Understanding Cash and Cash Equivalents is crucial in financial accounting for assessing a company's liquidity and operational efficiency. These assets include physical currency, demand deposits, and short-term investments like treasury bills and money market funds. They are key for daily operations, investment opportunities, and financial stability, and are used by entities from small businesses to multinational corporations.
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Cash is physical currency and demand deposits that are immediately available for transactions
Characteristics
Cash Equivalents are short-term, highly liquid investments with minimal risk of value changes
Examples
Examples of Cash Equivalents include treasury bills, commercial paper, and money market funds
Cash and Cash Equivalents are crucial for analyzing a company's liquidity and ability to cover short-term liabilities
Cash and Cash Equivalents are used by individuals and companies to manage their financial positions
Cash and Cash Equivalents are prominently reported on a company's balance sheet
Companies like Apple Inc. and small businesses rely on Cash and Cash Equivalents for daily expenses
Cash and Cash Equivalents can be calculated by adding cash on hand, balances with banks, and cash equivalents
Criteria
Cash and Cash Equivalents must meet specific criteria, such as high liquidity and short-term maturities, to be classified as such
Accounting Standards
The classification of Cash and Cash Equivalents is governed by accounting standards like IFRS and GAAP
Liquidity refers to the ease of converting assets into cash without significant loss of value
Cash and Cash Equivalents are the most liquid assets and are crucial for a company's financial health and ability to adapt to challenges and opportunities
Understanding Cash and Cash Equivalents is essential for conducting liquidity analysis and assessing a company's financial stability
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______ are considered ______ if they can be quickly turned into a known cash amount with minimal risk and have original maturities of ______ or less.
Cash Equivalents
highly liquid investments
three months
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Definition of Cash
Most liquid asset, immediately usable for transactions.
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Characteristics of Cash Equivalents
Highly liquid, convertible to cash within 90 days, low value fluctuation risk.
