Accounting

Cash and Cash Equivalent

By May 24, 2019September 21st, 2021No Comments

What is Cash & Cash Equivalent?

Cash and Cash Equivalent is the value of cash and assets that can be easily converted into cash. There are two components: (1) Cash and (2) Cash Equivalent. Let’s go over what each of these entail.

Cash includes physical coins and paper bills, money in checking and savings accounts, money orders, etc. By comparison, Cash Equivalents are assets that can liquidate into cash within 90 days. They are assets such as Certificate of Deposit, Treasury Bills, Commercial Paper, Money Market Funds, etc. Hence, these items are highly liquid and can easily convert into cash within 90 days.

Companies usually group the two together and show them as a single line item. Together, Cash and Cash Equivalent measures the amount of money a company has at its disposal. Financial analysts uses this number often to determine the company’s valuation and to evaluate a company’s spending power.

This is an Asset on the Balance Sheet. Recall that the Balance Sheet orders the Assets section by liquidity. By definition, cash is the most liquid asset any company has. Therefore, it usually appears as the first line on the Balance Sheet, under Current Assets.

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