Question

What is meant by 'Cash Equivalents'?

Hint:

Cash equivalents must be highly liquid and carry insignificant risk of value change.

Answer 1

Cash equivalents refer to very short-term investments that a business holds for meeting its immediate cash obligations. These investments are highly liquid, meaning they can be converted into cash quickly without any significant loss of value. Typically, cash equivalents have a maturity period of three months or less from the date of acquisition. Examples include Treasury bills, commercial papers and money market instruments. The purpose of holding such assets is to ensure sufficient liquidity while earning small returns on idle cash. Cash equivalents form an essential part of cash and cash equivalents in the balance sheet and help a business manage its daily financial requirements efficiently. They are considered nearly as good as cash due to their stability and low risk.