Cash is money, but it's only one form of money. Businesses use a concept called cash equivalents. Briefly define cash and cash equivalents and identify the different forms of cash equivalents.

Question

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Answer 1

Cash is money that is immediately available to be spent. Cash is composed of the three forms of money that can be immediately used to make payments: currency, demand deposits, and traveler's checks. Businesses use cash equivalents which are assets that may be quickly converted to cash in a few hours or a few days and include marketable securities, commercial paper, and debt investments that mature in less than three months. Demand deposits is money held in checking and savings accounts and make up most of the non-currency cash. Marketable securities are stocks and bonds that are traded on an open market. Marketable securities represent either ownership or debt of publicly held firms and government issues debt, in the form of bonds, notes, and bills. Commercial paper and short-term debt are two forms of short-term financing. Commercial paper is notes issued by credit worthy corporations for cash. Commercial paper is issued to be paid to the bearer of the note, and thus is fully transferable. Short-term debt is expected to be collected in less than a year, but it can be sold to other investors at any time.