Question

Statement-I: Cash equivalents mean short term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

Statement-II: An investment normally qualifies as a cash equivalent only when it has a short maturity period of three months or more from the date of acquisition.

Choose the correct alternative from the following:

• A. Both the Statements are false.
• B. Both the Statements are true.
• C. Statement I is false and Statement II is true.
• D. Statement I is true and Statement II is false.

Hint:

A cash equivalent matures in three months or less, not more.

Answer 1

The Correct Option is D

Step 1: Understand the question:
Two statements about cash equivalents are given. We must test each.

Step 2: Check Statement I:
Cash equivalents are short-term, highly liquid investments. They are readily convertible into known amounts of cash and carry an insignificant risk of change in value.
This is the exact definition in AS 3. Statement I is TRUE.

Step 3: Check Statement II:
An investment qualifies as a cash equivalent only if its maturity is short. The period is three months or less from the date of acquisition.
The statement says three months or more. That would include long-term investments, which are not cash equivalents. Statement II is FALSE.

Step 4: Pick the option:
Statement I true and Statement II false. This is option (D).
Option (A) is wrong because Statement I is true. Option (B) is wrong because Statement II is false. Option (C) is wrong because it reverses the truth values.

Final Answer:
Statement I is true and Statement II is false. Option (D).