Model Question: Why cash balances don't accrue interest
Working on a 3-statement for a public stock pitch. The company has a very large cash position on its balance sheet through the forecasted period.
Assuming they have $1,000 in cash, in the form of 3mo T-bills, would I need to record a $50 interest income every year? Because yield is 5%/yr even though not specified by management? Curious bc I haven't done this in the past and wanted to know if it was done in the industry.
If you are doing 3FS model then yes you do, in fact this is the most classic source of circularity in a model.
However, most of the times, unless it's company like Apple hoarding shit ton of cash stuck in offshore account, a model may simply assume pay-out of any excess cash or the cash may be needed for operating purpose and hence will not earn interest (or a very small money market interest).
Appreciate the help, thx. When you mention circularity, are you suggesting that a mistake usually gets made in this process?
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