Cash and Cash Equivalents (CCE)

What are Cash and Cash Equivalents?

Definition: Cash and cash equivalents are highly liquid assets including coin, currency, and short-term investments that typically mature in 30-90 days.

CCE is actually two different groups of very similar assets that are commonly combined because they are so closely related. Let’s take a look at each one of these current assets in more detail.


What is Included in Cash?

In economic terms, cash is the form of exchange for all business transactions and activities. In other words, it’s the standard method of payment for businesses. In fact, U.S. currency has “this note is legal tender for all debts, public and private” printed directly the face of each bill to indicate that it is backed by the federal government to be of value and able to cover any obligations.

In accounting terms, cash is the currency and coinage owned by a company. This includes the money in company’s bank account, petty cash drawer, and register. Companies can generate their cash reserves in a few different ways.

First, owners and investors can contribute money to the business in exchange for a percentage ownership in the company. Second, the company can generate money from selling goods or services to customers as part of its ongoing operations. Third, the business can borrow money from banks, financial institutions, and other lenders.

Controlling cash flow and financing is a crucial part of running any business. A business can be profitable and still not be able to pay its bills on time because money was not managed properly. Profitability does not always equate to large amount of free cash flow. Investors and creditors need to know where the company’s cash comes from and where it goes. That’s why management details each cash activity for the period on the statement of cash flows.

What is Included in Cash Equivalents?

Cash equivalents are assets, typically investments that are so liquid and easily converted into cash that they might as well be currency. These are extremely low risk, short-term investments that typically mature in no more than 90 days. Some examples of cash equivalents include:

  • Treasury Bills
  • Short-term Government Bonds
  • Marketable Securities
  • Commercial Paper
  • Money Market Funds

It’s important to note that these investments are only considered equivalents if they are readily available and are not restricted by some agreement. For instance, if a company has a loan that requires it to maintain a minimum level of their treasure bills, these T-bills cannot be considered equivalents because they are restricted by the debt covenants.

How are Cash and Cash Equivalents Reported on the Balance Sheet?

Businesses can report these two categories of assets on the balance sheet separately or together, but most companies choose to report them together.

GAAP allows this financial statement presentation because some investments are so liquid and risk adverse that they are considered cash. Take T-bills for example. These investments are backed by the U.S. government and will always be paid. It’s not like a private short-term bond or loan where the company can default or go bankrupt. T-bills are a safe, guaranteed investment that can be cashed in at any time. Thus, GAAP recognizes these investments as if they were actual currency.

If the T-bills can’t be cashed in because of debt covenants or some other agreement, like in our debt restriction example above, the restricted T-bills must be reported in a separate investment account from the non-restricted T-bills on the balance sheet.

Is Accounts Receivable Included in CCE?

Accounts receivable is not considered cash because it isn’t currency. It is, however, considered an equivalent because it is highly liquid and easily converted into cash in a short period of time. Thus, it would be included in equivalents calculation.

Are Certificates of Deposit (CDs) Considered Included?

Yes, CDs are short-term securities that are easily converted into a known amount of cash in a short period of time. Certificates of Deposit are always included in cash equivalents.

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