Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value
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Cash equivalents sit alongside cash on the balance sheet and in the cash flow statement. Typical examples are money market funds, treasury bills and bank deposits with a maturity of three months or less from the date of acquisition. Equity investments and longer-term deposits are usually excluded, because their value can change by more than an insignificant amount before they are converted to cash.
Example: A UK software company holds £150,000 in its current account, £100,000 in a 30-day notice deposit and £200,000 in a 12-month fixed-term deposit. It reports £250,000 as cash and cash equivalents. The 12-month deposit is shown separately as a short-term investment, because its maturity is longer than three months.