Cash and Cash Equivalents

Cash and Cash Equivalents

Shruti Chand

In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of cash equivalents

This read will help you get started with understanding the concept and its significance in determining financial health of a business.

Introduction

Cash and Cash Equivalents on the assets side of the balance sheet is the total amount of cash or assets that can be converted into cash on an immediate basis. Any bank accounts or marketable securities that a business owns can be categorized as cash equivalents.

What is included in Cash and Cash Equivalents?

Cash equivalents are the assets with short maturities typically 90 days or less. Examples of cash equivalents on a firm’s balance sheet include:

  • Treasury Bills
  • Money market mutual funds
  • Commercial Paper (bought from other firms)
  • Bank Certificates of deposit
  • Repurchase agreements
  • Other money market instruments

Cash on the other hand is not limited to the amount of money in checking and savings accounts (and coins and banknotes). It also includes assets such as cheques received but not deposited.

Cash and Cash Equivalents is recorded in the balance sheet in the “Current assets” section. Cash and Cash equivalents are related to other current assets that will transformed into cash later.

Measure of liquidity

Cash and Cash equivalents are used to measure the liquidity of the firm. For example, in financial analysis, it enters the computation of liquidity ratios.

Final Words

Cash and Cash equivalents may be a small part on the balance sheet of a firm but have a lot of impact as it is used to pay day-to-day operations of the firm on a very frequent basis.

Related posts on the SimTrade blog

   ▶ Shruti CHAND Balance sheet

   ▶ Shruti CHAND Current Assets

About the author

Article written in October 2021 by Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022).

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