Cash and Cash Equivalents

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According to International Accounting Standard 7 (IAS 7), Cash “comprises cash on hand and demand deposits”. And cash equivalents “are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value”.


Cash is the money in the form of currency. Currency includes currency notes and coins. Any currency notes and coins held by an enterprise are part of the term “cash”.

Demand deposit is a type of an account from which funds can be withdrawn at any time without having to inform the bank or depository institution. Most of the checking and saving accounts are demand deposits.

Cash Equivalent

Cash equivalents are investments that can be readily converted to cash. Common examples of cash equivalents include commercial paper, treasury bills, short term government bonds, marketable securities, and money market holdings. An item should satisfy the following criteria to qualify for cash equivalent.

  • The investment should be short term. They should mature in less than three months. If they mature in more than three months they will be classified as other investments.
  • They should be highly liquid. This means that they should be easily sold in the market. The buyers of these investments should be easily available.
  • They should be convertible to known amounts of cash. This means that their market price should be available and this market price should not be subject to significant fluctuations.
  • They should not be too risky. There should be very little risk of changes in their value. This means that equity shares cannot be classified as cash equivalents. But preferred shares purchased shortly before the redemption date can be classified as cash equivalents.

In short, cash and cash equivalents mean the cash and those assets which are immediately convertible to cash. Cash and cash equivalents are the most liquid assets of any business. Cash and cash equivalents are very important for the liquidity of a business. A company should have sufficient cash and cash equivalents to meet its urgent liabilities when they fall due.  

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Quote Guest, 4 November, 2013
I was hoping to learn something here but instead I'm lost as a bumble bee. I have $2 in my pocket & $2 in my other pocket & $500 thooth & a $800 shoulder & a $600 toe since I was a young lad. What is my net worth now & is it trending higher ?
Quote Guest, 9 January, 2014
do u take cash at company or group level?
Quote Vit. A., 13 January, 2014
Guest wrote:
do u take cash at company or group level?
It depents on what you are analysing: company or whole group.
Quote Guest, 6 January, 2015
Thanks, my question is What about bank overdraft ??
Quote Vit. A., 7 January, 2015
Guest wrote:
Thanks, my question is What about bank overdraft ??
Overdraft is a current liability.
Quote Guest, 17 September, 2015
Is savings deposit in closed bank part of CCE? Tnx a lot.
Quote Guest, 14 June, 2017
What if ang nakalagay lang is 'redeemable preference share' qualified pa rin ba siya as cash equivalent?
Quote Guest, 21 September, 2017
you write "The investment should be short term. They should mature in less than three months".
IAS 7 does not state "short-term" nor does it quantify that it should be "less than three months".

could you please state your sources?
Thank you.
Quote Guest, 29 July, 2019
Can treasury shares be classified as cash equivalent
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