Cash and Cash Equivalents

Learning Outcomes

  • Identify cash and cash equivalents
  • Demonstrate proper financial statement presentation of cash and cash equivalents

The Facebook logo. When Facebook, Inc. went public back on May 18, 2012, selling its stock on the open market raised over $16 billion in cash for the company. Since then, much of that money has been invested and the company has made money (a LOT of money) and so it has a robust cash balance: over $19 billion. By cash, we mean cash and cash equivalents, and by that, we mean lots of things other than actual cash.

In the spirit of full disclosure, Facebook publishes their definition of cash and cash equivalents in the notes that accompany the financial statements: (Facebook, Inc. Form 10-K for the year ended December 31, 2019, Note 4, page 81):

Cash and cash equivalents consist of cash on deposit with banks and highly liquid investments with maturities of 90 days or less from the date of purchase.

In another note, the company gives more detail. Below is a breakdown of cash and cash equivalents for Facebook for the year ended December 31, 2019, with a comparison to the year ended December 31, 2018 (Facebook, Inc. Form 10-K, Note 4, page 89).[1]

Cash and Cash Equivalents and Marketable Securities

The following table sets forth the cash and cash equivalents and marketable securities (in millions):

December 31,
Description 2019 2018
Subcategory, Cash and cash equivalents:
      Cash $ 4,735 $ 2,713
      Money market funds 12,787 6,792
      U.S. government securities 815 90
      U.S. government agency securities 444 54
      Certificate of deposits and time deposits 217 369
      Corporate debt securities 81 1
Total cash and cash equivalents Single Line19,079Double Line Single Line10,019Double Line

Even though the financial statements say, “Cash,” that number is really a summary of all the demand deposit accounts, such as business checking, payroll, and maybe some tiny petty cash accounts.

A money market fund is a mutual fund that invests solely in cash and cash equivalent securities, which are also called money market instruments. These vehicles are very liquid short-term investments with high credit quality, such as:

  • Certificates of deposit (CDs)
  • Commercial paper
  • U.S. Treasuries
  • Bankers’ Acceptances
  • Repurchase agreements

What all those cash and cash equivalent line items have in common in the above example from Facebook is that they are readily convertible to actual funds in the checking account that can be used to pay bills.

Practice Question: Cash and Cash Equivalents Defined

Cash and Cash Equivalents Presentation

Below is a partial balance sheet for Facebook for the year ended December 31, 2019, with a comparison to the year ended December 31, 2018 (Facebook, Inc. Form 10-K, page 73). Notice all numbers are rounded to the nearest million, so the cash and cash equivalents reported are actually just over $19 billion, not $19,000. Also, notice the number has been rounded to $19,079,000,000. That rounding implies a materiality threshold of $499,999.99. Hopefully, the accountants aren’t passing on any errors that large, but if they did, it might not have really affected the financial statements. Anyway, that’s an interesting mathematical exercise to play around with in your spare time.

(in millions, except for number of shares and par value)
Description December 31,
Description 2019 2018
Category, Assets
Subcategory, Current Assets:
     Cash and cash equivalents $     19,079 $     10,019
     Marketable securities 35,776 31,095
     Accounts receivable, net of allowances of $206 and $229 as of December 31, 2019 and December 31, 2018, respectively 9,518 7,587
     Prepaid expenses and other current assets 1,852 1,779
          Total current assets Single line
Single line
Property and equipment, net 35,323 24,683
Operating lease right-of-use assets, net 9,460
Intangible assets, net 894 1,294
Goodwill 18,715 18,301
Other Assets 2,759 2,576
Total assets Single line
$     133,376
Double line
Single line
$     97,334
Double line

Also, notice two things about $19 billion in cash and cash equivalents:

  1. It’s a very, very big number.
    • Take two billion $10 bills and put them in a stack. After about 60 years of stacking, you’d have about 150 stacks, each a mile high.
  2. It’s likely not very much actual cash on hand.

Again, even though we say “cash,” we mean money that is available to spend right now or nearly right now. We call this term “liquidity.” Cash equivalents are highly liquid. Marketable securities are fairly liquid, but not as liquid as cash equivalents because selling stocks and other marketable securities in a hurry may adversely affect the price (imagine taking money out of savings to pay for an emergency expense like a broken tooth versus trying to sell your car). If you examine the above asset section of Facebook’s balance sheet, you may notice the assets are not listed alphabetically, or by descending amount, but by descending assessment of liquidity.

Practice Question: Cash and Cash Equivalents Presentation