Financial Accounting: In an Economic Context

THE DEFINITION OF CASH

Chapter 6 of this text defines cash for purposes of balance sheet disclosure and points out that it consists of coin, currency, and available funds on deposit at the bank. Negotiable instruments such as money orders, certified checks, cashier's checks, personal checks, and bank drafts are also considered cash. The total of these items as of the balance sheet date is the cash amount that appears on the balance sheet.

When preparing the statement of cash flows, companies commonly consider as cash the items already mentioned as well as certain cash equivalents, which include commercial paper and other debt investments with maturities of less than three months.¹ They do so because these items can be converted to cash immediately; for all intents and purposes, therefore, they are virtually the same as cash. In the remainder of this chapter, where we illustrate the statement of cash flows, we will also treat cash equivalents as cash.

Bristol-Myers Squibb considers securities with maturities of less than three months to be cash equivalents. Would such securities be included in the cash account and reported on the statement of cash flows or in the marketable securities account on the balance sheet? Why?