Which item is an example of cash and cash equivalents?

Which item is an example of cash and cash equivalents?

• A. Bank overdraft
• B. 3-month Treasury bill
• C. Equipment
• D. Inventory

Answer: (B)

Cash and cash equivalents are the most liquid assets that can be quickly converted to a known amount of cash with little risk of change in value. They include cash on hand, demand deposits, and short-term investments that are near cash in liquidity and have original maturities of three months or less. A bank overdraft isn’t an asset at all; it’s a liability that represents money owed to the bank and can affect cash, so it doesn’t count as cash or a cash equivalent. A three-month Treasury bill fits the definition nicely: it’s a short-term government security with a very near-term maturity, highly liquid, and easily convertible to cash with little risk. That quick access to cash makes it effectively the same in practice as cash equivalents. Equipment and inventory are not cash equivalents. Equipment is a long-term fixed asset used in operations, and inventory must be sold to generate cash, which takes time and introduces more risk and variability. So the item that qualifies as cash and cash equivalents is the 3-month Treasury bill.

Cash and cash equivalents are the most liquid assets that can be quickly converted to a known amount of cash with little risk of change in value. They include cash on hand, demand deposits, and short-term investments that are near cash in liquidity and have original maturities of three months or less.

A bank overdraft isn’t an asset at all; it’s a liability that represents money owed to the bank and can affect cash, so it doesn’t count as cash or a cash equivalent.

A three-month Treasury bill fits the definition nicely: it’s a short-term government security with a very near-term maturity, highly liquid, and easily convertible to cash with little risk. That quick access to cash makes it effectively the same in practice as cash equivalents.

Equipment and inventory are not cash equivalents. Equipment is a long-term fixed asset used in operations, and inventory must be sold to generate cash, which takes time and introduces more risk and variability.

So the item that qualifies as cash and cash equivalents is the 3-month Treasury bill.