cash equivalents

(noun)

A deferred expense or prepayment, prepaid expense, plural often prepaids, is an asset representing cash paid out to a counterpart for goods or services to be received in a later accounting period.

Related Terms

Examples of cash equivalents in the following topics:

  • Cash

    • In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately (as in the case of money market accounts).
    • Cash and cash equivalents can be used to pay the short-term debt of a company.
    • Cash and cash equivalents are the most liquid assets found within the asset portion of a company's balance sheet.
    • Cash equivalents are assets that are readily convertible into cash, such as money market holdings, short-term government bonds or treasury bills, marketable securities, and commercial paper.
    • Cash equivalent investments should also have an insignificant risk of change in value: for example, common stock cannot be considered a cash equivalent, but preferred stock acquired shortly before its redemption date can.

  • Quick Ratio (Acid-Test Ratio)

    • Quick Ratio = (Cash and cash equivalent + Marketable securities + Accounts receivable) / Current liabilities.
    • Cash and cash equivalents are the most liquid assets found within the asset portion of a company's balance sheet.
    • Cash equivalents are assets that are readily convertible into cash, such as money market holdings, short-term government bonds or Treasury bills, marketable securities, and commercial paper.
    • Cash equivalents are distinguished from other investments through their short-term existence.
    • Thus, common stock cannot be considered a cash equivalent, but preferred stock acquired shortly before its redemption date can be.

  • Defining the Statement of Cash Flows

    • A statement of cash flows is a financial statement showing how changes in balance sheet accounts and income affect cash & cash equivalents.
    • In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
    • Essentially, the cash flow statement is concerned with the flow of cash in and out of the business.
    • International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements.
    • Indicate the purpose of the statement of cash flows and what items affect the balance reported on the statement

  • Components of the Cash Budget

    • The cash budget includes the beginning balance, detail on payments and receipts, and an ending balance.
    • A cash budget is a prediction of future cash receipts and expenditures for a particular time period, usually in the near future.
    • The cash flow budget helps the business determine when its income will be sufficient to cover its expenses and when the company will need to seek outside financing.
    • Cash receipts from customers - Collecting the accounts receivable.
    • One of the assets listed is cash, which factors into the overall budget.

  • Limitations of the Statement of Cash Flows

    • The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments.
    • As a cash flow statement is based on the cash basis of accounting, it ignores the basic accounting concept of accrual.
    • Cash flow statements are not suitable for judging the profitability of a firm, as non-cash charges are ignored while calculating cash flows from operating activities.
    • The statement of cash flows includes cash flows from operating, investing and financing activities.
    • Identify the factors that make the statement of cash flows of limited use

  • Identifying Varying Conditions

    • Management uses policies and techniques for the management of working capital such as cash, inventory, debtors and short term financing.
    • The policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short-term financing, such that cash flows and returns are acceptable.
    • Identify the cash balance that allows for the business to meet day-to-day expenses, but reduces cash holding costs.
    • Identify the appropriate credit policy (i.e., credit terms which will attract customers such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence return on capital or vice versa).
    • Identify the appropriate source of financing, given the cash conversion cycle.

  • Components of the Statement of Cash Flows

    • There can also be a disclosure of non-cash activities.
    • In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
    • Essentially, the cash flow statement is concerned with the flow of cash in and out of the business.
    • For businesses that use cash basis accounting, the cash flow statement and income statement provide the same information, since cash inflows are considered income and cash outflows consist of expense payments or other types of payments (i.e. asset purchases).
    • Statement of cash flows includes cash flows from operating, financing and investing activities.

  • Comparing Statement of Cash Flows with the Income Statement

    • While the income statement focuses on a firm's profitability, the statement of cash flows focuses on a firm's solvency.
    • This situation is the reason behind the importance of the cash flow statement.
    • The statement of cash flows shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
    • This is an example of a cash flow statement reflecting cash flows for the Municipality of San Narciso in the Philippines.
    • Describe how a company would use an income statement versus how they would use a statement of cash flows

  • Interpreting Overall Cash Flow

    • In financial accounting, a cash flow statement (also known as statement of cash flows or funds flow statement) is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents.
    • A positive cash flow means that more cash is coming into the company than going out, and a negative cash flow means the opposite.
    • The company may have a positive cash flow from operations, but a negative cash flow from investing and financing.
    • Capital Acquisitions Ratio = cash flow from operating activities / cash paid for property, plant and equipment
    • Company B has a higher yearly cash flow.

  • Reasons for Maintaining Cash on Hand

    • The main reason a business maintains cash on hand is to meet financial obligations.
    • In bookkeeping and accounting, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near immediately (as in the case of money market accounts).
    • Cash is seen as a reserve for payments and as a way to meet financial obligations.
    • Managing liquidity is a daily process requiring bankers to monitor and project cash flows to ensure adequate liquidity is maintained.
    • A business's cash account is how much currency it has on hand at a given time.