Cash and Cash Equivalent

Cash and cash equivalent is the part of the current assets and is presented on the face of the balance sheet or statement of financial position. It is considered to be the most liquid form of current assets because it is used to pay of current liabilities and meet day to day operational expenses. The excess cash is kept into the bank account.

By cash equivalent, we mean highly liquid investment which can be converted into cash in less than 03 months. Investors pay a high level of importance to the cash ratio because they want to know the liquidity situation of the entity. If the entity has higher cash ratio, it is good for the investor to believe that their investment will remain safe and secure.

Entity should keep sufficient amount of cash and cash equivalent but not in excess of the requirements. A high level of cash and cash equivalent means that the entity is more prone to takeovers because the buyer will have sufficient cash available to finance the acquisition. 

Components 

The following are the components of cash and cash equivalent:

  • Petty cash
  • Saving account balance
  • Checking account balance
  • Currency
  • Coins
  • Overdraft facility from bank
  • Pay order
  • Money market funds
  • Treasury bills
  • Bearer document such as commercial paper
  • Marketable securities.

An important tool to keep the bank balance and balance as per company's reocrd is Bank reconciliation statement.

Related Posts: Cash Book MCQS

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