Accounting Lecture Notes: Cash Equivalents and Investment

Introduction

• Welcome to the accounting lecture focusing on cash equivalents, short-term investments, and their classifications.
• Discussion on definitions and implications of cash equivalents in accounting.

Key Concepts

Cash Equivalents

• Definition: Short-term, highly liquid investments.
  • Readily convertible into cash.
  • Near maturity with insignificant risk of value changes due to interest rate fluctuations.

Characteristics of Cash Equivalents

• Not primarily for medium of exchange but for investment purposes.
• Must be highly liquid and maintain insignificant risk with interest rate changes.

Examples of Cash Equivalents

• Three-Month Threshold
  • BSP Treasury Bills (3 months)
  • Three-month time deposit
  • Three-month money market instruments or commercial papers
• Classification
  • If the investment term is 3 months or less, it can be categorized as a cash equivalent.

Classification of Investments

Short-Term vs Long-Term

• Short-Term Investment: Typically 3 months up to not more than 12 months.
  • Classified as current assets.
• Long-Term Investment: More than 12 months.
  • Typically categorized as non-current assets beyond the scope of cash equivalents.

Important Details

• Even if an investment is highly liquid, it must meet the 3-month criteria to be considered a cash equivalent.
• Investments longer than three months are generally not classified as cash equivalents.
• The threshold of three months plays a critical role in the classification.

Conclusion

• Summarized criteria for classifying cash equivalents.
• Emphasized the importance of understanding the time and liquidity aspects in investment classification.
• The focus on three-month criteria is crucial for accurate investment categorization.