What does the term 'cash equivalents' refer to?

The term 'cash equivalents' refers to short-term, highly liquid investments that can be quickly converted to cash, typically within three months or less. These investments are considered as good as cash on a company's balance sheet because they are readily available for use in the business. Examples of cash equivalents include Treasury bills, commercial paper, and money market funds.

In essence, cash equivalents are vital for assessing a company's liquidity and financial health. Investors and analysts look for these items in financial statements, as they reflect the company's ability to meet short-term obligations without significant risk. Understanding this concept is fundamental for effective financial statement analysis, as it directly influences a firm's cash position and operational flexibility.