How Does Cash and Cash Equivalents Report in the Balance Sheet?

Definition

Cash and Cash Equivalents are the line item on the balance sheet, which reflects the particular business’s overall cash or liquidity position. They are basically those assets that can be converted to cash in a relatively quicker period.

Therefore, it can be seen that Cash and Cash Equivalents are a group of assets that the company owns.

In most cases, the company has a variety of cash and cash equivalents, the aggregate of which is mostly shown on the top line of the balance sheet.

The main reason behind their position in the balance sheet is that they are current assets, and within current assets, they are mainly the most liquid amidst all the other short-term assets.

What is included in Cash and Cash Equivalents?

Cash includes bills, coins, undeposited checks, and any other liquid item that can be considered legal tender.

It also includes money that is kept in checking and savings accounts. Cash in hand basically includes all the items that are similar to cash. It can be seen that the overall liquid assets, which can readily be converted to cash, are considered as Cash or Cash Equivalents.

Cash

As far as cash in its pure form is concerned, it can be seen that it basically is the money that exists in the form of currency.

It also includes all bills, coins, and other currency notes. Similarly, demand deposits are further considered a type of account from which funds can readily be withdrawn without any prior notice.

Examples of demand deposit accounts are mainly all saving accounts or checking accounts. Therefore, all demand account balances are also included in the balances at the end of a subsequent year.

Foreign Currency

In a lot of instances, it can be seen that companies have more than one currency. They mainly keep alternate currencies in order to hedge themselves from the currency exchange risk.

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Therefore, in the same manner, currency from foreign currencies is also considered as liquid and easily convertible assets.

However, currency from other foreign countries must also be converted and reported in the report’s financial statements.

This is to ensure that the overall balances are in one currency so that stakeholders have proper clarity regarding the overall cash equivalents that the company has at the end of a particular given financial year.

Cash Equivalent

 In the same manner, it can be seen that cash equivalents are investments that can be converted into cash quickly.

However, the main contingency in this regard is the fact that these investments have to be short-term, and the overall investment duration should be three months or less. In the case where the investment is for a longer time duration, it should be classified into other investments.

The main rationale behind this is the fact that cash equivalents should be highly liquid and should be easily sold on the market. In the same manner, the buyers of these investments should also be easily accessible.

However, to declare cash equivalents as liquid assets, it also becomes essential to have the known market price for all these instruments.

The central premise is to ensure that these instruments are relatively stable and are not subject to significant fluctuations before redemption or maturity.

Which items should not be included in Cash and Cash Equivalents?

In certain instances, there are situations where companies tend to be confused regarding the overall items which should be included in cash and cash equivalents and which should not be included.

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Despite the clear distinction in the liquidity cycle, it is also rudimentary to realize that certain elements should also be accounted for when it comes to the items not necessarily included as cash or cash equivalents.

Firstly, inventory should not be included as a cash equivalent, predominantly because it cannot be readily converted to cash.

In the same manner, because of the fact that the net realizable value is still uncertain, it can be seen that including the inventor might be a deception because there is no certainty about the value for which it will be sold.

In the same manner, credit collaterals are also not supposed to be included as cash equivalents because there is ambiguity regarding the overall timeline the amount will actually be realized.

However, in the case of Treasury Bills, it can still be made possible because it is certain that the amount will be paid upon maturity.

How does Cash and Cash Equivalents report in the balance sheet?

Cash and cash equivalents are reported in the balance sheet showing the total balance at the reporting with a comparative figure of the previous reporting balance. In general, it is reporting the total in the current assets section of total assets.

The breakdown of the total cash and cash equivalents is shown in the note to financial statements. The noted breakdown normally shows the balance of cash on hand, cash at the bank, and other cash equivalent items.

How does Cash and Cash Equivalents report in the statement of cash flow?

In the cash flow statement, cash and cash equivalent show the balance of two different dates or times. Normally, the cash flow statement shows the cash generated from operating activities, financial activities, and then the cash generated from investing activities.

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The accumulation of cash from all of these activities will come up with the net change in cash and cash equivalents during the period.

This net change in cash and cash equivalents during the period plus cash and cash equivalent at the beginning of the period will get total cash and cash equivalent at the end of the period. This amount should be equal to the total balance on the balance sheet.

Conclusion

The overall reasoning behind the proper calculation of Cash and Cash Equivalents is that it is directly related to the overall liquidity structure of the company.

It is a clear reflection about the overall ability of the company to meet its day-to-day expenses and ensure that they honor their financial commitments on time.

Therefore, this particular line item has a very high impact on the company’s overall working capital and speaks volumes about the overall manner in which working capital is managed within the company.

Furthermore, Cash and Cash Equivalents are also important factors for calculating numerous other ratios and calculations. It provides very useful insight regarding cash management at the company and how it can be improved due to better management practices.

Therefore, Cash and Cash Equivalents can be regarded as an essential asset for any organization because it mirrors their ability to harness and foster better relationships.

To summarize the information mentioned above, it can be seen that cash and cash equivalents include any liquid cash that the company presently has available and other bank accounts and marketable securities that can readily be converted to cash.

However, the primary determinant of an item to be included as a Cash Equivalent is the premise that they should have maturities of three months or less.