Cash equivalent

A cash equivalent is a highly liquid investment having a maturity of three months or less. It should be at minimal risk of a change in value. Examples of cash equivalents are:

To be classified as a cash equivalent, an item must be unrestricted, so that it is available for immediate use.

The cash and cash equivalents line item is stated first in the balance sheet, since line items are stated in their order of liquidity, and these assets are the most liquid of all assets. Businesses tend to invest more heavily in cash equivalents when they project a short-term need for cash, so that their investments can be readily converted into cash.

Related Courses

The Balance Sheet