Cash and Short-Term Investments include both cash on hand, cash at bank, and liquid securities—such as treasury bills, commercial paper, and money market instruments—with original maturities of twelve months or less. They represent the total pool of assets a company can quickly convert to cash without significant loss of value.
Why are Cash and Short-Term Investments Important?
This combined metric is important because it:
Shows Total Liquidity: Provides a complete view of funds available for operations, capital expenditures, or unexpected needs.
Indicates Financial Flexibility: A strong balance of cash and short-term securities signals the ability to weather downturns and fund strategic initiatives.
Affects Creditworthiness: Creditors and rating agencies assess this metric to determine a company’s capacity to meet short-term obligations.
How are Cash and Short-Term Investments Calculated?
On the balance sheet, Cash and Short-Term Investments are the sum of cash accounts and marketable securities maturing within one year:
Cash and Short-Term Investments = Cash and Cash Equivalents + Short-Term Investments
Where:
Cash and Cash Equivalents include cash on hand, demand deposits, and investments with maturities ≤ 3 months.
Short-Term Investments include marketable securities with maturities > 3 months but ≤ 12 months.
Additional Considerations
Classification: Ensure proper grouping between cash equivalents (≤ 3 months) and short-term investments (3–12 months) as per accounting standards.
Fair Value Measurement: Short-term investments are generally reported at fair value, with unrealized gains or losses affecting comprehensive income.
Cash Flow Implications: Review the cash flow statement to see how operating, investing, and financing activities impact this combined balance.