Classification of cash equivalents.

If a company has asset classes that include short-term and long-term investments, what criteria should they employ to determine if an asset is reported as a cash equivalent or an investment on their classified balance sheet? Use examples to illustrate your position and be sure to cite GAAP to support your claims.

In your responses to classmates, identify what type of internal controls would ensure proper classification of cash equivalents. How would that fit into the company's overall system of internal controls over cash? Use examples to illustrate your position, and be sure to cite GAAP to support your claims.

Sample Solution

Cash equivalents are short-term, highly liquid investments that can be readily converted into cash. They include:
1. Money Market Instruments: Short-term notes and bills issued by governments (Treasury bills), corporations (commercial paper), and other entities (bankers acceptances).
2. Bank Deposits: Deposit accounts with banks or other financial institutions that offer low risk of loss of principal but minimal return on investment. Examples include certificates of deposit, savings accounts, money market mutual funds and demand deposits.