What Cash Equivalent refers to are investment securities used for investing short-term. Cash equivalent possesses a high credit quality, and are highly liquid. What this means is cash equivalents are investments that can easily and readily be converted into a common amount of cash.
Before any item can be termed as Cash equivalent, it should fulfill the following criteria.
- The investment shouldn’t be long-term but one that is of a short term benefit. The investment should have a maturity date not higher than 90 days. Should the investment surpass 90 days, then, it will be classified as other investment.
- The investment should be highly liquid. In other words, the investment must be something that can be sold easily and should have ready buyers.
- There must be a market price for the investment (a known amount of cash) that is not susceptible to serious fluctuations.
- They should not be high-risked investments. This means, there should be a small risk of it changing value.
Below are some examples of cash equivalent:
- Commercial paper: this is a debt that has not been secured and granted by an entity. Companies make use of commercial paper to fulfill its short-term working capital obligations.
- Marketable security: this is an investment that is easily traded and can be converted to cash at any time as a result of a strong secondary market for security. Securities like this are commonly traded on the public exchange, where there are readily available price quotes.
- Treasury bills: this is issued by the United States Government and is short-term debt security designed by the government to raise money.
Certificates of deposit can be regarded as cash equivalent to but that’s depending on when the cash equivalent investment expires. If it is bought shortly before the date of its redemption and is not expected to have its value fluctuate, preferred shares of equity may be regarded as a cash equivalent.
Cash in simple terms refers to money in the form of notes or coins. Cash is money as a form of currency. Therefore, the term cash also is referred to as any coin or notes an enterprise holds. Demand deposit falls under cash and is a type of account in which money or funds can be withdrawn from without necessarily informing the depository institution or bank. Examples of cash include:
- Cash in savings accounts
- Money orders
- petty Cash
- Bank drafts
- Cash does not have any time-period, while it takes some time for cash equivalents to be able to be converted into cash, usually three months.
- Cash refers to currency; notes, coins, money order while cash equivalent on the other hand refers to liquidated securities.
- Cash Equivalents are converted to money, however, cash is cash and cannot further be converted to cash again.
- Cash refers to money held at hand and cash at bank, meanwhile, cash equivalent refers to short term highly liquid assets that can easily be converted to cash.
Information on cash and cash equivalents is used by analysts at times in comparison with a company ‘s current liabilities to assess whether it will be able to pay its bill in the short-term.