TOD: Cash and Cash equivalent

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    Bunmi Mercy 1 week ago

     

    Our Term Of the Day (TOD) is Cash and Cash equivalent.

     

    Cash and cash equivalent is used to refer to items that are highly liquid in nature. This means that such item(s) can be easily converted into cash.

     

    In financial statements, CCE is an example of current assets and it can be found in the statement of financial position and cash flow statement (both at the beginning and at the end).

     

     Treasury bills, Cash at hand and demand deposits are examples of cash and cash equivalent.

     

    Two main criteria for classifying an item as CCE are:

     

    1.      The ability for an asset to be easily convertible into a certain amount of cash.

     

    2.      The ability of an asset to be converted without significant loss in value at maturity.

     

    IAS 7, Statement of Cash flow notes that “…an investment normally qualifies as a cash equivalent only when it has a short maturity of, say three months or less from the date of acquisition”.

     

    So, next time you want to classify an asset as CCE, ask yourself if that asset meets the two criteria above.

     

    Asides from the examples of CCE stated above, what other examples do you know? Tell us in the comment section.

     

     

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