Cash and Cash Equivalents - Key Concepts

Cash and cash equivalents (CCE) are the most liquid assets used as a medium of exchange and measurement basis in financial statements.
Measured at face value; presented as a single line item under current assets when possible.
CCE reflect liquidity and cash management strategy of a firm; excessive cash may imply missed investment opportunities.

Cash on hand: physical currency (bills and coins), unrestricted and immediately available.
Cash in bank: deposits in checking/current, savings, and time deposits.
Cash in fund: cash set aside for specific purposes (e.g., petty cash, payroll, travel, interest, dividends, taxes).

Bills and coins; checks received but not deposited yet; cashier’s checks and manager’s checks guaranteed by the bank; traveler's checks.
Checks can be receivables or part of cash on hand depending on status (e.g., unreleased, postdated, stale, NSF).

Demand/checking/current account: highest liquidity; unlimited withdrawal; low interest.
Savings account: limited withdrawals; earns interest; generally liquid.
Time deposits: funds held for a fixed period; higher interest; withdrawal incurs penalties; classified as cash equivalents if criteria are met.
Compensating balances: restricted balances tied to loan facilities; typically non-interest-bearing and may be treated as cash equivalents if unrestricted; otherwise disclosed as a separate item.

Time deposits: usually higher interest; insured by PDIC; classified as cash equivalents if maturity restrictions align with cash‑equivalent criteria.
Cash equivalents: short-term, highly liquid investments convertible to cash with insignificant risk of changes in value.
Common cash equivalents: $ext{money market funds}, ext{time deposits}, ext{banker's acceptances}, ext{treasury bills}, ext{commercial paper}$

Term criterion: $ext{term} \,\le\, 3\text{ months}$ or
Maturity criterion: acquired within $3\text{ months}$ before maturity and maturity ≤ 3 months from purchase.
If both criteria fail, classify as short-term investments (if within 1 year) or long-term investments (if >1 year).
Equity securities generally do not qualify as cash equivalents unless there is a redemption date (e.g., certain preferred shares with a redemption date within the period).

Cash and cash equivalents are typically presented as a single line item under current assets.
Notes may disclose components (cash in bank and cash in fund) separately.
If foreign currency cash equivalents exist, translate at the reporting date rate; do not use the publication date rate.
If a bank fails, PDIC insurance provides coverage up to $500{,}000$ per depositor per bank.
Insurance coverage is per depositor, not per account; multiple accounts under the same name in an insured bank do not increase coverage.

Occurs when checks are issued beyond available funds; treated as current liabilities.
Offsetting across different banks is generally not allowed; offsets permitted if accounts are in the same bank or if overdraft is immaterial.
If overdraft is repayable on demand and forms part of cash management, net with cash and cash equivalents in presentation.

Balances held to secure or reduce loan risk; often not earning interest.
If restricted, disclosed separately; if unrestricted, may be included in cash and cash equivalents.
Should be disclosed in notes; classification follows the nature (current vs non-current) of the related loan.

Cash funds: money set aside for specific purposes (e.g., petty cash, payroll, travel, interest, dividends, taxes).
Current asset if designated for short-term use (≤ 1 year).
Non-current asset if designated for long-term use (> 1 year) (e.g., sinking funds, long-term contingency funds, insurance funds).

Postdated checks: not yet cashable; treated as receivables, not cash.
Stale checks: not cashed within 6 months; generally receivables.
Bank drafts and money orders: bank-issued instruments; typically cash equivalents or cash in bank depending on immediacy.
Travel advances and cash advances: short-term receivables (IOUs) to be repaid; treated as current assets.

If available for immediate use and unrestricted: cash or cash in bank.
If readily convertible within 3 months and acquired within 3 months of maturity: cash equivalents.
If more than 3 months to maturity or longer horizon: short-term or long-term investments.
For practical classification, use the flow: cash on hand + cash in bank + cash in fund (as applicable) and classify investments as cash equivalents, short-term, or long-term based on the criteria above.

CCE definition: cash + cash equivalents; highly liquid and near cash.
Three-month rule: maturity ≤ 3 months or purchase ≤ 3 months before maturity.
Common CCE items: $ext{money market funds}, ext{time deposits}, ext{banker's acceptances}, ext{treasury bills}, ext{commercial paper}$
Non-CCE items: most equity securities without redemption date; long-term investments unless classified otherwise.
PDIC: $500{,}000$ insurance per depositor per bank.
Presentation: single line for cash and cash equivalents within current assets; notes may disclose components.
Overdrafts: generally current liabilities unless offset conditions apply.
Time deposits vs savings: time deposits typically higher interest and longer lock-in; PDIC insured; classified as CCE if criteria met.