Question

Discuss cash and cash equivalents. How important are the items that fall within this category to the successful operations of a company?

Answer 1

Cash means the dollars cash in hand at the point of time while cash equivalents are the instruments which can be readily converted into cash. It is important to have adequate cash and cash eq. to run the operations of the company. If the company do not have enough of them than company may have to be liquidated even. A company with high liquidity may suffer opportunity cost of having extra cash and cash equ. but also have advantage to sail it off during the times of low turnover or lower receivables payment. While the company with low liquidity have to look for short term loans to support their operations at higher interest costs.

Cash eq. include bank accounts, money market funds, marketable securities, and Treasury bills.