Cash equivalent definition
/What is a Cash Equivalent?
A cash equivalent is a highly liquid investment having a maturity of three months or less. It should be at minimal risk of a change in value. To be classified as a cash equivalent, an item must be unrestricted, so that it is available for immediate use.
Examples of Cash Equivalents
Examples of cash equivalents are bankers’ acceptances, certificates of deposit , commercial paper , marketable securities , money market funds , short-term government bonds, and treasury bills .
Presentation of Cash Equivalent
The cash and cash equivalents line item is stated first in the assets section of the balance sheet , since line items are stated in their order of liquidity , and these assets are the most liquid of all assets.
Understanding Cash Equivalents
Businesses tend to invest more heavily in cash equivalents when they project a short-term need for cash , so that their investments can be readily converted into cash. When this is not the case, they are more likely to invest in assets that take longer to liquidate; in this case, they would not be listed as cash equivalents.
