Code word referring to smoking weed. Best to be used around those that you do not want to know exactly what you are talking about. The connection is that you would use a bowl to both eat cereal and to smoke weed out of. When referring to really good cereal you could even specify Special K as the type of cereal you'll be enjoying.
Hey we should go get some cereal in the morning before we go to work. If you like, I have some Special K cereal we can enjoy.