Cash and Receivables

Cash and Cash Equivalents

At its most basic, cash includes all items that are immediately available for use in the business and are free from any contractual restrictions.

Think of it as anything a bank would accept for deposit and immediate credit.

Common Examples of Cash:

Coins and currency (like in a cash register or petty cash fund).
Demand deposits (checking accounts, savings accounts).
Negotiable instruments ready for deposit, such as:
- Money orders
- Cashier's checks
- Certified checks
- Personal checks (from customers, as long as they aren't post-dated)

This is where the CPA exam likes to test the rules. Cash equivalents are short-term, highly liquid investments that are:

Readily convertible to a known amount of cash.
So near their maturity that they present an insignificant risk of change in value due to interest rate fluctuations.

Here is the most important rule you must memorize:

To be a cash equivalent, an investment must have an original maturity of three months or less from the date of purchase.

This "date of purchase" part is critical.

Example (IS a cash equivalent): On December 1, 20X1, your company buys a $10,000 U.S. Treasury bill that was issued on August 1, 20X1, and matures on February 1, 20X2.
- Maturity from your purchase date: Dec 1 to Feb 1 is two months.
- Conclusion: This IS a cash equivalent.
Example (is NOT a cash equivalent): On March 1, 20X1, your company buys a $50,000 U.S. Treasury note that matures on August 1, 20X1. - Maturity from your purchase date: March 1 to Aug 1 is five months. - Conclusion: This is NOT a cash equivalent. It would be classified as a short-term investment (e.g., trading, available-for-sale, or held-to-maturity). Common Examples of Cash Equivalents:
U.S. Treasury bills (T-bills) purchased with 3 months or less to maturity.
Money market funds (which are generally considered "on demand").
Commercial paper (a form of short-term corporate debt) if its original maturity is 3 months or less.
Certificates of Deposit (CDs) with a maturity of 3 months or less.

The FAR exam will try to trick you with items that sound like cash but aren't.

Item	Why It's Excluded	How It's Classified
Restricted Cash	It is not "free from restriction." It's set aside for a specific purpose (e.g., as collateral for a loan, or to be used for a future plant expansion).	Reported as a separate line item. It can be current or non-current depending on when the restriction will be lifted.
Compensating Balances	A minimum balance required to be kept in a bank account to support a loan. This portion is not available for general use.	Reported as "restricted cash" (current or non-current) if the restriction is legally binding.
Bank Overdrafts	A negative cash balance in a checking account.	Generally reported as a current liability. Exception: If you have multiple accounts at the same bank, GAAP allows you to offset an overdraft with a positive balance.
Post-Dated Checks (from customers)	You cannot deposit it today.	Accounts Receivable.
NSF Checks (from customers)	"Non-sufficient funds." The check bounced; it's not cash.	Accounts Receivable (you have to go back and collect it).
IOUs (from employees)	This is a receivable, not cash.	Receivable from Employee.