Where do companies keep their cash?

By Matt Lee AAA
A:

If you have ever looked over a company's balance sheet, you have no doubt noticed the first account under the current asset section is cash and cash equivalents. The cash account contains, as the name suggests, all of the company's cash, while the cash equivalents account represents highly liquid investments the company can convert to cash within a few days. The cash that is listed as such on the company's books will be stored in a bank account, or equivalent financial institution, where the company can pay its liabilities and expenses.

The company may also keep a small amount of cash in its office for smaller office-related expenses. This is called petty cash, and this would also be recorded in the cash account on the balance sheet.

The cash equivalents that a company carries on its books are short-term investments that are highly liquid, and are considered to be just like cash because they can be quickly converted into cash at a fair price. This means that the cash equivalents account contains all very short-term investments that can be sold at a reasonable price and within a few days. So, if a company wants to use some of its cash equivalents to pay some of its bills, it could just sell some of its cash equivalents and use the proceeds to do this. Examples of cash equivalents include money market accounts and Treasury bills (T-bills).

A money market account is very similar to a bank account, but the interest that a company can earn on this account is slightly higher. There may be some restrictions imposed on the firm for using a money market account, such as a maximum number of transactions within the account during a specified period, or even minimum deposit requirements. Treasury bills can also provide the company with another alternative to a regular bank account. T-bills are government debt issues that are sold at periodic intervals and can be resold within a public market at any time by the company, which is why they are classified as cash equivalents.

To learn more about understanding the financial statements, read Introduction To Fundamental Analysis.

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