Question

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.

Answer 1

Examples of assets that are usually classified as current assets on a company's balance sheet include:

cash, which includes checking account balances, currency, and undeposited checksfrom customers (that are not postdated)
petty cash
cash equivalents, such as government securities which were purchased within 90 days of their maturity
temporary investments, such as certificates of deposit maturing within one year of the balance sheet date, and certain other investments
accounts receivable, or trade receivables, after deducting an allowance for doubtful accounts
notes receivable maturing within one year of the balance sheet date
other receivables, such as income tax refunds, cash advances to employees, and insurance claims
inventory of raw materials, work-in-process, finished goods, manufacturing and packaging supplies
office supplies
prepaid expenses, such as insurance premiums which have not yet expired
advance payments on future purchases

To be classified as a current asset, the amounts must be cash or be expected to turn to cash, be used up, or expire within one year of the balance sheet date. In the rare cases where a company's operating cycle is longer than one year, the operating cycle time is used in place of the one-year time period.