then reconciles with the loss or profit as tabulated using GAAP previously. It reconciles the equity found at the end of the period using HAAP and that found at the start of earlier of the period to be compared. The entity to be compared for reconciliation thus includes the last calculation from HAAP and the first calculation with IFRS (KPMG). Bibliography AICPA.IFRS For SMES-US GAAP Comparison Wiki: Cash flow statements. Jan 4, 1980 web. 2nd April 201. < http://wiki.ifrs.com/Statement-of-Cash-Flows .> Wikinvest. Generally Accepted Accounting Principles (GAAP). 2012. Web. 2nd April 2013. KPMG.IFRS compares to US GAAP. October, 2012.2nd April, 2013. Differencebetween.net. difference between GAAP and IFRS.2013. 2nd April 2013, Earnest and young.US GAAP versus IFRS: the basics. December 2012. 2nd April 2013. Stephen G & Norbert T. Major differences in U.S GAAP and IFRS and latest development. May 18, 2009. 2 April 2013. Read More