Learn About the Measurement of Cash Flows

Cash flows are defined to include both cash and cash equivalents. The statement of cash flows explains the difference between the beginning and ending balances of cash and cash equivalents. We continue to use the phrases cash flows and the statement of cash flows, but we must remember that both phrases refer to cash and cash equivalents. Recall that a cash equivalent must satisfy two criteria: (1) be readily convertible to a known amount of cash and (2) be sufficiently close to its maturity so its market value is unaffected by interest rate changes. In most cases, a debt security must be within three months of its maturity to satisfy these criteria. Companies must disclose and follow a clear policy for determining cash and cash equivalents and apply it consistently from period to period. American Express, for example, defines its cash equivalents as “time deposits and other highly liquid investments with original maturities of 90 days or less.”