Cash and cash equivalents

Cash and cash equivalents are either cash or assets that are readily convertible into cash. Any items falling within this definition are classified within the current assets category in the balance sheet of a business.

Examples of cash are:

  • Coins
  • Currency
  • Cash in checking accounts
  • Cash in savings accounts
  • Bank drafts
  • Money orders
  • Petty cash

Examples of cash equivalents are:

  • Commercial paper
  • Marketable securities
  • Money market funds
  • Short-term government bonds
  • Treasury bills

The two primary criteria for classification as a cash equivalent are that an asset be readily convertible into a known amount of cash, and that it be so near its maturity date that there is an insignificant risk of changes in value due to changes in interest rates by the time the maturity date arrives. If there is any question about whether a financial instrument can be classified as a cash equivalent, consult with the company's auditors.

Cash and cash equivalents information is sometimes used by analysts in comparison to a company's current liabilities to estimate its ability to pay its bills in the short term. However, such an analysis may be flawed if there are receivables that can be converted into cash within a few days.