A:

Most of the time, when an investor or analyst searches through the financial statements of a publicly traded company, he or she will run across a reference to short-term liquid assets, or cash and cash equivalents. A lot of companies explain cash positions in a couple of sentences, if not a paragraph, that is similar to the following:

Liquidity
The following summarizes our cash and cash equivalents and marketable securities:

Cash and cash equivalents: $239
Marketable securities: $154
Total: $393

This example shows that a business using short-term marketable securities classifies them as a "cash equivalent". Marketable securities generally refer to an investment in commercial paper, banker's acceptances or Treasury bills. These securities are highly liquid, and generally provide the company a bit of a return on its investment - likely just enough to keep up with inflation. If all of the company's cash equivalent reserves are tied up in cash, it will lose a little bit of spending power every year to inflation.

Investment in equity is investment in stocks, or similar securities. While these are usually recognized as being highly liquid, they have a tendency to fluctuate in value - often dramatically. Stocks are not a great investment for a cash equivalent account. Although they can be readily converted to cash, there may be a significant spread between a stock's book value and its current price. A negative spread could result in a cash crunch. (See What's the difference between book and market value?)

The essential thing to note is that a marketable security will likely only be worth significantly less than what it was purchased for if there's a spike in interest rates. Equity investments, on the other hand, have a lot more potential to drop in value and are, therefore, not considered cash equivalent investments.

For more information, see Reading The Balance Sheet, Getting To Know The Money Market and Cash-22: Is It Bad To Have Too Much Of A Good Thing?

RELATED FAQS
  1. Where do companies keep their cash?

    If you have ever looked over a company's balance sheet, you have no doubt noticed the first account under the current asset ... Read Answer >>
  2. What does the cash ratio of a company measure, and how does it affect decision making?

    Learn what the cash ratio of a company measures, and understand why its an important liquidity ratio for a company to use ... Read Answer >>
  3. What is the relationship between the cash ratio and liquidity?

    Understand the relationship between a company's cash ratio and its liquidity. Learn what the cash ratio measures and what ... Read Answer >>
  4. How do I determine cash flow investing activities for a publicly traded company?

    Learn how cash flows from investing activities are calculated, which sources and uses of cash are included in this section, ... Read Answer >>
  5. How can you use a cash flow statement to make a budget?

    Understand how a cash flow statement can be used to create a company budget. Learn the difference between a cash budget and ... Read Answer >>
Related Articles
  1. Investing

    What are Cash Equivalents?

    Cash equivalents are money market instruments.
  2. Investing

    Understanding Cash and Cash Equivalents

    Cash and cash equivalents are items that are either physical currency or liquid investments that can be immediately converted into cash.
  3. Investing

    What is the Cash Ratio?

    The cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities.
  4. Investing

    The Essentials Of Corporate Cash Flow

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
  5. Investing

    Why Cash Management Is Key To Business Success

    Businesses need to generate a healthy cash flow to survive, but not hold too much so that inventory suffers or investment opportunities are missed.
  6. Investing

    Understanding Financial Liquidity

    Understanding how this measure works in the market can help keep your finances afloat.
  7. Investing

    Understanding Cash Management

    Cash management is a broad term that applies to the collecting, managing and investing of cash.
  8. Investing

    What Is a Cash Flow Statement?

    Learn how the CFS relates to the balance sheet and income statement as a part of a company's financial reports.
  9. Investing

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
RELATED TERMS
  1. Cash And Cash Equivalents - CCE

    An item on the balance sheet that reports the value of a company's ...
  2. Cash Ratio

    The ratio of a company's total cash and cash equivalents to its ...
  3. Cash Position

    The amount of cash that a company, investment fund or bank has ...
  4. Cash

    Legal tender or coins that can be used to exchange goods, debt ...
  5. Core Liquidity

    Cash and other financial assets that banks possess that can easily ...
  6. Mutual Fund Cash Level

    The percentage of a mutual fund's total assets that are currently ...
Hot Definitions
  1. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  2. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  4. Current Account

    The difference between a nation’s savings and its investment. The current account is defined as the sum of goods and services ...
  5. Liability

    Liabilities are defined as a company's legal debts or obligations that arise during the course of business operations.
  6. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
Trading Center