What are cash and cash equivalents on the balance sheet?
A company balance sheet contains many items, and one of those includes the CCE, also known as “Cash or Cash equivalent.” This item on the list is very liquid. It may either be cash or anything that can be easily converted to cash. CCE refers to company assets that are either cash or cash equivalents, such as marketable securities and bank accounts. And when we say marketable securities, we talk about debt securities with maturity dates of not more than 90 days or three months. Equities and stock holdings are not cash equivalents even they seem to be because their values can fluctuate at any time. On the other hand, examples of assets that are equivalent to cash include commercial paper, treasury bills, and government bonds. These government bonds are only short-term, and they should not have maturity dates of more than three months. We also have marketable securities and money market holdings. They are liquid, and they do not decline in value, unlike the others. We ought to explain more about this below.
Tell me more about cash and cash equivalents.
So what does CCE mean? This is the total value of cash on hand that a company owns. This group of assets and items include those that have similar qualities to cash. You will find their aggregates on the top of the balance sheet because they are considered current assets. In short, they are only short-term, and they are very liquid. If a company has a good amount of CCE, it is most likely capable of meeting short-term obligations like rent and monthly payments.
What are the different types of CCE?
CCE is helpful for companies in terms of working capital needs. Hence, we said that if the company has enough CCE, the company is more than capable of meeting its short-term obligations like debts, bills, and current liabilities. What are these assets that we talk about? Here is an enumeration of CCE:
- Cash. Cash refers to coins, bills, and currency notes. We also have demand deposits where funds can be withdrawn anytime without the need to notify the institution.
- Foreign Currency. A company may hold more than one currency at a time. Hence, there is also an exchange risk. If the currency is not from its home country, it should be translated to the reporting currency.
- Cash equivalents. As the name suggests, these assets are also like cash because they can always be converted into cash. These investments are short-term, and they last for three months or less. Investments that last more than three months are classified as other investments. We should know the dollar amounts of the cash equivalents because all cash equivalents’ market prices must be known. They should have values that fluctuate every now and then, especially before redemption or the maturity date. Depending on the maturity date, the certificate of deposits can also be cash equivalents. Also, some preferred shares can be considered if they are bought before redemption and if their values do not fluctuate.
What does not count as CCE?
We have mentioned many types of assets. Many more do not count as CCE even when they are short-term and current assets. For example, we have credit collateral and inventory. They cannot be converted easily to cash.