Definition of cash


Definition of cash

In order to prepare a cash flow statement in accordance with IFRS, it is necessary to understand how the term "cash" is defined. The term will include cash in hand and cash on deposit with a bank or other financial institution. However, it will also include "cash equivalents" which are short-term liquid investments. "Cash equivalents are investments which can be converted into cash without notice and which are within three months of maturity when acquired. Short-term advances from banks, which are repayable within three months of the date of advance, must be deducted from the total cash and cash equivalents in order to derive the net cash balance.

This rather broad definition of cash has been used because it was felt that it would provide a clearer picture of how cash is managed during the period. If a narrow definition of cash is used, the true liquidity position of the business could be obscured. For example, a business may have a relatively small amount of cash in hand or in the bank at any given time. However, this may be due to the fact that any spare cash available is channeled into short-term investments in order to generate additional revenues for the business.

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