Question: Because current assets are listed in order of liquidity, most businesses present “cash and cash
equivalents” as the first account on their balance sheets. For example, as of December 31, 2008, Ball Corporation
reported cash and cash equivalents totaling $127.4 million. The statement of cash flows uses this same
terminology as it explains the drop of $24.2 million in Ball’s cash and cash equivalents that took place during
2008. What constitutes cash and what are cash equivalents?
Answer: Cash consists of coins, currencies, bank deposits (both checking accounts and savings accounts) and
some negotiable instruments (money orders, checks, and bank drafts). Cash equivalents are short-term, highly
liquid investments that are readily convertible into known amounts of cash. They are so near their maturity date
that significant changes in value are unlikely. Only securities with original maturities of ninety days or fewer are
eligible to be classified as cash equivalents. Cash equivalents held by most companies usually include Treasury
bills1, commercial paper2, and money market funds.
Going forward, FASB is considering the elimination of the cash equivalents category. Any of these items other
than cash will then appear in the financial statements as temporary investments. For simplicity purposes, cash will
be used in the examples presented throughout this chapter. However, until the authoritative rules are changed, the
accounting for cash equivalents is the same as that for cash.
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