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Accounting Allah Shmoop What is cash baby Don't hurt me

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Don't hurt me If you look at the balance sheet

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you will notice that the top left first most important

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item is what Yes cash It's such an important item

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that company's classify it in a few different ways Well

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there's just basic vanilla cash which might be the bookkeeper's

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assessment of how many twenties tens and fives they're sitting

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there in the cigar box Cash might also be the

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sum total of cash that lives that moment in the

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combined bank accounts at Bank of America and Wells Fargo

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and Sometimes Cos Prison a kissing cousin of cash called

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cash equivalents Well what on Earth is a cash equivalent

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Well cos often don't need the cash they have on

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the books toe simply be deployed in company operations like

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they have excess cash At one point Apple had over

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one hundred billion dollars of cash sitting in its various

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bank accounts all around the world It didn't need that

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cash to continue stamping out iPhones and selling copies of

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you know nineteen seventies hippie music So Apple simply left

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its cash in a savings account at Bank of America

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and it earned very small interests and part of the

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reason that you get very small interest rates in a

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savings account or a checking account is that the cache

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is immediately available any time you want And it has

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to be that way from the bank or well bad

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things happen to the bank right The company could in

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theory demand that BankAmerica immediately wire back to the corporation

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all of the cash within a day or a week

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or a month at most And in return for that

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privilege the bank pays very little interest rate to the

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people depositing cash in its coffers there or set another

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way in return for having such extreme liquidity Apple receives

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only a few basis points and interest for the privilege

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of that kind of checking account Yeah but since Apple

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really doesn't need the cash today and may never need

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it the company is likely oh so comfy locking it

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up for a year or three or five or ten

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and us getting a meaningful E higher interest rate return

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note the difference of just one percent on one hundred

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billion dollars Yeah it's a billion dollars a year for

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doing nothing Yeah not bad as your cynical right eyebrow

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now raises into a gentle triangle We know that extreme

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liquidity in cash means that there is extreme attraction for

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criminals both petty and pro who want to abscond with

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your hard earned dough when there exist large bank accounts

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in large corporations There also exists large controls so that

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layers of high friction bureaucracy or placed in a moat

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protecting the cash in a castle you worked so hard

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to build So how do companies keep their cash While

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there are a few options by a really large CERT

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a mattress and just stuff it full of twenties and

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hundreds while upping your fire insurance coverage that's one way

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to keep cash You could also stick all the money

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and either a checking or savings account and a normal

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bank The difference being that a checking account usually offers

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more liquidity like is available within a few days or

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a week A lower hold time for the cash in

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the bank and check writing privileges And usually you get

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a little pink piggy bank for your privileges Stick quarters

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in there Okay How else can you keep cash while

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you could buy a CD or a certificate of deposit

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Their very safe investments backed by the U S Government's

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ability to tax it Citizens meaning very safe hold times

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are usually between six months and five years or so

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so CDs or a bit less liquid than say a

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bank savings account But in a pinch any corporation could

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sell it CD for a very slight discount to a

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market or Parr and get cash shortly thereafter is a

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very liquid very safe The alternative is to buy into

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a money market fund which is usually a combo of

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CDs meaning an M M F is a collection of

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short term debt obligations like CDs But it also includes

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corporate bonds that air soon maturing and safe and secure

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And it includes other debt obligations that are safe and

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secure in liquid would within a short period of time

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And why would you do a money market fund instead

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of savings account in a bank Well you might make

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another third of a percent of interest and that is

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cash What is it good for Absolutely everything

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