What are Cash and Cash Equivalents?

Cash and Cash Equivalents Definition

Cash and Cash equivalents are related to the detail on the balance sheet that summarises the value of a business’s assets that are cash or can be transformed into cash instantly. The cash equivalents consist of marketable securities, bank accounts, short-term government bonds, commercial paper and Treasury bills with a maturity date of 3 months or less. Marketable bonds and money market holdings are estimated cash equivalents as they are liquid and not directed to substantial variations in the state.

As mentioned earlier :

• The cash flow report depicts the outflows and inflows of cash and cash equivalents of different actions of the firm during a distinct time
• According to the Accounting Standard -3, ‘Cash’ includes funds in hand and demand securities with the banks (financial institutions) and ‘Cash equivalents’ involves short-term extremely liquid financing that are easily changeable into established values of cash and which are subjected to a petty peril to differences in the value
• Financing usually fits as cash equivalents when it has a low maturity, three (3) months or less from the date of purchase

Criteria for Cash Equivalent

The following are the criteria required for being considered as a cash equivalent:

1. The investment should mature within three months. If maturity period is more than 3 months, it can be considered as any other investment.

2. The investment instruments should be highly liquid which means that there should be many buyer of the instrument in the market at any time.

3. The market price of such instruments should be made known, so that they can be easily converted into that particular amount easily. The market price must not vary with the corresponding market fluctuations.

4. The risk factors associated with such instruments should be less and the instrument should be able to maintain their value in fluctuating market conditions.

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This concludes the article on the topic of Cash and Cash Equivalents, which is an important topic for Class 12 Commerce students. For more such interesting articles, stay tuned to BYJU’S.