Question

How are compensating balance requirements normally disclosed?

a. On the first line of the current assets.
b. In notes to the financial statement.
c. Under the cash equivalent line on a balance sheet.
d. With the line of credit disclosure.

Answer 1

Compensating balance requirements are normally disclosed in the notes to the financial statement. They represent the minimum balances that must be maintained in association with financial agreements, such as bank loans, affecting a company's liquidity.

Step-by-step explanation:

Compensating balance requirements are typically disclosed in the notes to the financial statement. Compensating balances are minimum balances that a bank may require a borrower to maintain in a banking account, and such requirements are often part of loan agreements or other banking arrangements. The disclosure of these requirements is important for understanding the company's liquidity and financial obligations.

When a company has a compensating balance agreement with its bank, it should clearly disclose this information in the notes to the financial statements. These balances can impact the amount of liquid cash available to the business for daily operations. If the compensating balance is significant, it might also affect how users of the financial statements assess the company's cash position and financial health.