Cash Equivalent | Cash flow | Cash flow statement | Meaning
Every company needs adequate cash in hand since no business can run successfully without to adequate cash in hand. The cash plays an important role in the effective functioning of any business organization. What the blood does in the human body, cash does the same in the business body. Hence, it is the responsibility of finance manager of the company to maintain adequate cash in hand at any time.
In this direction, the management is interested to know as how much cash inflow has taken place and from what sources during a particular period as well as how much cash out flow has taken place through preparing a statement i.e. Cash Flow Statement. It is otherwise called as Statement of Accounting for Variations in Cash.
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Meaning of Cash Equivalent
Cash equivalent means a short term highly liquid investments which are readily convertible into known amounts of cash. It is subjected to an insignificant risk of changes in value. Here, short term refers to three months or less than three months from the date of acquisition of investments for conversion into cash.
Some times equity shares are bought and sold within three months. If so, investments made in such shares is treated as cash equivalents. Likewise, redeemable preference shares were bought and their redemption period falls within three months. If so, these type of investments i.e. preference shares is treated as cash equivalent. The reason is that there is only an insignificant risk of failure on the part of the company to repay the amount at maturity.
Meaning of Cash Flow Statement
Cash flow statement is providing a detailed information relating to different sources of cash inflows and the different uses or application of cash i.e. cash outflows for a particular period.
Definition of Cash Flow Statement
T.S.Reddy and Y.Hari Prasad Reddy,
“Cash flow statement is a statement which portrays the changes in the cash position between two accounting periods”.
A detailed study of cash flow statement helps the management to increase or accelerate the sources of cash inflow and discover the new sources of cash flows. Likewise, an in-depth analysis of the different uses or application of cash can help the management to slow down or reduce the cash outflow.
In this way, cash flow statement helps the management to take the quality decisions for solving short term finance problems and also in the preparation of cash budget for the next period.
