Usually the most liquid of all assets.The quickest of quick assets, the most current of current assets.

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What are Cash Equivalents?

Cash includes legal tender, bills, coins, checks received but not deposited, and checking and savings accounts. Cash equivalents are any short-term investment securities with maturity periods of 90 days or less. They include bank certificates of deposit, banker’s acceptances, Treasury bills, commercial paper, and other money market instruments.

Cash and its equivalents differ from other current assets like marketable securitiesMarketable SecuritiesMarketable securities are unrestricted short-term financialinstrumentsthat are issued either forequity securities or for debt securities of a publicly listed company. Theissuing company creates theseinstruments for the express purpose of raising funds to further finance business activities andexpansion. and accounts receivableAccounts ReceivableAccounts Receivable (AR) represents the credit sales of a business, which have not yet been collected from its customers. Companies allow, based on their nature. However, certain marketable securities may classify as a cash equivalent, depending on the accounting policy of a company.


List of Cash Equivalents

The full list of cash equivalents includes the following items with maturity dates that are typically three months or less:

Banker’s acceptanceCommercial paperTreasury billsOther liquid investments that mature within three months

Companies may elect to classify some types of their marketable securities as cash equivalents. This depends on the liquidity of the investment and what the company intends to do with such products. Typically, this will be disclosed in the footnotes of a company’s financial statements.

Working Capital

Cash and cash equivalents are part of the current assets section of the balance sheet and contribute to a company’s net working capital. Net working capital is equal to current assets, less current liabilitiesCurrent LiabilitiesCurrent liabilities are financial obligations of a business entity that are due and payable within a year. A company shows these on the.

Working capital is important for fundinga business in the short term (12 months or less) and can be used to help finance inventory, operating expenses, and capital purchases.

Importance in Financial Modeling and Valuation

In financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company"s financial performance. Overview of what is financial modeling, how & why to build a model. and valuation, cash is king. Financial analysts spend a lot of their time “undoing” the work of accountants (accruals, matching, etc.) to arrive at the cash flowValuationFree valuation guides to learn the most important concepts at your own pace. These articles will teach you business valuation best practices and how to value a company using comparable company analysis, discounted cash flow (DCF) modeling, and precedent transactions, as used in investment banking, equity research, of a business.

When building a financial modelTypes of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types, cash is typically the last item to be completed and will reveal whether or not the balance sheet balances and if the model is working properly.


The above example of cash equivalents is taken from CFI’s Financial Modeling Courses.

What’s Not Included in Cash Equivalents

Investments in liquid securities, such as stocks, bonds, and derivatives, are not included in cash and equivalents. Even though such assets may be easily turned into cash (typically with a three-day settlement period), they are still excluded. The assets are listed as investments on the balance sheet.

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More Learning

CFI offers the Commercial Banking & Credit Analyst (CBCA)™Program Page - CBCAGet CFI"s CBCA™ certification and become a Commercial Banking & Credit Analyst. Enroll and advance your career with our certification programs and courses. certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: