To calculate cash and cash equivalents, one must total the figures for each category and add them together. Cash may include things such as:
- Coins
- Currency
- Money Orders
- Checking Account balance
- Savings Account balance
Whereas cash equivalents can include:
- Money market accounts
- Treasury bills
- Short term government bonds
- Commercial paper
It is also important to note a related calculation known as the cash balance formula. This formula determines the amount of cash that a business has available on hand to make investments and meet its short-term liabilities. The cash balance formula is:
Cash Balance = Beginning Cash Balance + (Receipts - Disbursem*nts)
where:
- Receipts = all cash inflows during the period
- Disbursem*nts = all cash outflows during the period
Receipts are all cash coming into the company during a given period. These can include:
- sales revenue;
- interest income from investments;
- government grants or subsidies;
- or any other source of new cash inflows.
Disbursem*nts are all of the company's cash during a given time. These can include:
- operating expenses;
- purchase of new equipment or property;
- loan payments;
- or any other cash outflows.
The beginning cash balance is the ending cash balance from the previous period giving a starting point to work from when adding up all of the new cash inflows and outflows during the current period.
Once a company has calculated the cash balance based on these terms, it can use this information to decide how to best use its cash. For example, if the company has a positive cash balance, it may want to reinvest some of that cash into the business. Alternatively, if it has a negative cash balance, it may need to take out a loan or raise additional capital. The cash balance formula is also used to forecast future cash balances so that a company can plan its finances accordingly.
How to Calculate Cash and Cash Equivalents in Balance Sheet
Cash and Cash Equivalents are entered as current assets on a company's balance sheet. The total value of cash and cash equivalents is calculated by adding together the total of all cash accounts and any highly liquid investments that can be easily converted into cash that qualify as a cash equivalent.
The value of cash and cash equivalents can fluctuate greatly from one period to the next, depending on several factors such as sales volume, capital expenditures, and the timing of collections and disbursem*nts. As a result, it is important for companies to closely monitor their cash and cash equivalent balances regularly to ensure that they have enough liquidity available to meet their ongoing cash needs.
Cash and Cash Equivalent Calculation Examples
It can be useful to work through some examples for calculating cash and cash equivalents on a balance sheet. The following demonstrates how to calculate cash in balance sheet:
Example 1
Company XYZ has the following information for its balance sheet:
Checking account: $2,000
Savings account: $500
Accounts receivable: $200
Inventory: $600
Commercial paper: $750
U.S. Treasury bills: $1,000
Of the figures provided, the checking account, savings account, commercial paper, and U.S. Treasury bills qualify as cash and cash equivalents. Summing these figures, it can be found that cash and cash equivalents total is $4,250 ($2,000 + $500 + $750 + $1,000).
Example 2
Suppose that Company ABC has the following information for its balance sheet:
Money Market Accounts: $1,400
Checking account: $950
Accounts receivable: $600
Inventory: $1,200
The money market accounts and checking accounts qualify as cash and cash equivalents of the figures provided. Summing these figures, it can be found that cash and cash equivalents total is $2,350 ($1,400 + $950).
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