Under United States generally accepted accounting principles (U.S. GAAP), cash includes currency and deposits available on demand. To calculate cash correctly, the preparer establishes ownership, availability and whether each amount already appears in another included balance.
Cash equivalents are short-term investments with high liquidity, ready conversion into a known cash amount and insignificant risk of value changes. Maturity generally must be no longer than three months from the investment's acquisition by the reporting entity.
To calculate cash equivalents balances, the preparer measures acquisition-to-maturity time, then evaluates liquidity and value risk. A security purchased with a longer maturity does not enter cash equivalents merely because its remaining life later falls below three months.
- A Treasury instrument or commercial paper can qualify when its acquisition maturity and other characteristics satisfy the definition.
- A certificate of deposit requires evaluation of its term, withdrawal provisions, penalties and ready convertibility; its label alone proves nothing.
- A money-market deposit withdrawable on demand is cash; an investment in a money-market fund requires the cash-equivalent analysis.
Common mistakes
- Starting from the reporting date. Alder's August-acquired Treasury note remains a $15,000 investment outside cash equivalents despite its January maturity.
- Deducting an informal minimum. Removing Alder's $6,000 informal minimum would understate unrestricted cash and equivalents from $77,000 to $71,000.
- Posting timing items twice. Another entry for Corvane's $8,000 deposit in transit would duplicate a receipt already present in the ledger.
Bottom line
- Cash includes owned currency, demand deposits, actual petty-cash currency and collectible checks available for current deposit.
- Cash equivalents require high liquidity, known cash conversion and insignificant value risk, generally with no more than three months from acquisition to maturity.
- Restricted balances are presented according to their purpose and expected availability; informal minimums without withdrawal restrictions remain cash.
- Book overdrafts and bank borrowings require appropriate liability presentation unless a supported offsetting basis permits net presentation.
Exam shortcut
Sort a mixed list into unrestricted cash, qualifying equivalents, current restrictions, noncurrent restrictions and other assets before adding. Circle amounts already included in another line. For every investment, place purchase and maturity dates beside each other, then test redemption terms and risk. Ignore a tempting short remaining life until acquisition maturity is established.
The full lesson (about 5,441 words, 36 min read) adds 3 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.A1
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