Chapter 6: Cash and Receivables
Cash Overflows for Apple
In 2013, Apple advised their shareholders that it sold 34M iPhones, up 90% from the same quarter last year, and up 150% from the year before. Along with the increased sales came increased profits (almost double) and increased cash in the bank; about US$ 9.9B in cash flow from operations for a total cash holding of about US$ 100B.
Until that point, Apple was reluctant to pay out dividends to its shareholders as most high-tech companies need large amounts of cash to expand their existing markets and for research and development costs to find new markets. In 2013, Tim Cook, CEO of Apple Inc., convinced Apple's board of directors that it was time to start paying out some periodic cash dividends to its investors; US$ 3.05 per share. Dividend payouts, along with some shares repurchases, totalled about US$ 7.8B paid to investors in the third quarter of 2013. Since Apple is a multinational corporation operating globally, some of this cash stockpile was in foreign funds. This strategy avoids paying the 35% US tax on foreign earnings repatriation. In all, about two-thirds of its cash holdings are in foreign currencies. Even though this cash is not available for dividends, this does not seem to bother Apple, since the company seems to have more than enough US cash for dividends payments and other return of capital. Even so, all this currency, especially foreign currency, is creating a new problem.
At this rate of continued growth, many analysts are predicting a continued piling up of foreign and US cash. The issue then becomes; what to do with all this cash, especially the massive two-thirds portion of foreign cash? It has become a conundrum—to manage all this cash, Apple has had to open about two hundred different bank accounts across different banks to monitor and track cash locations and spending, as well as to track and manage liquidity across the organization on a day-to-day basis.
The risk to their gigantic cash pile sitting in bank accounts is that it may be earning simple interest instead of better rates from investing in higher yielding instruments such as money market funds. For a cash-rich company such as Apple, a centralized cash management system is crucial; it will provide information quickly and efficiently so that Apple's money managers can make critical (and timely) investment decisions. Another benefit of a centralized cash repository is reduced risk of fraudulent access to cash, since cash invested in money market funds and similar alternatives is less accessible than cash sitting in a bank account, or many bank accounts as is the case with Apple.
In Apple's case, a centralized cash treasury will add value by reducing the percentage of idle cash through streamlining bank accounts and by allowing cash managers to focus on ensuring the right levels of cash with the remainder invested in instruments with better returns.
While some may consider too much cash in too many bank accounts to be an enviable position, it is still a risk that could lead to cash opportunities lost or worse, cash leaking away in inappropriate hands if left unexamined.
(Source: Apple Inc., 2013)
After completing this chapter, you should be able to:
- Describe cash and receivables, and explain their role in accounting and business.
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Describe cash and cash equivalents, and explain how they are measured and reported.
- Explain the purpose and key activities of internal control for cash.
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Describe receivables, identify the different types of receivables, explain their accounting treatment, and prepare the relevant journal entries.
- Describe accounts receivable, and explain how they are initially and subsequently measured and reported.
- Describe notes receivables, and explain how they are initially and subsequently measured and reported.
- Describe derecognition of receivables and the various strategies businesses use to shorten the credit-to-cash cycle through sales of receivables or borrowings secured by receivables.
- Describe how receivables are disclosed on the balance sheet and in the notes.
- Identify the different methods used to analyze cash and receivables.
- Explain the differences between IFRS and ASPE for recognition, measurement, and reporting for cash and receivables.
Introduction
As the opening story about Apple illustrates, actively managing cash and receivables has important implications for businesses. The time frame required to convert receivables to cash is a cycle that calls for regular monitoring. This chapter addresses how management uses financial reporting to regularly assess both the credit-to-cash cycle and its overall cash position in terms of liquidity (the availability of liquid assets to pay short-term obligations as they come due) or solvency (the ability to meet all maturing obligations as they come due). This chapter will focus on cash, cash equivalents, accounts receivable, and notes (loans) receivable. Each of these will be discussed in terms of their use in business: their recognition, measurement, reporting, and analysis.
Chapter Organization