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

The following are all examples of cash equivalents:

• Treasury bills . Short-term government securities with maturities of less than three months.

• Commercial paper . Unsecured short-term debt instruments issued by corporations, typically with maturities under 90 days.

• Certificates of deposit . Short-term, high-quality bank instruments with maturities of three months or less.

• Money market funds . Funds that invest in short-term, highly liquid instruments such as T-bills and commercial paper.

• Banker’s acceptances . Short-term instruments created by a company's order to a bank to pay a specified sum at a future date.

• Repurchase agreements . Short-term borrowing instruments where securities are sold and later repurchased, typically overnight or within a few days.

• Short-term government bonds . Bonds issued by governments with maturities of three months or less.

• Marketable securities . Highly liquid securities that are traded in active markets and have very short maturities.

• Demand deposits . Bank accounts where funds can be withdrawn at any time without prior notice, such as checking accounts.

• Cash management accounts . Accounts provided by financial institutions that combine checking, savings, and investment capabilities, maintaining funds in highly liquid, low-risk investments.

These instruments qualify as cash equivalents because they are low-risk, highly liquid, and can be converted to cash within a short time frame.

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.

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