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Cash equivalents are very short-term, low-risk investments that are almost as liquid as cash, such as money market funds. Together with cash they form the company's most accessible funds.
How it relates
CashCash is the money the company has immediately available in bank accounts and on hand. It is the most liquid asset and can be used instantly for payments and investments.+Cash Equivalents=Cash & Cash EquivalentsCash and cash equivalents combines cash and near-cash investments. It shows how much very liquid money the company has available to meet obligations or seize opportunities.
Cash equivalents are very short-term, low-risk investments that are almost as liquid as cash, such as money market funds. Together with cash they form the company's most accessible funds.
Criteria for cash equivalents:
- Highly liquid: Readily convertible to known amounts of cash
- Short maturity: Generally original maturity of three months or less
- Low risk: Insignificant risk of changes in value
Common examples:
- Treasury bills: Short-term government securities
- Money market funds: Pooled investment in short-term securities
- Commercial paper: Short-term corporate debt (high quality only)
- Certificates of deposit: Bank CDs maturing within three months
Why it matters:
- Liquidity measure: Combined with cash for assessing financial flexibility
- Yield opportunity: Earn returns while maintaining near-cash liquidity
- Cash flow statement: Changes flow through investing activities unless immaterial
- Reporting standards: Definition is consistent across accounting frameworks
Analysis considerations:
- Composition: Review notes for types of instruments held
- Risk profile: Even cash equivalents carry some credit and interest rate risk
- Foreign holdings: Cash equivalents held abroad may not be freely available