Financial statement reporting of cash and cash equivalents

Cash and cash equivalents are reported as assets (resources) on balance sheets. Unlike the relatively simple balance sheets presented in earlier chapters, most companies prepare classified balance sheets. A classified balance sheet is designed to help users identify and understand many different types of assets, liabilities, and stockholders' equity items by reporting information in different categories or classes. An example of a classified balance sheet is shown below.

Christopher Corporation
Balance Sheet
December 31



Current Assets


  Cash and Cash Equivalents


  Accounts Receivable


   Merchandise Inventory


Total Current Assets


Property, Plant, and Equipment






  Machinery and Equipment


Total Property, Plant, and Equipment


Other Assets


Total Assets




Liabilities and Stockholders' Equity




Current Liabilities


  Accounts Payable


  Income Taxes Payable


  Wages Payable


Total Current Liabilities


Long-term Liabilities


Total Liabilities




Stockholders' Equity


Common Stock


Retained Earnings


Total Stockholders' Equity


Total Liabilities and Stockholders' Equity


As illustrated above, a classified balance sheet usually reports assets in three classes: (1) current assets, (2) property, plant, and equipment, and (3) other assets. Current assets are assets that are going to be converted into cash or used up in the operation of a company within the next 12 months. In the case of the Christopher Corporation, the $360,000 of current assets suggest the company will convert into cash or use up in operations $360,000 of assets by the following December 31. Cash and cash equivalents are logically classified as current assets because (1) cash is already cash and (2) cash equivalents can be very quickly converted into cash, often within a few hours or days. The speed within which assets can be converted into cash or used up determines the order in which current assets are reported. For example, since accounts receivable often take longer to be collected, and thus converted into cash, they are reported after cash and cash equivalents.

The property, plant, and equipment category on the classified balance sheet reports assets that have lives of many years and are used in the company's operation. For example, the Christopher Corporation's balance sheet includes $230,000 of buildings in which the company houses its offices and that are expected to last for many years.

The other assets balance sheet category reports such assets as long-term investments and patents.

Liabilities are usually reported on the classified balance sheet in two categories: current liabilities and long-term liabilities. Current liabilities are those that will be paid within the next 12 months while long-term liabilities will be paid after the next 12 months. The Christopher Corporation reports accounts payable of $155,000 as a current liability, suggesting the company will need to have $155,000 available to pay its creditors by the following December 31.

Stockholders' equity is usually reported on the classified in two classes: one showing the dollar amount invested by stockholders (common stock) and one showing the dollar amount of resources generated by management and kept in the company (retained earnings). For example, the Christopher Corporation's balance sheet reports its owners invested $360,000 in the company.

Similar to the manner in which cash and cash equivalents were examined in this chapter, the most important items reported on the classified balance sheet will be examined in later chapters. For example, Chapter 7 examines accounts receivable, while Chapter 9 examines property, plant, and equipment.

** You now have the background to do text exercise 6.12.

In addition to categorizing items on the classified balance sheet, companies prepare classified income statements, an example of which is shown below.

Christopher Corporation
Income Statement
For the Year Ended December 31



Operating Expenses


  Supplies Expense


  Wages Expense


  Insurance Expense


  Rent Expense


Total Operating Expenses


Operating Income


Other Revenues and (Expenses)


Income Before Taxes


Income Taxes Expense


Net Income


The major categories reported on the classified income statement are revenues, operating expenses, other revenues and expenses, and income taxes expense. Operating expenses report resources used up by management in the major operation of the business. On the other hand, the other revenues and expenses section reports resources generated or used up by management in non-major operations of the business. For example, interest revenue for investments in certificates of deposit and interest expense for bank loans are reported in the other revenues and expenses category. Income taxes expense is reported in its own category because of its large dollar amount and because it is controlled by governments and not management. As you proceed through other chapters you will examine all of the categories on the classified income statement.

** You now have the background to do text exercise 6.11.


Financial Reporting Summary

The following table summarizes the relationships among the major topics examined in this chapter.



Sources of Resources





Stockholders' Equity

Cash and cash equivalents




Operating Expenses
  Bank service expense
Other Revenues & Expenses
Interest revenue
Interest expense




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