What are Cash Equivalents in Financial Statements
Cash equivalents are assets that a business invests in short-term securities to earn interest. These securities can include stocks, bonds, treasury bills, commercial paper, or other known securities. Cash equivalents are considered to be easily convertible to cash.
They are typically used by businesses to manage their liquidity and meet short-term financial obligations. A cash equivalent tends to be highly liquid, low risk, very secure and can be converted back into cash quickly and easily, usually within 90 days.
Investing in these securities is a good idea because they can be easily traded in the market. Their value can also be quickly determined. Additionally, they can indicate the health of the business and its ability to pay short-term debts.
The balance sheet displays a business's cash equivalents at the top, along with cash, as these assets are the most liquid.
Frequently asked questions
What is an example of cash equivalents
Cash equivalents refer to any short-term investment securities that mature in 90 days or less. These encompass bank certificates of deposit, banker's acceptances, Treasury bills, commercial paper, and other instruments in the money market.
How are cash equivalents reported in the financial statements
Cash and cash equivalents are reported as a separate line item on a company's balance sheet. This line item is usually towards the top of the balance sheet's current assets section.
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