cash equivalents

(noun)

A deferred expense or prepayment, prepaid expense, plural often prepaids, is an asset representing cash paid out to a counterpart for goods or services to be received in a later accounting period.

Related Terms

Examples of cash equivalents 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

  • Cash

    • In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately (as in the case of money market accounts).
    • Cash and cash equivalents can be used to pay the short-term debt of a company.
    • Cash and cash equivalents are the most liquid assets found within the asset portion of a company's balance sheet.
    • 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.
    • Cash equivalent investments should also have an insignificant risk of change in value: for example, common stock cannot be considered a cash equivalent, but preferred stock acquired shortly before its redemption date can.

  • 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.

  • Day-to-Day Needs

    • Operating cash flow refers to the daily cash inflows and outflows generated from business revenues earned, excluding certain costs.
    • Cash outflows occur due to cash payment of business expenses, purchase of assets, and payment on debt .
    • "Cash and cash equivalents" on the balance sheet are the most liquid assets found on this statement.
    • Cash equivalents are distinguished from other investments through their short-term existence; they mature within three months and have insignificant risk of change in value.
    • Cash and cash equivalents are also used in the contexts of payments and payment transactions and refer to currency, money orders, paper checks, and stored value products, such as gift certificates and gift cards.

  • Defining the Statement of Cash Flows

    • A statement of cash flows is a financial statement showing how changes in balance sheet accounts and income affect cash & cash equivalents.
    • In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
    • Essentially, the cash flow statement is concerned with the flow of cash in and out of the business.
    • International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements.
    • Indicate the purpose of the statement of cash flows and what items affect the balance reported on the statement

  • Limitations of the Statement of Cash Flows

    • The simplest drawback to a cash flow statement is the fact that cash flows can (but not always) omit certain types of non-cash transactions.
    • As the name implies, the statement of cash flows is focused exclusively on tangible changes in cash and cash equivalents.
    • Under IAS 7, cash flow statement must include changes in both cash and cash equivalents.
    • US GAAP permits using cash alone or cash and cash equivalents.
    • Bank borrowings (overdraft) in certain countries can be included in cash equivalents under the IAS 7.

  • 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.

  • 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.

  • Components of the Statement of Cash Flows

    • There can also be a disclosure of non-cash activities.
    • In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
    • Essentially, the cash flow statement is concerned with the flow of cash in and out of the business.
    • For businesses that use cash basis accounting, the cash flow statement and income statement provide the same information, since cash inflows are considered income and cash outflows consist of expense payments or other types of payments (i.e. asset purchases).
    • Statement of cash flows includes cash flows from operating, financing and investing activities.