Which statement correctly defines cash and cash equivalents?

Which statement correctly defines cash and cash equivalents?

• A. Cash in hand and short-term highly liquid investments with original maturities of three months or less
• B. Bank overdrafts only
• C. Cash in hand and non-current investments
• D. Cash in hand and short-term investments with original maturities greater than one year

Answer: (A)

Cash and cash equivalents are the most liquid assets a business holds: cash on hand and short-term, highly liquid investments that can be quickly turned into a fixed amount of cash with little risk of change in value. The critical point is the original maturity: three months or less from the date of acquisition. That makes these assets practically as good as cash for meeting immediate obligations. Because of this, the option that includes cash in hand plus short-term investments with original maturities of three months or less is the correct definition. Bank overdrafts are not cash assets; they’re typically treated as a liability. Non-current investments are long-term and not cash equivalents. Short-term investments with maturities longer than three months aren’t cash equivalents either, since they’re not near-term enough to be considered cash.

Cash and cash equivalents are the most liquid assets a business holds: cash on hand and short-term, highly liquid investments that can be quickly turned into a fixed amount of cash with little risk of change in value. The critical point is the original maturity: three months or less from the date of acquisition. That makes these assets practically as good as cash for meeting immediate obligations.

Because of this, the option that includes cash in hand plus short-term investments with original maturities of three months or less is the correct definition. Bank overdrafts are not cash assets; they’re typically treated as a liability. Non-current investments are long-term and not cash equivalents. Short-term investments with maturities longer than three months aren’t cash equivalents either, since they’re not near-term enough to be considered cash.