What are Considered as Cash and Cash Equivalents?

March 25, 2010 by Jay
Filed under Business Finance

CCE or Cash and Cash Equivalents refer to the liquidated assets that are declared on the balance sheet of the company. It is often reflected under the asset section of the sheet. In accordance to the company’s chart of accounts, Cash and Cash Equivalents are often the first account on the balance sheet. Cash and Cash Equivalents come in different meanings. In this article, we will discuss further the difference of Cash and Cash Equivalents.

When we speak of cash, it includes money and other mediums that are negotiable and payable in money. It is the most accepted form of exchange medium in banks for immediate credit and deposit. Aside from money, other forms of cash include money orders, bank drafts, checks, coins, and bills. These forms are also widely accepted by banks for immediate encashment or deposit. Apparently, postdated checks are not considered as cash since they are considered as checks. Checks are not often acceptable in banks for outright encashment, deposit, or immediate credit. In addition, the utilization of cash is unrestricted. It is important that an item is reported and recognized immediately for payment of existing obligations.

On the other hand, cash equivalents refer to highly liquid and short-term investments that are immediately convertible into cash. As it approaches its maturity, it presents unimportant risks of changes in value caused by interest rate changes. Because of its short-term maturity, cash equivalents are often discriminated from other investments. The maturity only lasts for three months compared to other investments with short-maturity period of one year or less.

Cash and Cash Equivalents are also considered as “current assets”. It is a list of data on the balance sheet that the company uses to convert into cash in a minimal span of time. It refers to the amount of money that the company has in money market funds, certificates of deposits, savings bonds, and bank accounts. It generally determines the amount of money that is immediately available for use in business. The more amounts of cash reflected on the balance sheet under Cash and Cash Equivalents the better it can be. Because on-hand cash can be used by the business to repurchase shares and pay dividends. It can also be used to provide extra room of funds for the business in case something goes bad with the financial status.

Apparently, there are instances that Cash and Cash Equivalents are not good for the company’s balance sheet. As this happens, the company is not generating sufficient earnings or profits internally. As an option, the company will just borrow money from the bank. If more Cash and Cash Equivalents are seen on the balance sheet of the company, it can be actually borrowed money.

Cash is measured at face value while cash equivalents are measured at maturity value whereas the face value of cash is combined with the interest rates. Moreover, cash is measured in current exchange rate. It is often written down in estimating the real value in case the financial institution or bank is holding the funds of the company due to financial difficulty or bankruptcy.