Cash Equivalents
A cash equivalent is a short-term investment that is readily convertible to known amounts of cash and that is subject to an insignificant risk of change in value. The main types of cash equivalents are money market funds, commercial paper, and Treasury bills.
In order to be classified as a cash equivalent, an investment must meet all of the following criteria:
1. It must be a short-term investment. This means that it must have maturities of three months or less.
2. It must be readily convertible to known amounts of cash. This means that it can easily be sold for cash without incurring any significant losses.
3. It must be subject to an insignificant risk of change in value. This means that the investment’s value will not fluctuate significantly over time.
