Cash and cash equivalents

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Cash and cash equivalents
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Cash is the most basic form of financial instrument. Some short-term, highly liquid debt investments are considered cash equivalents and can be included in the balance sheet together with cash. There are very few problems with the valuation of cash, although some cash equivalents that are securities may be carried at fair value, and balances in foreign currency must be adjusted to reflect current exchange rates [1].

Cash characteristics

According to the widespread use, cash includes not only cash in hand but also deposits payable on demand at banks or other financial institutions. Cash also includes other types of accounts that have the general characteristics of deposits on demand, in the sense that the customer can deposit additional funds at any time, as well as effectively withdraw funds at any time without prior notice or penalty. All fees and loans on these accounts are cash receipts or payments for both the account owner and the bank that runs it. For example, a bank granting a loan by posting the receipts in the customer's deposit account is the bank's cash payment and the customer's cash receipt at the time of entry [2].

Cash equivalents characteristics

Cash equivalents- short-term, highly liquid investments that have both of the following features [3]:

  • easily convertible into known amounts of cash and
  • so close to the maturity that they pose a slight risk of changes in value due to changes in interest rates.

In general, only investments with an original maturity of three months or less are eligible under this definition. Original maturity means the original maturity date for the investee. For example, both a three-month US Treasury bill and a three-year US Treasury note purchased for three months from maturity qualify as cash equivalents. However, Treasury note purchased three years ago do not become cash equivalent when the remaining maturity is three months. Examples of items commonly considered to be cash equivalents are [4]:

  • Treasury bills,
  • money market funds,
  • commercial papers,
  • federal funds sold (for the entity conducting banking operations).

Balance sheet presentation issues with cash

There are several problems with the presentation of the balance sheet with cash. Cash, the use of which is limited, should be reported separately from unlimited cash and be excluded from current assets in the classified balance sheet. Most types of companies report cash flow in a cash flow statement. A statement of cash flows is prepared in several choices, but as rule receipts and payments should be classified as financing, investing, or conducting business. Generally, cash inflows and outflows should be presented separately (gross), but there are a few exceptions that allow for net cash flow reporting. For example, changes in cash equivalents can be reported net in the cash flow statement. Besides, companies may present cash flows from some short-term, high-turnover financial instruments on a net basis. Exceptions are wider for financial institutions. Usually, the amounts in the deposit for financial institutions cannot be transferred liabilities to the same institutions. However, some financial institutions may value mutual balances with other financial institutions in some circumstances [5].


  1. R.Sangiuolo,L.F.Seidman. 2008. p.1.02
  2. J.M.Flood. 2015. p.84
  3. J.M.Flood. 2015. p.84
  4. J.M.Flood. 2015. p.84
  5. R.Sangiuolo,L.F.Seidman. 2008. p.1.02


Author: Magdalena Domalik