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Why is shareholder equity not considered in cash and cash equivalents?

Lina Ch's Profile

If a company has a weak cash flow, can it use shareholder equity (in Statement of Changes in Equity) to keep the company going? In a start up company that is 100% equity financed, the shareholder equity is the same as the cash in bank. In a larger, private company, why is the equity in the statement of changes not considered available cash for the company? 

Answers

(Agent, JKS Solutions, Inc.) |

Equity is not cash and cannot be deposited in a bank account and cannot be considered a cash equivalent. The statement of changes in equity reports the changes in equity at the balance sheet date. The statement of cash flows reports the classified changes in cash for the period and the cash balance at the balance sheet date.

The size of the company does not matter.

If you have an intermediate accounting textbook all your answers can be found there.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Start-ups tend to be very simple from a financial reporting point of view. You sell equity and receive cash. Every number you compute seems to be related to cash. As you grow, you may take on debt, you may book fixed assets and adjust for periodic depreciation, and declare dividends. These more mature activities begin to disrupt the relationship of cash to the value of your company.

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Cash is solely comprised of cash, and a company cannot be kept going without it. Cash provided at the time of equity infusions can be investedm in inventory, intangibles, equipment, and other assets. If you do not have cash, you will be unable to sustain the company. In the US, reporting equity as cash in the cash flow statement does not conform to GAAP and will risk legal action.

Topic Expert
Randy Lewis
Title: Managing Partner
Company: LP Valuation, LLC
(Managing Partner, LP Valuation, LLC) |

The basic accounting equation (which forms the balance sheet) is:

Assets = Liabilities + Shareholders' Equity

Or

Assets - Liabilities = Shareholders' Equity

Your question is why doesn't the SE section reflect the cash that is available in the company. Per the equation above, if cash is your only asset and you have no liabilities, then it's true. However, this is almost never true after initial equity has been sold.

Kevin Roones
Title: Senior Accounting Professional
Company: In-between
(Senior Accounting Professional, In-between) |

Regardless of the size of the company, if equity was issued, either in the form of a stock offering or contributed capital by the owner(s), the initial entry in simplistic terms was to debit cash and credit equity.

If the company has used up cash through operations and now needs an additional cash infusion, the only way to accomplish that through equity would be to have an additional offering of some sort or an additional capital contribution from the owners.

In other words, since cash is an asset, it can only be increased through a credit to another asset, a liability (such as a bank loan) or additional equity.

Topic Expert
Randy Lewis
Title: Managing Partner
Company: LP Valuation, LLC
(Managing Partner, LP Valuation, LLC) |

Good point Nancy. Also, there are noncash expenses on the P&L, like depreciation.

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