[Commerce Class Notes] on Cash and Cash Equivalents Pdf for Exam

What are Cash and Cash Equivalents?

The lined items on a business’s balance sheet that describes the valuation of an organisation’s cash and liquid holdings are known as cash and cash equivalents. These items are liquid money or components that can be feasibly turned into money.

The cash equivalents consist of vendible securities and bank accounts that mature by 90 days or less. Sometimes, even equity or stock holdings are considered as cash equivalents as they can be sold in the stock market at short notice.

Understanding Cash and Cash Equivalents (CCE)

They are generally the group of liquid holdings acquired by an enterprise. To make it simple, it can be said that this asset category covers items that are akin to cash.

Here are some components that fall under cash and cash equivalents list.

First, take a look at the components of cash:

1. Foreign Currency

Companies that possess multiple currencies can sometimes undergo currency interchanging risk. The foreign currencies must be converted into reporting currency for accounting purposes. Results obtained after conversion must be similar to a value if that company would have calculated operations using a single denomination.

Translation losses garnered from the reduction of foreign currencies are not mentioned with CCE. However, these mislays are noted in the economic reporting account known as “accumulated other comprehensive income.”

2. Money Order

It is a financial statement given by the government or banks that a payee uses to obtain funds on the requirement. One advantage of a money order is that it is prepaid. So people prefer money orders more than checks.

They can be used to make payments for small business dues and debts as well. Moreover, money orders can be purchased with a small charge at places like post offices.

3. Petty Cash

It signifies the amount of money that is used for making payments of trivial outlays, and that amount may vary for every organisation. These funds must be kept secured and recorded to prevent thefts.

4. Cash at Bank 

It is the amount of money and other liquefiable assets that are parked with a financial institution. It is a highly liquid asset and can be used to meet several short-term expenditures.

5. Bank Overdrafts

It refers to a situation when a bank balance passes below zero due to excessive withdrawals.

6. Coins

Irrespective of their material, coins that work as a medium between buying and selling are considered as cash.

Now let’s Move on to Cash Equivalents Examples.

1. Commercial Paper

Commercial papers are short-term unsecured debt instruments that are issued by companies. They are mainly used to finance payroll, inventories, payable accounts and various liabilities of short-duration. It comes with a fixed maturity that seldom goes above 270 days.

2. Marketable Securities

These are financial assets that can be quickly converted into cash. These assets are mainly traded on public platforms as they provide ready prices. Furthermore, two types of marketable securities are present: marketable debt securities and marketable equity securities.

3. Money Market Funds (MMF)

Money market funds are the same as checking accounts. But these funds have a high rate of interest accrual on deposited funds. Net Asset Value (NAV) of MMF remains stable in comparison to other mutual funds. For trades, non-profit enterprises, and various other organisations, money market funds are a productive tool for cash management.

4. Short-Duration Government Bonds

Short-term government bond funds are limited mutual funds. They are restricted concerning funding bylaws and investment objectives. That means investment can be only made on short-term liabilities of the government or related agencies.

Cash and cash equivalents in a balance sheet can be reported together or separately. In general, most organisations prefer to show them collectively.

Next, take a look at how to calculate CCE.

Evaluation of Cash and Cash Equivalents

Cash and cash equivalents are reported as current assets on a balance sheet. However, its value changes as different transactions occur. These alterations are termed as ‘cash flows’, and they are noted down on accounting ledger. For example, if a business spends Rs.1000 on buying goods, this is shown as Rs.1000 increase in cash outflow and reduction in cash and cash equivalents value.

Analysts use quite a few formulas to calculate dealings associated with CCE. The first cash and cash equivalents formula:

The second:

However, there are exceptional items that are not considered as cash and cash equivalents. They are – 

1. Credit Collateral

If Treasury bills are given as a mortgage for a loan, it does not fall under the list of cash equivalents. So, restricted T-bills must be shown separately.

2. Inventory

Inventories available in a company’s stock may not be easily convertible into cash. Hence, it is not a cash equivalent.

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