Cash and Cash equivalents

3470 Words Nov 14th, 2013 14 Pages
Cash & Cash Equivalents

 Introduction:

Cash & cash equivalents may constitute a significant proportion of the total assets of an entity. It is the most liquid asset found within the asset category of a company 's balance sheet. It is an important criterion to evaluate the liquidity and the short term solvency of a business venture. Liquidity and short term solvency means the ability of the business to pay its short term liabilities. Inability to pay-off short term liabilities affects its credibility and credit rating. The amount of cash and cash equivalents also shows the ability of the organization to grow and seize any investment opportunity to expand inorganically.

An important feature of cash & cash equivalents which has a
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Cash equivalents are therefore,

• of short term maturities (say three months or less), and

• held for meeting short-term cash commitments (e.g. Government securities, Treasury Bills, Preference shares, etc., carrying maturity within three months from acquisition) – rather than for investments or other purposes.

Investments in shares are excluded from cash equivalents unless they are, in substance, cash equivalents; for example, preference shares of a company acquired shortly before their specified redemption date (provided there is only an insignificant risk of failure of the company to repay the amount at maturity).

There is a difference in the definition of Cash equivalents as per AS 3 Cash flow Statements and as per Revised Schedule VI.

(i) Difference:

As per AS 3 ‘Cash Flow Statements’, deposits with original maturity of three months or less only should be classified as cash equivalents. Further, balances with banks to the extent held as margin money or security against the borrowings, guarantees, other commitments are neither in the nature of demand deposits nor readily available for use by the company and accordingly, do not meet the definition of cash equivalents.

(ii) Resolution of the above difference as per the Exposure Draft on Guidance Note to the
Revised Schedule VI to the Companies Act, 1956:

The requirements of the Accounting Standards would prevail over the

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