Cash and Cash Equivalents

What are cash equivalents?

Cash equivalents are short-term, highly liquid investments that are easily convertible to known amounts of cash.

Examples of cash equivalents?

Examples include treasury bills, commercial paper, and money market funds.

Why are cash and cash equivalents important?

They provide liquidity for a company, allowing it to meet short-term obligations.

What is the primary purpose of cash management?

To ensure that a company has enough cash available to meet its liabilities and operational needs.

How is cash measured on a balance sheet?

Cash is measured as the amount of currency on hand or readily available in bank accounts.

What accounts are typically included in cash equivalents?

Accounts typically include checking accounts, savings accounts, and petty cash.

What is the difference between cash and cash equivalents?

Cash refers to physical currency, while cash equivalents refer to short-term investments that can be quickly converted to cash.

What are the risks associated with cash equivalents?

Risks include interest rate risk and credit risk, as these investments can fluctuate in value.

How do cash equivalents affect cash flow?

They provide immediate liquidity, which can influence a company’s cash flow statement.

What are bank overdrafts?

Bank overdrafts occur when withdrawals from a bank account exceed the available balance.

Can bank overdrafts be classified as cash equivalents?

Yes, bank overdrafts can be classified as cash equivalents if they are payable on demand.

What is the role of cash in financial management?

Cash serves as a buffer for emergencies and allows for strategic opportunities, like investments.

How do companies determine their cash needs?

Companies analyze historical data, forecasts, and market conditions to determine their cash needs.

What is the cash conversion cycle?

The cash conversion cycle is the time taken to convert inventory and accounts receivable into cash.

How do fluctuations in interest rates affect cash equivalents?

Fluctuations can impact the returns on cash equivalents like treasury bills or money market accounts.

What is the role of liquidity in cash management?

Liquidity is crucial for ensuring a company can cover its short-term liabilities without financial strain.

How often should businesses review their cash flow?

Businesses should regularly review their cash flow, ideally monthly, to ensure financial health.

How can a company improve its cash position?

A company can improve its cash position by managing receivables, reducing expenses, and optimizing inventory.

What financial statements reflect cash and cash equivalents?

The balance sheet and the cash flow statement reflect cash and cash equivalents.

What are some strategies for managing cash flow effectively?

Strategies include maintaining cash reserves, monitoring cash inflows and outflows, and forecasting.