Cash and Cash Equivalents (CCE)

Cash and Cash Equivalents (CCE)

Definition
 

Highly liquid assets that are readily convertible into known amounts of cash are called and cash equivalents. 

CCE meaning indicates that assets are subject to insignificant risk of changes in value.

Description

Cash and Cash equivalents are assets that can be converted to cash. These assets have a maturity period of three months or less and bring cash in hand easily with immediate liquidity conversions.

When it comes to risk, the CCE involves minimal risk of value fluctuations.

Cash and cash equivalents are often shown on the balance sheet as current assets. They are classified separately from other assets to emphasise their liquidity and immediate utility.

Even though CCE is less risky assets, there are still risks to consider such as inflation risk and counterparty risk.

• Physical Cash: This includes a company's currency notes and coins. These can be typically kept in registers or safes for immediate use in transactions.
• Bank Deposits: Cash held in savings or other demand deposit accounts is easily accessible for withdrawals or transfers.
• Money Market Instruments: Treasury bills, commercial paper, and certificates are high-liquidity and low-risk short-term investments that offer slightly higher returns than traditional bank deposits while maintaining liquidity.

Importance of cash equivalents in cash flow statement
 

Here are the pointers which tell the importance of cash equivalent in cash flow statement:

• Liquidity Assessment: Cash equivalents can reveal important information about a company's short-term liquidity condition. Including them in the cash flow statement enables stakeholders to assess the company's ability to meet urgent financial obligations and fund operational requirements.
• Accurate Cash flow analysis: Cash flow represents the comprehensive view of cash statements, both cash and highly liquid assets. This helps in exact analysis of the cash available in the company.
• Risk Management:Cash equivalents can help when there is a need for liquid cash. So when you add them in cash flow statements, it gives a clear idea on fluctuations in cash in the company.
• Investor Confidence: Investors and creditors frequently examine a company's cash flow statement to assess its financial strength and stability. Companies that clearly report cash equivalents demonstrate their conservative cash management procedures, which can boost investor confidence and faith in the organisation's ability to weather financial problems.
• Strategic decision making: Cash equivalents can bring clear ideas on where and how the company can invest the money for growth and navigate economic uncertainties. This helps you give a complete understanding of resources at hand.

How to calculate cash and cash equivalents? 

These are the steps to calculate the cash and cash equivalents here for a company:

Step 1: Find where in balance sheet do you have current assets:

Balance sheets define the type of assets categorically like the ones based on the liquidity are aligned together. Look for the current assets section, which is near the top of the balance sheet.

Step 2: Identify cash and cash equivalents:

Look for line items in the current assets column that qualify as cash or cash equivalents. This may include:

• Cash on hand.
• Cash in Checking and Savings Accounts
• Short-term investments (often having a maturity of 90 days or less) include:
• Money Market Funds
• Treasury Bills
• Commercial Paper

Step 3: Add up the items to reach a value

Once you have aligned all the line items that will give you cash equivalents, you can add all of them to reach a figure. 

Trends that can affect the Cash and Cash Equivalents in cash flow statements
 

Here are the trends that can affect the Cash and Cash Equivalent:
 

• Investing Activities Trends:

Capital expenditures for investments in property, plant, and equipment (PP&E) or acquisitions can deplete cash reserves. 

Activities like purchasing or selling marketable securities can impact cash equivalents. Increased investment in short-term securities may boost cash reserves, while selling investments may result in cash outflows.

• Financing Activities Trends:

If you kick start borrowing activities, like obtaining loans, it can increase cash inflows. On the other hand, debt repayments or dividend payments to shareholders may reduce cash reserves.

• Economic Conditions:

An economic downturn can decrease sales, delay customer payments, or pose difficulty accessing credit markets, impacting cash inflows.

However, economic expansions stimulate sales growth and improve customer payment capacity and behaviour. 

• Industry-specific Factors:

Industry dynamics, market trends, or regulatory environment changes can affect cash flow patterns. At times, mergers or acquisitions can influence cash flow by altering competitive landscapes, market shares, or capital structures.

• Seasonal Variations:

Cash flows are sometimes affected due to holidays, weather conditions, or industry-specific demand patterns. Understanding and anticipating these seasonal trends is essential for cash flow management.

• Currency Fluctuations:

Exchange rate fluctuations affect the valuation of cash and cash equivalents held in foreign currencies. Changes in exchange rates can impact reported cash balances when translated into the reporting currency.

Example

Saarsan Corporation reported Rs.50 million in cash and cash equivalents on its balance sheet for the fiscal year ending December 31, 2023. This included Rs.30 million in cash held in various bank accounts and Rs.20 million in short-term investments, such as treasury bills and money market funds.

FAQ

What is cash meaning in accounting?

Cash refers to physical money like coins & banknotes, along with the currency help in banks. It refers to liquid assets that can be spent for transactions. 

What is the cash market?

The market where the financial instruments commodities, assets are bought and sold for payment are called cash markets.

What is meant by cash equivalents?

Highly liquid investments that are easily converted into cash and have a short maturity period are cash equivalents. These include treasury bills, commercial papers, money market funds, etc.