Hello need help with response to two peers discussion:
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.
To determine whether an asset should be reported as cash equivalent or an investment on a classified balance sheet, companies should consider the asset’s nature and the timeframe of its use.
Cash equivalents are short-term investments that are readily convertible into cash and have a low risk of value fluctuations. According to Generally Accepted Accounting Principles (GAAP), an asset must have a maturity of three months or less from the date of purchase to be classified as a cash equivalent (FASB ASC 305-10-20-2). On the other hand, investments are assets held for more extended periods with the expectation of earning a return on the investment. Examples of investments are stocks, bonds, and real estate. GAAP requires companies to categorize investments into either trading securities, available-for-sale securities, or held-to-maturity securities based on their intended use and how they are managed.
To illustrate this, think of a company with a $50,000 investment in a bond with a maturity of two years. Since the bond is not readily convertible into cash and has a maturity of more than three months, it should be classified as an investment on the balance sheet. However, if the company had a $50,000 investment in a money market fund that matures in one month, it would be classified as a cash equivalent.
The determination on whether an asset is a cash equivalent or investment is taken in a perspective that investment is still categorized as a cash equivalent, whenever it is less than ninety days of maturity or less (Dimitriou, M,2020) Therefore it can still be included in the cash and also in the cash equivalents balance from the date at which the investment was an acquisition. However, certain criteria can be used to differentiate whether the short-term liabilities and the long term are either cash equivalent or investments. There two criteria which are used to determine the state, the two primary criteria that differentiate the classifications.
uses the maturity dates and the amount of cash invested in considering the insignificant risk of change since there are also values in interest rates before the dates of the maturity arrives.