Cash and Cash Equivalents

'Cash and Cash Equivalents' is an asset that appears on the statement of financial position of a business and includes currency (coins and bank notes) held by a business (in hand and in bank accounts) and cash equivalents.

Cash is a medium of exchange, a store of value and a unit of account and a business needs to have sufficient cash in order to be able to pay its liabilities. Higher cash ratio (ratio of cash and cash equivalents to current liabilities) suggests that the business is liquid (i.e. it is expected not to face any difficulty in paying its very short-term liabilities).

A business generates cash from sale of products and services, sale of assets, borrowings from banks and other creditors and from capital contributions by its owners. It uses cash to pay for its operating and capital expenditure, its liabilities and in paying dividends to its owners. Information about sources and uses of cash are presented in the statement of cash flows.

Businesses keep a small amount of cash (called petty cash) for day to day cash expenses and keep a larger percentage of cash at its bank. Control over cash is vital for efficient and profitable operations of a business that is why businesses prepare their cash and bank reconciliations periodically.

Cash equivalents are not precisely coins and bank notes but are marketable securities of very short-term maturity (typically always less than 3 months) which are not expected to deteriorate significantly in value till maturity. They are treated as equivalent to cash under IAS 7 Statements of Cash Flows.

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork