Cash and Cash Equivalents

In this chapter, we will explore the concept of “Cash and Cash Equivalents” in detail. We will take a close look at what is included in this category, as well as how we define and differentiate between various types of cash accounts such as checking, savings, money market funds, and more.

Further, we will delve into the intricacies of Bank Reconciliations, ex- plaining the process to bridge the gap between bank balance and book balance for cash.

Through practical questions, you will understand how to handle specific situations such as held checks and negative cash balances.
Lastly, we will illuminate the guidelines for classifying cash on balance sheets, particularly in situations where accounts may be held at different banks. This chapter promises to be a comprehensive exploration of man- aging, understanding, and recording cash in an accounting context.

What is included in cash and cash equivalents? Cash and items that are convertible into cash within 90 days.

Typical Accounts in Cash and Cash Equivalents:

• 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)

Practice Question – Definition of Cash

The CPA questions typically focus on treasury bills and certificates of deposit. The key is that these securities must mature within 90 days of purchase to be included in cash and cash equivalents (not within 90 days of year-end).

Inch Co. had the following balances at December 31, Year 1:

Cash in checking $   35,000

account Cash in money $   75,000

market account

U.S. Treasury bill, purchased 12/1/Year 1, maturing 2/28/Year 2 $  200,000

U.S. Treasury bill, purchased 12/1/Year 0, maturing 5/31/Year 2 $ 150,000

Inch's policy is to treat as cash equivalents all highly-liquid investments with a maturity of three months or less when purchased. What amount should Inch report as cash and cash equivalents in its December 31, Year 1, balance sheet?

In this question, we have a US Treasury bill that’s maturing within three months of pur- chase (included as cash) and a treasury bill that’s maturing within six months of purchase (not included as cash). Therefore, the checking account is included ($35,000), the money market account is included ($75,000), and the US treasury bill maturing within three months is included ($200,000), totaling $310,000.