Cash And Cash Equivalents Flashcards, test questions and answers
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What is Cash And Cash Equivalents?
Cash and cash equivalents are current assets that include coins, currency, bank deposits, certificates of deposit (CDs) and Treasury bills. These types of assets are considered to be the most liquid of all assets because they can be converted into cash quickly and easily. Cash equivalents are also known as short-term investments since they can typically be converted into cash within a relatively short period of time.The primary purpose of holding cash and its equivalents is to ensure that the business has sufficient liquidity to meet its short-term obligations. Since these types of assets are so liquid, they can provide a company with immediate financial resources when needed. This ensures that the business has enough money on hand to pay bills or cover expenses in a timely manner without having to borrow or wait for other forms of financing. When evaluating a company’s financial position, investors and creditors look at its level of liquidity which is often measured by its ratio between current liabilities and current assets such as cash and its equivalents. If a company has too much or too little in this category it could affect their ability to meet their obligations in the future. For businesses who need additional capital but do not want to take on more debt or issue equity securities, investing in cash equivalent instruments such as CDs can be advantageous since it provides them with access to funds without taking on additional risk associated with long-term investments such as stocks or bonds. In addition, investing in Treasury bills offers companies an opportunity for higher yields than regular savings accounts while still providing them with access to readily available funds when needed. Overall, cash and its equivalents play an important role in ensuring that businesses have sufficient liquidity so they can meet their short-term obligations while also providing them opportunities for higher yields if desired.