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.