Cash and Cash Equivalents
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Not every liquid asset gets to call itself "cash" on the balance sheet. FAR draws a hard line at 90 days, and the exam loves to test exactly which side of that line an investment falls on.
What counts as cash and cash equivalents?
Cash, plus anything convertible into cash within 90 days of purchase. That includes:
- Checking accounts
- Savings accounts
- Money market funds
- Petty cash
- Treasury bills maturing within 90 days of purchase
- Certificates of deposit maturing within 90 days of purchase
What's the 90-day rule for T-bills and CDs?
The clock starts on the purchase date, not the balance sheet date. A treasury bill purchased with an original maturity of three months or less qualifies as a cash equivalent. A treasury bill purchased with a longer original maturity doesn't qualify — even if, by the balance sheet date, less than 90 days happen to be left before it matures.
Measure from the purchase date, never from year-end. A 6-month T-bill bought 5 months before year-end is still a 6-month T-bill. It never becomes a cash equivalent just because it's close to maturing.
Worked example: Inch Co.
Inch Co. had the following balances at December 31, Year 1:
| Account | Balance |
|---|---|
| Cash in checking | $35,000 |
| Cash in money market account | $75,000 |
| U.S. Treasury bill, purchased 12/1/Yr 1, maturing 2/28/Yr 2 | $200,000 |
| U.S. Treasury bill, purchased 12/1/Yr 0, maturing 5/31/Yr 2 | $150,000 |
Inch's policy treats as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. The question: what amount should Inch report as cash and cash equivalents on its December 31, Year 1 balance sheet?
Check each T-bill against its own purchase date:
- The first T-bill was purchased 12/1/Year 1 and matures 2/28/Year 2 — three months from purchase. It qualifies.
- The second T-bill was purchased 12/1/Year 0 and matures 5/31/Year 2 — eighteen months from purchase. It doesn't qualify, regardless of how close it is to maturing by the balance sheet date.
The $150,000 T-bill is excluded entirely — it would be reported as a short-term investment, not cash.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.
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