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Cash is nothing but any form of money. To run any business successfully, you must have a regular flow of cash, and so companies often have liquefiable assets which can be readily converted to cash. These are called Cash Equivalents.
Common examples of cash equivalents include commercial paper, treasury bills, short term government bonds, marketable securities, and money market holdings. An item should satisfy the following criteria to qualify for cash equivalent.
Exceptions can exist for short-term debt instruments such as Treasury-bills if they're being used as collateral for an outstanding loan or line of credit. Restricted T-bills must be reported separately. In other words, there can be no restrictions on converting any of the securities listed as cash and cash equivalents.
Inventory that a company has in stock is not considered a cash equivalent because it might not be readily converted to cash. Also, the value of inventory is not guaranteed, meaning there's no certainty in the amount that'll be received for liquidating the inventory.
Cash and cash equivalents information is sometimes used by analysts in comparison to a company's current liabilities to estimate its ability to pay its bills in the short term. However, such an analysis may be flawed if there are receivables that can be readily converted into cash within a few days.
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