Cash equivalents are highly liquid short-term investments that are readily convertible into known amounts of cash and have a very short maturity period, typically three months or less from the date of acquisition. They are considered to be highly secure and easily marketable, allowing companies to maintain liquidity and meet short-term cash needs.
The technical definition of cash equivalents as per Schedule III of the Companies Act, 2013 (India) refers to “cash equivalents” in the context of the preparation of financial statements. Schedule III provides a format for the presentation of financial statements for companies in India.
As per Schedule III, “cash equivalents” include:
Short-term Investments: Investments that are readily convertible into known amounts of cash and have an original maturity period of three months or less from the date of acquisition.
Examples of Cash Equivalents (as per Schedule III):
Treasury Bills: Short-term government securities with a maturity of three months or less.
Commercial Paper: Short-term unsecured promissory notes issued by corporations.
Bank Deposits: Time deposits with a maturity of three months or less.
Money Market Funds: Mutual funds that invest in short-term, high-quality securities.
Certificates of Deposit (CDs): Time deposits issued by banks with a specified maturity date.
Marketable Securities: Highly liquid investments in equity or debt securities with short-term maturities.
Liquid Mutual Funds: Mutual funds that invest in highly liquid and low-risk securities.
