Cash and Cash Equivalents
- Cash includes legal tender, bills, coins, checks received but not deposited, and checking and savings accounts
- Cash equivalents are any short-term investment securities with maturity periods of 90 days or less. They include bank certificates of deposit, banker’s acceptances, Treasury bills, commercial paper, and other money market instruments.
- Cash and its equivalents differ from other current assets like marketable securities and accounts receivable, based on their nature.
- Cash Equivalents includes
- Banker’s acceptance
- Commercial paper
- Treasury bills
- Other liquid investments that mature within three months
- Cash and cash equivalents are part of the current assets section of the balance sheet and contribute to a company’s net working capital.
Importance of Cash and Cash equivalents
- A company carries cash and cash equivalents to pay its short-term bills but to also preserve capital for long-term capital deployment.
- Cash and cash equivalents help companies with their working capital needs since these liquid assets are used to pay off current liabilities, which are short-term debts and bills.
- Because of liquidity reasons, people say cash is king. With ample money, companies can use it for anything, including:1. Paying interest and paying off debt to reduce the company’s financial leverage
2. Buying capital goods to increase production capacity and future growth
3. Acquiring other companies without having to owe
4. Paying operating costs and distribute dividends
