Which statement correctly describes cash equivalents?

Which statement correctly describes cash equivalents?

• A. Long-term investments that are not cash equivalents
• B. Bank overdrafts
• C. Short-term, highly liquid investments readily convertible to known amounts of cash with insignificant risk
• D. They include accounts receivable

Answer: (C)

Cash equivalents are short-term, highly liquid investments that can be readily converted to known amounts of cash with insignificant risk of changes in value. This exact description fits the option describing short-term, highly liquid investments that are readily convertible to known cash amounts and carry little risk. Typical examples include money market instruments and treasury bills that mature quickly, usually within a few months. Bank overdrafts are not cash equivalents; they’re liabilities representing borrowing and are treated separately in financial reporting. Long-term investments aren’t cash equivalents because their liquidity horizon is longer and their value isn’t guaranteed in the near term. Accounts receivable aren’t cash equivalents either, as they arise from credit sales and depend on customers paying, so they aren’t readily convertible to cash in known amounts at once.

Cash equivalents are short-term, highly liquid investments that can be readily converted to known amounts of cash with insignificant risk of changes in value. This exact description fits the option describing short-term, highly liquid investments that are readily convertible to known cash amounts and carry little risk. Typical examples include money market instruments and treasury bills that mature quickly, usually within a few months.

Bank overdrafts are not cash equivalents; they’re liabilities representing borrowing and are treated separately in financial reporting. Long-term investments aren’t cash equivalents because their liquidity horizon is longer and their value isn’t guaranteed in the near term. Accounts receivable aren’t cash equivalents either, as they arise from credit sales and depend on customers paying, so they aren’t readily convertible to cash in known amounts at once.