What are Cash and Short-Term Investments?

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:

$$\textsf{Cash and Short-Term Investments} = \textsf{Cash and Cash Equivalents} + \textsf{Short-Term Investments}$$

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.