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Restricted Cash | For Balance Sheet & Cash Flow Statement - YouTube
Channel: WallStreetMojo
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today we are going to learn a concept which is known
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as a restricted cash. Now what exactly
this concept is all about as you can see
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there is an extract from the cash flow
statement and in the cash flow statement
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there are three bifurcations from cash
flow from the operating, investing and
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financing activities so in the investing
activity there is been highlighted over
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here the maturities of the marketable
securities and change in the restricted
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cash so what exactly this is we need to
learn that. We need to learn the
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definition of the same. Now the restricted
cash is the portion of the cash which is
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set aside for specific purpose I'm
emphasizing on and is not available for
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the general business use for any
immediate basis so it's like you know
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when you have capital reserve right. It
is used for only for specific purpose in
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the similar fashion that the restricted
cash is used for the specific purpose.
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Now in the broader sense it is a portion
of the money a business entity has in
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its possession but they cannot use it
immediately instead that portion of the
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cash is subjected to some specific
limitation that they need to undergo
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such as being in in marked for future
use or some waiting period so the cash
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is usually held in some special account
okay decisions for some special account
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example like you know the escrow account
right and so it remains a separate from
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the rest of the business of the cash and
cash flows. So it may be represented
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by cash amount on its way into the
business or for cash and that is being
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held for prior to spending. Now such kind
of cash is not available and
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this is not considered as a part of the
liquidity source it is actually excluded
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in the calculation of various
liquidity ratios if that state so it
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takes many forms which a balance sheet
should note clearly specifying the
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source and its uses
so payment deposits are
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let me write payment deposits are
like you know one of the types of the
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restricted cash which
represents the cash a business receives
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from the customer prior to shipping the
goods or providing service but cannot
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spend until satisfying ordered due to
specified clause in the agreement. The
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legal fees in the escrow account which
will go to the attorney following the
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completion of the lawsuit if any is
another form of this kind of cash first
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and second right so business can also
set aside set money aside to pay off
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their something's called as the future
debt or mentioning if so not fault not to
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be spent for any other purpose. let's
take some examples on this and get into
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some more details regarding this I'm
writing over here as examples the first
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and the foremost example that we'll go
for is the amounts that are pledged as
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collateral okay amount that are pledged
as collateral now sometimes you know
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certain corporations the pledge a
certain amount of the cash as collateral
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against the risk covered by insurance
companies so this cash is generally
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maintained in a separate escrow account
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second example the mandatory deposits in at certain banks okay now this is the
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most common deposit of the restricted
cash where the bank needs to know
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deposit a certain amount of cash in the
central bank. The central bank I mean to
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say over here as RBI in India right and
this amount is not available to the for
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any in any sort of use. The contribution
is the next example the contribution to
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cover any pension liabilities. Now
companies in certain geographic
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geographies maintain funds to cover some of the employees benefits like
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pensions which are to be paid in the
future course now we need to
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understand the restricted cash
accounting okay. Balance sheets a balance
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sheet for any entity must add all the
assets and the liabilities incurring the
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cash and cash flows.
so this cash is generally reported as a
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separate you can say the separate line
items right this cash is generally
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reported as separate items as a part of
the CCE account on the company's
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balance sheet and the reason why the
cash is restricted is typically stated
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in the company notes.So this allows
the balance sheet to have a balance
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until the cash is brought into brought
as a revenue or a paid out of as an
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expense and accounted for normally. Now the restricted cash all right are see on
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the cash flow statement or I'll just
write CFS now a restricted cash on the
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cash flow statement is another form of
the financial statement in which the
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called corporations uses to account for
such cash and keeps it accounts balanced.
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Now what we saw at the very inception
stage with that extract that was the
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cash flow statements extract right so
the cash flow refers to the rate
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at which the cash basically moves in and
out of the business they normally change
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in cash and cash equivalent is presented in the final reconciliation
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at the end of the cash
flow statement as the purpose of you
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know restricted cash and cash flow
statement is explained is to explain you
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know how and why the the balance of the
cash can move. So when there is such a
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cash which is not presented as a part of
the cash balance in the balance sheet
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change in the restricted cash should be
presented either in the cash from
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operating activities or there are three
activities I will change this to
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investing which I discussed at the very
beginning and the final is the financing
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activity right so these are the three
activities and depending on the reason
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of maintaining the
restricted cash in the balance sheet
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like for example a change in the cash
because of the repayments of the
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borrowings are reported under the
cash flow of the financing activities.
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okay now change in the deposits which is
taken from the clients change from the
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deposits which is taken from client
to construct you know an asset are
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normally related to the mean operations
and you know because of that they are
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covered in the operating activities.
Now in case where it is expected to be
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used of one use after after one year
from the balance sheet it and it should
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be classified as a non current asset.
However if it is expected to be used
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within 12 months then in that scenario
or from the balance sheet then it should
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be classified as the current asset. Now
we will try and understand what is
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compensating balances now compensating balances is minimum cash
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balance that a company is required to
maintain in an account especially
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maintained as a part of your sort of a
contractual agreement okay.There's some
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contractual agreement with a potential
or you know current lender so a
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compensating balance is generally used
to offset banks cause
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partially when lending out money which
is typically calculated as a loan
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percentage you can say that okay. For
example a company agrees to let's say to
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keep $800,000 in bank account in
exchange for the bank extending eight
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million as a credit line so compensating
balances are often considered as the
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restricted cash and and must be reported
in the company's balance sheet so that's
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it for this particular topic if you have
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