Question

in summation of your discussion, the components of the statement of cash flows show how management is spending cash. Interpreting the statement of cash flows includes examining fundamental relationships such as cash-generating efficiency and free cash flow. Cash-generating efficiency, which focuses on net cash flows from operating activities, and it is the ability of a company to generate cash from operations.

According to Brigham and Erhardt (2016), the statement of cash flows shows the effect on cash and cash equivalents of the operating, investing, and financing activities of a company for an accounting period. Cash equivalents are short-term, highly liquid investments such as money market accounts, commercial paper (short-term notes), and U.S. Treasury bills.

The cash flow statement of a business is often misunderstood and confused with the income statement or the profit and loss statement. A cash flow statement illustrates the actual flow of money through the company and how much cash is available to pay expenses each month. It may be more descriptively called a report of sources and uses of cash. Why are short-term investments (such as marketable securities) not considered cash equivalents in your opinion?

Answer 1

Well , in my opinion ,

Short Term investments on the Balance Sheet are securities which can be easily converted into cash in the next three to twelve months. These are also known as marketable securities, it can be debt security or equity investment.

However, Cash equivalents include bank accounts and marketable securities, which are debt securities with maturities of less than 90 days.

A business typically stores a large part of its excess funds in short-term investments so that it can earn a small return while still being able to access the funds for its operating needs on short notice, however in cash equivalent marketable securities can be converted into cash as & when required.

In short term investment, we get interest on the investment made, however in cash equivalent we convert them in cash as when we needs cash.

Short term investment is shown under current asset at the balance sheet, however cash equivalent is shown under cash & cash equivalent, also in cash flow statement.