when reported on financial statements investments in these types of liquid accounts are often combined with cash and represent a company s total holding of money and liquid investments 
types of cash equivalentstreasury bills are commonly referred to as t bills these are securities issued by the united states department of the treasury that mature in one year or less companies financial institutions and individuals who buy t bills lend the government money which the government pays back upon maturity t bills are sold at a discount and redeemed at face value the minimum purchase amount is 100 while the maximum is 10 million for a non competitive bid or 35 of the offering amount for a competitive bid 1 the yield of t bills is the difference between the purchase price and the value at redemption commercial paper is short term less than a year unsecured debt used by big companies to raise funds to meet short term liabilities such as payroll corporations issue commercial paper at a discount from face value and promise to pay the full face value on the maturity date designated on the note maturities range from one to 270 days marketable securities are financial assets and instruments that can easily be converted into cash and are therefore very liquid they are traded on public exchanges and there is usually a strong secondary market for them marketable securities can have maturities of one year or less and the rates at which these may be traded has a minimal effect on prices examples of marketable securities include t bills cds bankers acceptances commercial paper stocks bonds and exchange traded funds etfs money market funds are mutual funds that invest only in cash and cash equivalents they are very liquid investments with excellent credit quality money market funds are an efficient and effective tool that companies and organizations use to manage their money since they tend to be more stable compared to other types of funds such as mutual funds a money market fund s share price is always 1 per share money market funds invest in cash equivalents short term government bonds are considered by some to be cash equivalents because they are very liquid actively traded securities they are issued by a government to fund government projects investors should be sure to consider political risks interest rate risks and inflation when investing in government bonds a certificate of deposit is a type of savings account with a financial institution it represents a certain amount of a saver s capital that can t be accessed by the saver for a specific period of time in return for the use of their capital the financial institution pays savers a fixed rate of interest savers can choose from cd terms ranging from one month to five years a cd is considered a very safe investment and is insured up to 250 000 when purchased at a federally insured bank should the saver need their money they may be able to break the cd contract by paying a fee or interest penalty a banker s acceptance is a form of payment that is guaranteed by a bank rather than an individual account holder because the bank guarantees payments this short term issuance by a bank is considered to be cash bankers acceptances are frequently used to facilitate transactions where there is little risk for either party some current assets though short term aren t considered to be cash equivalents if they re prohibited from being converted to cash or if they can t readily be turned into cash such assets include features of cash equivalentsdifferent types of cash equivalents usually have the same characteristics those characteristics include as of sep 30 2022 berkshire hathaway had 28 869 000 000 in cash and cash equivalents 2uses of cash equivalentsthere are several important reasons why a company should store some of its capital in cash equivalents cash equivalents are part of the company s net working capital current assets minus current liabilities which it uses to pay invoices for operating expenses buy inventory cover debt servicing and make other purchases like people companies should maintain enough easily accessible cash to handle unexpected costs that might arise for instance when business is slow or the economy stumbles investing in cash equivalents gives companies the security of cash when they need it and earns them a return the interest earned is usually higher than that earned from a basic bank account and provides some protection against inflation companies may intentionally carry higher balances of cash equivalents so they can capitalize on business opportunities when they arise instead of locking capital into a long term illiquid and maybe volatile investment a company can choose to invest added cash in cash equivalents in the event it needs funds quickly some lenders may require that in return for a loan a company maintain a designated amount of liquid cash equivalents this financial restriction is intended to protect the lender s financial interest should business slow it can also result in better loan terms due to less risk for the company that agrees to it moreover a company can benefit from the discipline of saving via cash equivalents advantages and disadvantages of cash equivalentswhile investing in cash equivalents has its benefits they also come with several downsides earns higher rate compared to cash in many savings accounts