Cash equivalent

(noun)

Cash equivalents are assets that are readily convertible into cash, such as money market holdings, short-term government bonds or Treasury bills, marketable securities, and commercial paper.

Related Terms

Examples of Cash equivalent in the following topics:

  • Types of Cash

    • Cash and cash equivalents are not just the amount of currency that a business has in its cash registers and bank accounts; they also include several different types of financial instruments.
    • Generally only demand CDs or CDs that will mature within three months of when the financial statements are prepared are cash equivalents.
    • Cash equivalents can also include government and corporate bonds, marketable securities and commercial paper.
    • Other investments and securities that are not cash equivalents include postage stamps, IOUs, and notes receivable because these are not readily converted to cash.
    • A CD may be a "cash equivalent" if it meets certain criteria.

  • What Is Cash?

    • Cash and cash equivalents are the most liquid type of company assets used by businesses to settle debts and purchase goods.
    • Cash equivalents are also generally included with cash on a business's financial statements.
    • For an investment to be considered a "cash equivalent," it must mature within three months.
    • For an instrument to be considered a cash equivalent, the risk of the investment losing its value must also be insignificant.
    • Define the role cash or cash equivalents play within a business

  • Reporting Cash

    • Cash and cash equivalents are reported in the current asset section of a business's balance sheet.
    • When the company's cash balance is reported on its balance sheet, all of those accounts are combined into one "cash" line item.
    • While the balance sheet may combine all cash and cash equivalents into one number, a business can provide further detail about its cash balance in the footnotes to the financial statements.
    • With regards to cash, the footnotes can explain how much of the cash balance was composed of actual currency and how much was cash equivalents.
    • Cash and cash equivalents are reported on the balance sheet.

  • Key Considerations for the Statement of Cash Flows

    • The statement of cash flows highlights the activities that directly and indirectly affect a company's overall cash balance.
    • A cash flow statement provides information beyond that available from other financial statements, such as the Income Statement and the Balance Sheet, through providing a reconciliation between the beginning and ending balances of cash and cash equivalents of a firm over a fiscal or accounting period.The main purpose of the statement, according to the Financial Accounting Standard Board (FASB) is to provide information about the changes of an entity's cash or cash equivalents in the accounting period .
    • The statement shows historical changes in cash and cash equivalents rather than working capital.
    • It does not predict future cash flows.
    • Investing activities - the acquisition and disposal of long term assets and other investments not included in cash equivalents.

  • Acid Test Ratio

    • The acid-test, or quick ratio, measures the ability of a company to use its near cash or quick assets to pay off its current liabilities.
    • Quick assets include the current assets that can presumably be quickly converted to cash at close to their book values.
    • The numerator of the ratio includes "quick assets," such as cash, cash equivalents, marketable securities, and accounts receivable.
    • The acid-test ratio is calculated by adding cash, cash equivalents, marketable securities, and accounts receivable.
    • A low acid-test ratio may be a sign of poor use of cash by a business.

  • Types of Transactions

    • In double-entry bookkeeping, a sale of merchandise is recorded in the general journal as a debit to cash or accounts receivable and a credit to the sales account.
    • Purchases can be made by cash or credit.
    • This transaction results in a decrease in accounts receivable and an increase in cash or equivalents.
    • The business that makes the payment will decrease its accounts payable as well as its cash or equivalents.
    • On the other hand, the business that receives the payment will see a decrease in accounts receivable but an increase in cash or equivalents.

  • Introduction to the Statement of Cash Flows

    • The money coming into the business is called cash inflow, and money going out from the business is called cash outflow.
    • The statement of cash flows show the company's ability to change cash flows in future circumstances.
    • The statement of cash flows also reconciles the cash balance from one balance sheet to the next.
    • The statement of cash flows is cash based and it shows the actual inflows and outflows of cash for the given month.
    • The cash flow statement includes only inflows and outflows of cash and cash equivalents.

  • Involuntary Conversion

    • Monetary assets consist of cash or cash-equivalent assets.
    • Non-monetary assets are not easily converted to cash, such as equipment.
    • An asset exchange with commercial substance will cause future cash flows to materially change.
    • For non-monetary asset exchanges without commercial substance, the expectation is that the exchange will not materially alter future cash flows.
    • The asset received is recorded on the balance sheet at the book value of the asset given up plus any cash paid.

  • Basic Components of Asset Valuation

    • Absolute value models that determine the present value of an asset's expected future cash flows.
    • Fair value is used in accordance with US GAAP (FAS 157), where fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties, or transferred to an equivalent party, other than in a liquidation sale.
    • When a plant asset is purchased for cash, its acquisition cost is simply the agreed on cash price.
    • However, when a business acquires plant assets in exchange for other non-cash assets (shares of stock, a customer's note, or a tract of land) or as gifts, it is more difficult to establish a cash price.
    • The general rule on non-cash exchanges is to value the non-cash asset received at its fair market value or the fair market value of what was given up, whichever is more clearly evident.

  • Importance of Cash Flow Accounting

    • The statement of cash flows provides insight that the balance sheet and income statement do not, particularly in regard to a company's cash position.
    • Without positive cash flow, a company cannot meet its financial obligations .
    • Management is interested in the company's cash inflows and cash outflows because these determine the availability of cash necessary to pay its financial obligations.
    • In addition, management uses cash flow for the following:
    • A company can fail because of a shortage of cash even when it is profitable.