Question

Which of the following statements relating to restricted cash is not correct?

Answer 1

Answer:

A. By including restricted cash as part of the amount reported as cash and cash equivalents, the company more clearly conveys to financial statement users the actual amount of cash available to pay liabilities.

Explanation:

Restricted cash can be defined as an amount of money and cash equivalents which is being held or set aside by a company for a specific purpose and as such it is not available for immediate business or general use. It is generally classified as either a current asset if it would be used in the short-term or as a non-current asset if it wouldn't be used in a one-year period or time frame.

Hence, the true and correct statements about restricted cash are as follows;

1. Restricted cash is not available for general use but rather restricted for a specific purpose.

2. Restricted cash must be reported separately on the balance sheet as other assets or restricted cash.

3. Companies are sometimes legally or contractually required to set aside cash for a specific purpose and are not allowed to use it for day-to-day operations.

Additionally, the purpose of a restricted cash is usually stated in the footnotes of a financial statement and depending on the company, the purpose might be for capital investments, debt reduction, repayment of loans, purchase of heavy equipments etc.