Restricted cash and solvency ratios
Safeguard Scientifics, Inc. reported the following in its 2008 financial statements.
Note 7: Long-Term Debt.
The credit facility required the company to maintain cash collateral equal to the company's borrowings (amounts in thousands).
|Cash held in escrow—current||$ 6,433|
|Cash held in escrow—long-term||501|
a. Why would a potential investor or creditor want to know about restrictions on cash?
b. Assume that the loans under the credit facility are expected to remain outstanding for two years. Should the restricted cash be disclosed as current or noncurrent? Discuss.
c. How might the disclosure of such a restriction affect the calculation of working capital, the current ratio, and the quick ratio?
Revenue recognition, ethics, and reputation
The Wall Street Journal reported, “For more than ten years, IBM has quietly turned to Merrill Lynch & Co. and others to execute a rare financial maneuver that propped up the results of IBM's big leasing business. The maneuver allowed IBM to book immediately all the revenue from a long-term computer lease—even though the actual dollars would flow in over the life of the lease. That didn't break any rules, but some accountants term it an end-run that many blue-chip companies would avoid. [IBM's external auditors] called the revenue booster troubling . . . and urged IBM to take immediate action to use the maneuver less.” ...