Cash is a form of money that a company can use to run its business. it can be in the form of liquid cash, coins, currency can be in bank accounts, notes etc. However, there is also a concept of cash equivalents. These are assets that a company has which can be liquified easily.
In India, follow Ind-AS, which simply means Indian accounting standards. Here's how the cash and cash equivalents definition has been prescribed and defined by the accounting standards in India.
Cash on hand and demand deposits.
Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
These are a few examples of cash equivalents in India-
Cash equivalents are meant to honour short term requirements of a business. Cash equivalents are not kept for long term or investment purposes.
A cash equivalent just does not have to be convertible to cash It has to be convertible to a known amount. This means that either the price should be predetermined or the market price should be subject to many fluctuations.
Cash equivalents, since are short term in nature and there should not be many fluctuations, the instruments should be of least to insignificant risk and should be readily convertible to cash. Hence, mostly all investments that qualify as cash equivalents have a maturity of less than three months.
Equity investments are generally not included in the cash equivalents category unless in the case of preference shares which are bought in a short period from their maturity and have a specified redemption date.
Cash and cash equivalents show up in the balance sheet of a company on the asset side.
The cash and cash equivalents meaning, in its true sense, lies in the cash flow statement. This is all the information is, on a company's cash and cash equivalents.
All companies registered in India are required to prepare cash flow statements. All stakeholders will be interested in how a company uses its cash.
Cash flow statements give us a snapshot of the inflows and outflows of the cash and cash equivalents. This is regardless of what is the nature of the company. Whether it's a financial institution where cash is actually a product or a manufacturing company where cash only tenders transactional use.
Assessment of cash flows in association with other financial metrics and statements can give a good idea of the deployment of cash and the ability of the company to adjust its cash flows to adapt to changing circumstances.
It gives an idea of the liquidity that the company has at hand. It is also an indicator of how much the company is keeping its assets in cash and how much in other forms.