Cash Equivalents
Candlefocus EditorDespite their name, cash equivalents are not true cash. Generally, they are short-term investment securities that mature within three months or less and can be converted into cash information quickly and with no risk of principal value. These type of investments can include money market funds, certificates of deposit, and Treasury bills. Some common examples of cash equivalents are commercial paper, bankers' acceptances, and other money market instruments, like U.S. government T-bills.
Cash equivalents must always be current assets since they are expected to be converted into cash within one year. This means that their amounts are reported at the top of the balance sheet, as the company's most liquid assets. The cash and cash equivalent balance is important in determining a company's short-term solvency by assessing both its ability to pay its upcoming liabilities and its support of other investments.
Generally, a company might hold cash equivalents for a variety of reasons. For example, companies with high levels of customer payments might need to hold cash and cash equivalents to further support their liquidity ratios or to meet their paying obligations since the cash funds are instantly accessible within a short period of time. As a result, having cash and cash equivalents on hand will result in a company having a stronger position to meet their future financial needs.
In conclusion, cash equivalents are extremely close to cash, with the difference being that cash equivalents are highly liquid, short-term investment securities. These investments must all mature within three months and have the ability to be quickly turned into cash with no risk of loss. The cash and cash equivalent values are always reflected at the top of the balance sheet, giving an overview of the company’s assets. Cash equivalents are important to a company’s short-term solvency and they can act as insurance against sudden changes in the financial environment of the company.