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Cash Equivalent

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Key Highlights

  • Cash equivalents are short-term, liquid assets that can be easily and quickly transformed into a specific amount of cash, with little to no risk of significant changes in their value.

  • Types of cash equivalents includes treasury bills, commercial paper, bank certificates of deposit (CDs) and money market funds.

What is Cash Equivalent?

Cash equivalents are short-term, liquid assets that can be easily and quickly transformed into a specific amount of cash, with little to no risk of significant changes in their value. These instruments are considered nearly as good as cash and are included with cash on a company’s balance sheet as current assets.

Types of Cash Equivalents

  • Treasury Bills: Short-duration debt instruments issued by the government, typically maturing within 90 days, used to raise funds for short-term financial needs.

  • Commercial Paper: A short-term, unsecured promissory note issued by companies to meet immediate financing needs.

  • Bank Certificates of Deposit (CDs): Time deposits with banks that mature in three months or less.

  • Money Market Funds: Pooled investments in safe, short-term debt, like a savings account with a slight boost.

Importance of Cash Equivalents

  • Liquidity Management: They help companies cover immediate costs or unexpected expenses without scrambling.

  • Investment Strategy: Companies may invest extra cash in these investments to earn a small return while keeping funds ready for action.