Cash equivalents: understand how this account works

Cash equivalents are an existing category in Accounting that concerns the resources that a company has available. In general, it can be said that cash equivalents are part of the positive balance of a business. It is also a data available amid the quarterly information released by the companies.

What are cash equivalents? Cash equivalents are highly liquid financial investments. They are readily convertible into cash amounts and subject to a minimal risk of change in value, either upwards or downwards.
This means that the present value of cash equivalents can be quickly converted into cash, if necessary. The most common type of cash equivalents is financial investments with daily liquidity. This is because it is possible to redeem the money at any time, without suffering loss of liquidity .

What is cash? Cash generating unit: what is it and how does it work? It is important to differentiate between cash and cash equivalents. Cash consists of cash and checks. These can be:

Cash equivalents standards Accounting is a systematic science. Thus, there are rules defining each of the points dealt with by it. Cash equivalents are no different. The theme is defined in Technical Pronouncement CPC 03, on the Statement of Cash Flows. The standard determines that an investment will only be considered cash equivalent if it has a maturity of up to ninety days. This is on the day of purchase, not on the date the analysis is made. In addition, investments in equity instruments, in general, cannot be considered cash equivalents. But there are exceptions for those who, in essence, fit the definition of cash equivalents.

Companies maintain this type of resource to meet short-term financial commitments. Therefore, the intention here is not to invest to earn income. It means having access to that money easily, when necessary. Accounting for cash value and cash equivalents is important for the business, as it facilitates the economic decision-making of entrepreneurs. These data are found in grade three of the company’s Chart of Accounts.

Statement of cash flows FCFF: know what Free Cash Flow is for the Firm Information about cash equity and cash flow are regularly reported to the government. The  Cash Flow Statement ( DFC ) is a mandatory accounting report for several companies. Law 11,638 / 2007 determines that publicly traded companies and companies with net worth over R $ 2 million must deliver the DFC. For companies with shares on the stock exchange, shipping is quarterly and cumulative. This means that the first will contain data for the three months of exercise. The second, six months. The third of the nine months and the last of the entire year. But, in addition to being mandatory, these data help to assess whether the company has the capacity to generate cash and cash equivalents.

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