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:

1. Typically have a maturity of three months or less
2. Low risk of change in value due to interest rate fluctuations
3. Examples include treasury bills, commercial paper, and money market funds
4. Reported alongside cash on the balance sheet
5. Provide liquidity while earning a small return
6. Important for cash management and short-term investment strategies
7. 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.