Cash and equivalents is a current asset on an agricultural balance sheet and represents highly liquid assets that can be quickly converted into cash.
These assets are crucial for the operational and financial stability of agricultural businesses.
In This Section
What are Cash & Equivalents?
Cash and cash equivalents represent the line item on the balance sheet indicating the value of a company’s assets which are cash or any asset which is instantly convertible into cash.
This category encompasses bank accounts and select marketable securities, like short-term debt securities maturing in less than 90 days. However, it typically excludes equity or stock holdings due to their potential volatility in value.
Types & Examples of Cash & Equivalents
Cash and equivalents typically include:
- Cash: Cash refers to currency, encompassing bills, coins, and currency notes, along with money orders, cashier’s checks, certified checks, and demand deposit accounts. Demand deposits permit withdrawals at any time without prior notice to the institution. Common examples are checking and savings accounts. The balances of all demand accounts are consolidated into the total cash amount as of the financial statement date.
- Bank Deposits: Bank deposits refer to funds placed into a bank account by an individual, business, or entity. These funds are typically held by the bank on behalf of the depositor and are available for withdrawal or for use in transactions. Bank deposits can take various forms, including savings accounts, checking accounts, certificates of deposit (CDs), and money market accounts. Depositors may earn interest on their deposits, depending on the type of account and the terms agreed upon with the bank.
- Foreign Currency: Businesses dealing in multiple currencies face currency exchange risks. Foreign currencies need to be converted into the reporting currency for financial reporting. Ideally, this conversion should yield results akin to operating solely in one currency. However, losses stemming from foreign currency devaluation are not reflected in cash and cash equivalents; instead, they are accounted for under “accumulated other comprehensive income” in financial reports.
- Cash Equivalents: Cash equivalents are investments easily convertible into cash. Typically short-term, they usually mature within 90 days. Investments maturing beyond this period should be categorized under “investments” rather than as cash equivalents. Cash equivalents must possess high liquidity, being readily sellable on the market, with accessible buyers. This can include some marketable securities, treasury bills, other short-term government bonds, money market accounts and also certificates of deposit.
Cash & Equivalents on the Balance Sheet
Cash & Cash Equivalents is considered a Current Asset on the balance sheet. Current assets are the assets that a company owns that are expected to be converted into cash or used up within one year or one operating cycle, whichever is longer.
Cash & Cash Equivalents is the most liquid of assets and as such will typically appear as the first account on the current assets in the balance sheet.
Purpose of Cash & Cash Equivalents
For a farmer, cash and cash equivalents on the balance sheet serve several important purposes:
- Liquidity Assessment: Cash and cash equivalents provide a measure of the farmer’s liquidity, indicating the amount of readily available funds that can be used to cover short-term expenses such as purchasing seeds, fertilizers, or livestock feed, as well as meeting any unexpected financial obligations.
- Working Capital Management: Maintaining an adequate level of cash and cash equivalents is crucial for managing the day-to-day operations of the farm. It ensures that the farmer has enough funds on hand to pay for ongoing expenses and to take advantage of any opportunities that may arise in the market.
- Risk Management: Having sufficient cash reserves can help mitigate the impact of unforeseen events or emergencies, such as crop failures, adverse weather conditions, or fluctuations in commodity prices. Cash and cash equivalents provide a buffer that can help the farmer weather periods of financial uncertainty.
- Investment Opportunities: Cash and cash equivalents can also be used to take advantage of investment opportunities that may arise, such as purchasing additional farmland, investing in new equipment or technology, or expanding the farm’s operations.
Overall, cash and cash equivalents play a critical role in the financial management of a farm, providing the liquidity and flexibility needed to support its ongoing operations and strategic goals.
How to Record Cash & Equivalents on a Balance Sheet
Identifying and entering cash and equivalents is relatively straightforward. To do this, the preparer will likely need to have open their bank statements, brokerage statements or have a physical count of any cash on hand.
