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:

For an asset to be treated as a cash equivalent, it must mature within 3 months from the date you buy it — not from the balance sheet date.

Answer 1

The Correct Option is D

Cash equivalents are short-term, highly liquid investments that are:

• Easily convertible to known amounts of cash,
• Near their maturity (i.e., 3 months or less),
• Subject to an insignificant risk of change in value,
• Held primarily for meeting short-term cash commitments rather than for investment or other purposes.

Key Condition: For an investment to be classified as a cash equivalent, it must have a maturity period of three months or less from the date of acquisition. This strict time-bound criterion ensures that the investment is not affected by interest rate changes or market volatility, and thus remains nearly as liquid and safe as cash itself. Common Examples:

• Treasury bills with original maturity ≤ 3 months,
• Commercial papers,
• Short-term government bonds,
• Bank deposits with ≤ 3 months tenure,
• Highly liquid money market funds.

Investments with maturity periods greater than 3 months, even if liquid, do not qualify as cash equivalents under this definition.