Cash and Cash Equivalents

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According to International Accounting Standard 7 (IAS 7), Cash “comprises cash on hand and demand deposits”. And cash equivalents “are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value”.

Cash

Cash is the money in the form of currency. Currency includes currency notes and coins. Any currency notes and coins held by an enterprise are part of the term “cash”.

Demand deposit is a type of an account from which funds can be withdrawn at any time without having to inform the bank or depository institution. Most of the checking and saving accounts are demand deposits.

Cash Equivalent

Cash equivalents are investments that can be readily converted to cash. Common examples of cash equivalents include commercial paper, treasury bills, short term government bonds, marketable securities, and money market holdings. An item should satisfy the following criteria to qualify for cash equivalent.

  • The investment should be short term. They should typically mature in less than three months. If they mature in more than three months they most likely will be classified as other investments.
  • They should be highly liquid. This means that they should be easily sold in the market. The buyers of these investments should be easily available.
  • They should be convertible to known amounts of cash. This means that their market price should be available and this market price should not be subject to significant fluctuations.
  • They should not be too risky. There should be very little risk of changes in their value. This means that equity shares cannot be classified as cash equivalents. But preferred shares purchased shortly before the redemption date can be classified as cash equivalents.

In short, cash and cash equivalents mean the cash and those assets which are immediately convertible to cash. Cash and cash equivalents are the most liquid assets of any business. Cash and cash equivalents are very important for the liquidity of a business. A company should have sufficient cash and cash equivalents to meet its urgent liabilities when they fall due.  

Cash and Cash Equivalents in the Balance Sheet

Cash and cash equivalents are typically reported as a separate line item in the statement of financial position, also known as the balance sheet. This line item represents the amount of cash or cash-like assets that a company has on hand, which can be used to meet short-term financial obligations.

Cash and cash equivalents are typically presented in the current assets section of the balance sheet. This section includes assets that are expected to be converted into cash within the next 12 months or within the normal operating cycle of the business, whichever is longer.

Cash and cash equivalents are considered to be highly liquid assets, meaning they can be easily and quickly converted into cash without significant loss of value. As such, they are typically reported at their fair market value and are included in the calculation of a company's working capital, which is an important measure of a company's short-term financial health.

Technically, it is possible for a company to have a negative balance in its cash and cash equivalents line item if it has an overdraft on its bank account. An overdraft occurs when a company withdraws more money from its bank account than it has available, resulting in a negative balance. In this case, the negative cash balance would be reported on the balance sheet as a liability, typically under the current liabilities section. This liability represents the amount of money that the company owes to the bank for the overdraft. It is important to note that while an overdraft may result in a negative cash balance, it is not a sustainable long-term financing strategy. Overdrafts typically come with high interest rates and fees, which can increase a company's financial expenses and reduce its profitability. Therefore, companies should aim to maintain a positive cash balance on their balance sheet by managing their cash flow effectively and avoiding excessive reliance on short-term financing sources.

Quote Guest, 3 December, 2012
thank you
Quote Guest, 13 March, 2013
Can deposit at reserve bank be a cash equivalent
Quote Guest, 13 March, 2013
or interbank deposits at reserve bank can it be a cash equivalent
Quote Vit. A., 13 March, 2013
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Guest wrote:
Can deposit at reserve bank be a cash equivalent
Quote
or interbank deposits at reserve bank can it be a cash equivalent
Depend on deposit terms. If you can quickly (within several days) withdraw you funds and receive money it's cash equivalent.
Quote Guest, 7 June, 2013
If your deposit maturity date maximum 1 then year it is cash equivalent.
Quote Guest, 22 June, 2013
ohh ok thanks
Quote Guest, 7 July, 2013
a bank draft coming from other company? does it includes in cash and cash equivalents?
Quote Guest, 7 July, 2013
i really doubt what items will be included in cash and cash equivalents: what if today is december 31, 2013, what items will be included in CCE?
1. FORMAL COMPENSATING BALANCE ARRANGEMENT with makati bank
2. credit memo from a vendor for a purchase return
3. money order from other company
4. undeposited NSFcheck received from Y, Incorporated dated december 1, 2013
5. time deposit
6. IOUS from shareholders and employees.
Quote Guest, 9 January, 2014
do u take cash at company or group level?
Quote Vit. A., 13 January, 2014
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Guest wrote:
do u take cash at company or group level?
It depents on what you are analysing: company or whole group.
Quote Guest, 6 January, 2015
Thanks, my question is What about bank overdraft ??
Quote Vit. A., 7 January, 2015
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Guest wrote:
Thanks, my question is What about bank overdraft ??
Overdraft is a current liability.
Quote Guest, 17 September, 2015
Is savings deposit in closed bank part of CCE? Tnx a lot.
Quote Guest, 14 June, 2017
What if ang nakalagay lang is 'redeemable preference share' qualified pa rin ba siya as cash equivalent?
Quote Guest, 21 September, 2017
you write "The investment should be short term. They should mature in less than three months".
IAS 7 does not state "short-term" nor does it quantify that it should be "less than three months".

could you please state your sources?
Thank you.
Quote Guest, 29 July, 2019
Can treasury shares be classified as cash equivalent
Quote Guest, 13 February, 2021
When only "cash" is asked in the problem. Do you also include money market that matures within 3 months?
Quote Vit. A., 22 March, 2023

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Guest wrote:
Can treasury shares be classified as cash equivalent
No, treasury shares cannot be classified as cash equivalents on a company's balance sheet. Treasury shares are shares of a company's own stock that the company has repurchased and is holding in its treasury, rather than canceling them. Treasury shares are typically considered to be a contra-equity account, which means they reduce the total equity of the company.

Cash equivalents, on the other hand, are highly liquid assets that can be easily and quickly converted into cash, such as money market funds, commercial paper, and short-term government bonds. These assets are typically held by companies as a way to manage their short-term cash needs and to earn a return on their idle cash balances.

While treasury shares may be a valuable asset for a company, they do not have the same liquidity and cash-like qualities as true cash equivalents. As a result, they should be reported separately on the balance sheet and not included in the cash and cash equivalents line item.

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