Cash, Cash Equivalents, and Short-Term Investments
Highly Liquid Assets Providing Immediate or Near-Term Liquidity
Cash, Cash Equivalents, and Short-Term Investments represent the most liquid assets on the balance sheet. They include physical cash, demand deposits, highly liquid investments with original maturities of three months or less (cash equivalents), and other short-term, low-risk investments readily convertible to known amounts of cash with minimal price fluctuation risk.
Breakdown of the Category
This line aggregates three closely related items:
Cash
- Currency on hand
- Demand deposits (checking accounts)
- Petty cash
Cash Equivalents
- Treasury bills (≤3 months)
- Commercial paper (≤3 months)
- Money market funds
- Certificates of deposit (≤3 months)
Short-Term Investments
- Government securities (3-12 months)
- Corporate bonds (high quality, short maturity)
- Marketable securities intended to be sold soon
Key test for cash equivalents: readily convertible to cash with insignificant risk of value change.
A Practical Example
A company ends the year with:
- $20M in checking accounts → Cash
- $50M in 60-day Treasury bills → Cash Equivalents
- $30M in 6-month corporate bonds (AAA-rated) → Short-Term Investments
Total line: $100M. All can be turned into cash quickly if needed for payroll, suppliers, or opportunities.
Accounting Treatment
- Cash: At face value
- Cash equivalents & short-term investments: Usually at fair value (changes often immaterial)
- Interest income recognized as earned
- Restricted cash (e.g., escrow, collateral) shown separately or disclosed
- Foreign currency cash translated at spot rate
Bank overdrafts sometimes offset against cash if right of offset exists.
Balance Sheet Presentation
Top of current assets as:
- 'Cash, Cash Equivalents, and Short-Term Investments'
- 'Cash and Cash Equivalents' + separate 'Short-Term Investments'
- Often the first or second line after total current assets summary
Footnotes detail restrictions, concentrations, and major components.
Why Companies Hold These Assets
- Meet daily operating needs (payroll, suppliers)
- Safety buffer for unexpected expenses
- Earn modest return on idle cash
- Maintain liquidity ratios for covenants
- Park funds temporarily before investments/acquisitions
What to Watch For
- Absolute level and trend (growing = strong cash generation)
- Days cash on hand (cash / daily operating expenses)
- Restricted cash reducing true liquidity
- Concentration in one bank or instrument (risk)
- Comparison to short-term obligations (current ratio coverage)
Very high balances may signal lack of investment opportunities or conservative management.
Key Takeaways
Most liquid assets—cash plus near-cash investments.
Cash equivalents: ≤3 months maturity, very low risk.
Short-term investments: Slightly longer but still highly liquid.
Critical for day-to-day operations and liquidity assessment.
First line of defense against financial stress.
Growth signals strong cash flow; declines warrant scrutiny.
Cash, Cash Equivalents, and Short-Term Investments
Highly Liquid Assets Providing Immediate or Near-Term Liquidity
Cash, Cash Equivalents, and Short-Term Investments represent the most liquid assets on the balance sheet. They include physical cash, demand deposits, highly liquid investments with original maturities of three months or less (cash equivalents), and other short-term, low-risk investments readily convertible to known amounts of cash with minimal price fluctuation risk.
Table of Contents
Breakdown of the Category
This line aggregates three closely related items:
Cash
- Currency on hand
- Demand deposits (checking accounts)
- Petty cash
Cash Equivalents
- Treasury bills (≤3 months)
- Commercial paper (≤3 months)
- Money market funds
- Certificates of deposit (≤3 months)
Short-Term Investments
- Government securities (3-12 months)
- Corporate bonds (high quality, short maturity)
- Marketable securities intended to be sold soon
Key test for cash equivalents: readily convertible to cash with insignificant risk of value change.
A Practical Example
A company ends the year with:
- $20M in checking accounts → Cash
- $50M in 60-day Treasury bills → Cash Equivalents
- $30M in 6-month corporate bonds (AAA-rated) → Short-Term Investments
Total line: $100M. All can be turned into cash quickly if needed for payroll, suppliers, or opportunities.
Accounting Treatment
- Cash: At face value
- Cash equivalents & short-term investments: Usually at fair value (changes often immaterial)
- Interest income recognized as earned
- Restricted cash (e.g., escrow, collateral) shown separately or disclosed
- Foreign currency cash translated at spot rate
Bank overdrafts sometimes offset against cash if right of offset exists.
Balance Sheet Presentation
Top of current assets as:
- 'Cash, Cash Equivalents, and Short-Term Investments'
- 'Cash and Cash Equivalents' + separate 'Short-Term Investments'
- Often the first or second line after total current assets summary
Footnotes detail restrictions, concentrations, and major components.
Why Companies Hold These Assets
- Meet daily operating needs (payroll, suppliers)
- Safety buffer for unexpected expenses
- Earn modest return on idle cash
- Maintain liquidity ratios for covenants
- Park funds temporarily before investments/acquisitions
What to Watch For
- Absolute level and trend (growing = strong cash generation)
- Days cash on hand (cash / daily operating expenses)
- Restricted cash reducing true liquidity
- Concentration in one bank or instrument (risk)
- Comparison to short-term obligations (current ratio coverage)
Very high balances may signal lack of investment opportunities or conservative management.
Key Takeaways
Most liquid assets—cash plus near-cash investments.
Cash equivalents: ≤3 months maturity, very low risk.
Short-term investments: Slightly longer but still highly liquid.
Critical for day-to-day operations and liquidity assessment.
First line of defense against financial stress.
Growth signals strong cash flow; declines warrant scrutiny.
Related Terms
Apply This Knowledge
Ready to put Cash, Cash Equivalents, and Short-Term Investments into practice? Use our tools to analyze your portfolio and explore market opportunities.
This content is also available on our main website for public access.