Follow these steps to enter and track cash and equivalents in the balance sheet:
- Step 1 – Identify Cash and Equivalents: Determine the total amount of cash and cash equivalents held by the farm. This includes physical cash on hand, funds in bank accounts, and any short-term investments that qualify as cash equivalents.
- Step 2 – Classify Cash and Equivalents: Separate cash and cash equivalents from other current assets on the balance sheet. Current assets are typically listed in order of liquidity, with cash and equivalents being the most liquid.
- Step 3 – Record Cash Holdings: List the amount of physical cash held by the farm under the “Cash” heading on the balance sheet. This may include cash in hand or cash in a safe.
- Step 4 – Include Bank Deposits: Include funds held in bank accounts under the “Cash and Cash Equivalents” heading. This may include checking accounts, savings accounts, or other demand deposit accounts that are readily accessible.
- Step 5 – Account for Cash Equivalents: Record any short-term investments that qualify as cash equivalents under the “Cash and Cash Equivalents” heading. These investments should have a maturity date of 90 days or less and be highly liquid and easily convertible into cash without significant risk of loss.
- Step 6 – Total Cash and Equivalents: Sum up the total amount of cash and equivalents to arrive at the final figure that will be reported on the balance sheet.
- Step 7 – Disclosure: Provide any necessary disclosures regarding the nature and terms of the cash and equivalents held by the farm, including any restrictions on their use or potential risks.
By following these steps, you can accurately account for cash and equivalents on the farm’s balance sheet, providing stakeholders with a clear picture of the farm’s liquidity and financial position.
Exclusions from Cash & Equivalents on the Balance Sheet
Generally speaking, any asset that does not fit the definition of cash or a cash equivalent that can be converted to cash immediately should not be classified under Cash & Cash Equivalents.
The most common mistakes farmers make when completing a balance sheet usually include misclassifying the following:
- Accounts Receivable: Amounts owed to the farm by customers for goods sold or services rendered on credit terms. While accounts receivable represent future cash inflows, they are not considered cash equivalents because they are not immediately available for use.
- Marketable Securities: Investments in stocks, bonds, or other financial instruments that can be readily bought or sold on the market. While these investments may be relatively liquid, they are not considered cash equivalents unless they mature within a very short timeframe (usually 90 days or less).
- Inventory: The value of crops, livestock, or other agricultural products held for sale or for use in the farming operation. While inventory represents assets that can be converted into cash, they are not considered cash equivalents because they may take time to sell and realize their full value.
- Prepaid Expenses: Payments made in advance for goods or services that will be received in the future, such as prepaid insurance premiums or prepaid supplies. While prepaid expenses represent future benefits, they are not considered cash equivalents because they do not represent readily available cash.
- Long-term Investments: Investments in assets such as land, buildings, or equipment that are not expected to be converted into cash in the short term. While these investments may have value, they are not considered cash equivalents because they are not readily convertible into cash.
By excluding these items from cash and equivalents, the balance sheet provides a more accurate reflection of the farm’s liquidity and financial position in the short term.
Frequently Asked Questions
What is the Difference between Cash & Cash Equivalents?
In simple terms, the main difference between cash and a cash equivalent lies in their form and level of liquidity.
- Cash: Cash refers to physical currency (coins and bills) and funds held in bank accounts that are readily available for spending or immediate use. It’s money you can touch or access instantly, like the bills in your wallet or the balance in your checking account.
- Cash Equivalent: Cash equivalents are short-term investments that are highly liquid and easily convertible into cash without significant risk of loss. These investments typically have a maturity date of 90 days or less. Examples include Treasury bills, money market funds, and short-term certificates of deposit (CDs). While not actual cash, they can be quickly converted into cash with minimal risk, making them almost as good as cash for practical purposes.
So, in essence, cash is the physical money you have on hand or in your bank accounts, while cash equivalents are investments that can be quickly converted into cash when needed. Both are considered highly liquid assets, but cash equivalents are slightly less liquid than actual cash.