What is restricted cash, and why is it reported separately?

Restricted cash refers to funds that are set aside for a specific purpose and cannot be used for general operational expenses. This cash is reported separately on the balance sheet because it is not readily available for the company's everyday use, which is crucial information for stakeholders assessing the company's liquidity and financial health. By classifying restricted cash separately, companies enhance transparency, allowing investors and analysts to understand that a portion of cash is committed to obligations such as debt repayment, legal requirements, or future capital projects, rather than being available for immediate operational needs. This clear delineation helps users of financial statements make informed decisions based on the company's operating cash flow situation.