James Bashaw | What Are Cash and Cash Equivalents (CCE)?
What Are Cash and Cash Equivalents (CCE)?
The line item on the balance sheet that shows the value of a company’s assets that are cash or can be instantly turned into cash is referred to as “cash and cash equivalents.” According to James Bashaw Bank accounts and marketable securities, or debt securities with maturities of fewer than 90 days, are examples of cash equivalents. However, because equity and stock assets can fluctuate in value, cash equivalents frequently do not include them.
Cash
Money that is in the form of currency, such as coins, bills, and currency notes, is referred to as cash. An account type known as a demand deposit allows money to be withdrawn at any moment without informing the institution. Checking and savings accounts are two instances of demand deposit accounts. Cash totals contain the balances of all demand accounts as of the date of the financial statements.
Foreign Currency
Companies that hold multiple currencies may be subject to currency exchange risk. For financial reporting, foreign currencies must be converted into the reporting currency. The conversion should produce outcomes that are similar to what would have happened if the company had run its activities in only one currency. Cash and cash equivalents do not include translation losses due to currency devaluations. These losses are included in the “accumulated other comprehensive income” financial reporting account.
Understanding Cash and Cash Equivalents (CCE)
As per James Bashaw, A collection of assets that a firm owns is called cash and cash equivalents. For the sake of simplicity, goods that are identical to cash are included in the total value of cash on hand. The total of a company’s cash and cash equivalents is always displayed on the top line of the balance sheet. This is because cash and cash equivalents are current assets, meaning they’re the most liquid of short-term assets.
Cash Equivalent
Investments that are easily convertible into cash are known as cash equivalents. The investment must be made for a brief period, typically three months or less. An investment should be recorded in the account labeled “other investments” if it matures in more than three months. Cash equivalents have to be very liquid and simple to sell. These investors’ buyers ought to be simple to reach.
Cash equivalents must be valued in dollars. Therefore, the market price of all cash equivalents must be known and should not fluctuate. Before redemption or maturity, it cannot be anticipated that the value of the cash equivalents will fluctuate significantly.
Cash vs. Cash Equivalents
Although cash and cash equivalents are combined in the balance sheet account, there are a few key distinctions between the two types of accounts. Cash equivalents represent ownership of a financial instrument that is frequently linked to a claim to cash, whereas cash itself is owned directly.
Cash and its equivalents may or may not have the same insurance protection. The FDIC frequently insures money market accounts (cash equivalents) and savings and checking accounts (cash) up to $250,000. Mutual funds investing in money markets, however, are not government-insured. There is no assurance that an entity will survive the duration of any debt instrument, whether it was issued by a government or a private company.
Unbreakable Certificate of Deposits
James Bashaw said Certificates of Deposit with periods longer than three months that cannot be broken fall under the category of cash equivalents that are in the gray. Financial firms frequently agree to waive interest in exchange for letting the owner of a CD break their financial product (i.e. the last six months of interest is foregone). The CD shouldn’t be regarded as a cash equivalent if a financial institution forbids this choice. This is especially true for longer-term products that must be held until maturity, such as five-year CDs.
