Cash Equivalents

On the balance sheet, cash and cash equivalents are usually shown together, because both are effectively available to spend. Cash includes notes, coins and bank deposits available on demand. Cash equivalents are investments that are almost as good as cash.

To qualify, an investment generally must mature within about three months of the date the company acquires it, and must be readily convertible into cash with an insignificant risk of a change in value. Examples include treasury bills, money market funds, short-term bank deposits and high-quality commercial paper.

For example, a company with 2 million in its bank accounts and 3 million in treasury bills maturing in 60 days might report cash and cash equivalents of 5 million.

Investments that do not meet these tests, such as shares, longer-term bonds or deposits with a one-year term, are usually classified as short-term or long-term investments instead.

Cash and cash equivalents is a key figure for judging a company's liquidity. The cash flow statement explains how this total changed during the period.