What Are Cash-Like Transactions and What Do They Include?

“Cash-like transactions” refer to financial instruments often known as “cash equivalents.” These tools are highly liquid and easily convertible into cash, allowing individuals and businesses to maintain readily available funds while potentially earning a return.

Defining Cash-Like Transactions

Cash-like transactions, or cash equivalents, are financial assets that function much like physical currency. They are highly liquid investments, quickly convertible into a known amount of cash. A defining characteristic is their insignificant risk of changes in value, often due to their short maturity periods.

The Financial Accounting Standards Board (FASB) defines cash equivalents as short-term, highly liquid investments readily convertible to known amounts of cash. They must also be so near their maturity that they present insignificant risk of changes in value because of interest rate fluctuations. This definition helps ensure consistency in financial reporting, highlighting assets accessible without delay or substantial loss. Businesses often hold cash equivalents to meet immediate financial obligations or take advantage of fleeting opportunities.

Common Instruments Considered Cash-Like

Several financial instruments are recognized as cash-like. Money market accounts (MMAs), offered by banks and credit unions, provide interest-bearing deposit accounts with features like check-writing and debit card access. MMAs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, offering security similar to traditional savings accounts.

Short-term government bonds, such as Treasury bills (T-bills), are another cash-like instrument. These debt securities are issued by the U.S. government with maturities typically ranging from a few days to one year. T-bills are low-risk and highly liquid.

Commercial paper, representing unsecured, short-term debt obligations, is issued by large corporations and financial institutions. These instruments generally have maturities up to 270 days and are used to manage short-term liabilities. Certificates of deposit (CDs) with very short maturities, typically three months or less from acquisition, are also treated as cash equivalents. CDs with short original maturities allow for quick conversion without significant penalty.

Characteristics That Make Transactions Cash-Like

The classification of a financial instrument as cash-like hinges on several attributes.

A primary characteristic is high liquidity, meaning the instrument can be readily converted into cash without significant loss of value. This allows for quick access to funds. The presence of an active and deep market facilitates this rapid conversion.

Another defining feature is a short maturity period. For an investment to qualify as cash-like, it must have an original maturity of three months or less from acquisition. This short timeframe minimizes exposure to interest rate fluctuations that could otherwise impact the instrument’s market value. Investments with longer maturities, even if liquid, typically do not meet this criterion.

Cash-like transactions also present an insignificant risk of changes in value. This stability ensures the amount of cash expected upon conversion is reliably known. The minimal risk profile distinguishes these instruments from other short-term investments that might be subject to greater market volatility.