Definition — cash and cash equivalents (CCE)
– Cash and cash equivalents (CCE) is a balance-sheet line that shows the amount of money a company can use immediately. It combines two asset types that are effectively cash for a business: actual currency and very-short-term, highly liquid investments.
What counts as cash
– Cash is legal tender and instruments that are treated like cash because they can be spent or withdrawn on demand. Examples: physical bills and coins, money orders, cashier’s or certified checks, and demand deposit accounts (checking and similar accounts that allow withdrawals at any time).
What counts as cash equivalents
– Cash equivalents are short-term investments that are so near maturity and so stable in value that they are effectively interchangeable with cash. Key requirements:
1. Original maturity of three months (about 90 days) or less from the date the investment was made.
2. Readily convertible to a known amount of cash (minimal price volatility).
3. Unrestricted (not pledged as loan collateral or otherwise encumbered).
Typical qualifying instruments
– Treasury bills (if purchased within three months of their maturity date).
– Commercial paper and banker’s acceptances that mature within 90 days.
– Some money market funds and money market deposit accounts.
– Short-term certificates of deposit (CDs) that meet the maturity and accessibility conditions.
Important nuance on maturity
– The 90-day rule refers to the original maturity when the investment was purchased. An instrument bought earlier with only 90 days left until maturity does not qualify; conversely, a three-year bond purchased with only three months remaining (because it was bought earlier) generally does qualify only if the original purchase was within three months of maturity (see accounting standards for specifics).
What is excluded from CCE
– Stocks and most marketable securities (price can fluctuate).
– Inventory (not readily convertible to a known cash amount).
– CDs that cannot be withdrawn at all (even with a penalty) during the fixed term.
– Prepaid expenses (refunds are not guaranteed and may not be immediate).
– Accounts receivable (collection is probable but not guaranteed).
– Assets pledged as collateral or otherwise restricted cannot be reported as cash equivalents.
Why CCE matters
– CCE is the most liquid asset category and sits at the top of the balance sheet. It shows a company’s capacity to meet short-term obligations and handle unexpected cash needs.
Quick checklist — does this asset qualify as a cash equivalent?
– Was it acquired with an original maturity of ≤ 90 days? (yes/no)
– Can it be converted to cash quickly without significant price uncertainty? (yes/no)
– Is the amount of cash to be received essentially fixed and known? (yes/no)
– Is the asset free of restrictions or pledges? (yes/no)
If you answered “yes” to all, it likely qualifies as a cash equivalent; if any answer is “no,” it should not be included.
Worked numeric example
– Company A holdings:
– Checking account balance: $50,000 (cash)
– Treasury bill purchased 45 days ago with 60 days to maturity: $120,000 (qualifies)
– 1-year Treasury note bought 3 months ago (matures in 9 months): $200,000 (does NOT qualify)
– CD with a 6-month original term (maturity > 90 days): $30,000 (does NOT qualify)
– Commercial paper issued 20 days ago, matures in 40 days: $25,000 (qualifies)
Compute CCE:
– Cash: $50,000
– Cash equivalents: $120,000 (T-bill) + $25,000 (commercial paper) = $145,000
– Total CCE on the balance sheet = $50,000 + $145,000 = $195,000
Reputable sources
– Investopedia — Cash and Cash Equivalents (overview): https://www.investopedia.com/terms/c/cashandcashequivalents.asp
– International Financial Reporting Standards (IFRS) — IAS 7: Statement of Cash Flows (discusses cash and equivalents): https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows/
– Financial Accounting Standards Board (FASB) — Accounting Standards Codification (ASC 305, Cash and Cash Equivalents): https://www.fasb.org/
– U.S. Department of the Treasury — Treasury securities (for context on T-bills): https://home.treasury.gov/policy-issues/financing-the-government/treasury-securities
Educational disclaimer
This explanation is educational and does not constitute personalized financial, accounting, or tax advice. For application to a specific company or transaction, consult a qualified accountant or financial professional.