Question

Short-term highly liquid investments qualify as cash equivalents if they are realisable into known amounts of cash from the date of acquisition within a period of :

• A. 6 months or less
• B. 9 months or less
• C. 12 months or less
• D. 3 months or less

Hint:

The key criteria for cash equivalents are: 1. Short-term (maturity of 3 months or less from acquisition date). 2. Highly liquid. 3. Readily convertible into a known amount of cash. 4. Subject to insignificant risk of change in value. Examples include treasury bills, commercial paper, and money market funds meeting these criteria.

Answer 1

The Correct Option is D

To solve the problem, we need to identify the correct period for which short-term highly liquid investments qualify as cash equivalents based on the conditions given in the question.

1. Understanding the Condition:
Short-term highly liquid investments qualify as cash equivalents if they are readily convertible into known amounts of cash and have an insignificant risk of changes in value. Additionally, these investments should be acquired within a specific period from the date of acquisition.

2. Correct Option:
According to the guidelines for cash equivalents, the correct period within which these investments qualify is 3 months or less. This ensures that these investments are close enough to cash to be considered part of the company’s liquidity.

3. Analyzing the Options:

• (A) 6 months or less: Incorrect, as cash equivalents must have a shorter maturity period.
• (B) 9 months or less: Incorrect, the period should be shorter for cash equivalents.
• (C) 12 months or less: Incorrect, this period is too long for an item to qualify as a cash equivalent.
• (D) 3 months or less: Correct, investments must be converted into cash within 3 months to be considered cash equivalents.

Final Answer:
Correct Option: (D) 3 months or less