Short-term, highly liquid investments that are readily convertible to known amounts of cash with insignificant risk of value change, typically maturing within 3 months.
Cash Equivalents are investments held for meeting short-term cash commitments rather than for investment or other purposes. Under Ind AS 7 and IAS 7, they must be: (1) readily convertible to a known amount of cash, (2) subject to insignificant risk of value changes, and (3) have a short maturity of 3 months or less from date of acquisition. Common examples include treasury bills, commercial paper, money market funds, and short-term government bonds. Cash and cash equivalents together form the first line of current assets on the balance sheet and are the focus of the Cash Flow Statement.
Company's cash and cash equivalents: Bank balances: ₹25,00,000 + 90-day Treasury Bills: ₹10,00,000 + Commercial Paper (60 days to maturity): ₹5,00,000 = Total Cash & Cash Equivalents: ₹40,00,000. Note: A 6-month FD bought last month is NOT a cash equivalent because its original maturity exceeds 3 months.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
Only if their original maturity is 3 months or less from the date of acquisition. A 1-year FD is NOT a cash equivalent even if it matures next week, because its original term exceeded 3 months. However, many companies classify short-term FDs separately as 'other current assets' or 'short-term investments'.
They indicate immediate liquidity — money available to pay bills, fund operations, or seize opportunities without delay. Analysts look at the cash & cash equivalents balance relative to current liabilities to assess short-term solvency. A declining balance over multiple periods is a warning sign.
Assets that are expected to be converted to cash or consumed within one year or one operating cycle, whichever is longer.
The net amount of cash and cash equivalents moving into and out of a business during a specific period.
A periodic document issued by a bank summarizing all transactions (deposits, withdrawals, fees, interest) in an account over a specific period.
The difference between a company's current assets and current liabilities, representing the short-term liquidity available for day-to-day operations.
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