Cash Equivalents
Cash Equivalents (Definition)
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash.
Key aspects of cash equivalents include:
- Typically have a maturity of three months or less
- Low risk of change in value due to interest rate fluctuations
- Examples include treasury bills, commercial paper, and money market funds
- Reported alongside cash on the balance sheet
- Provide liquidity while earning a small return
- Important for cash management and short-term investment strategies
- Must be easily convertible to cash without significant loss of value
Cash equivalents play a crucial role in a companys liquidity management and short-term financial planning.