Question

What is cash and cash equivalents while preparing cash flow statement?

Answer 1

Dear Student,
Cash and are cash equivalents are the short-term highly liquid investments that are readily convertible into known amount of cash and which are subject to an insignificant risk of change in value. Cash equivalents are held for the purpose of meeting short term commitments rather than for investments or other purpose. For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.
In Cash Flow Statement, cash and cash equivalents means the total value of cash in hand, it includes items with a similar nature to cash. Cash flow in any entity takes place when there is an inflow or outflow of cash and cash equivalents from operating, investing and financing activities of the company.
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Regards