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:

विकल्प

• Both the Statements are false.

• Both the Statements are true.

• Statement I is false, and Statement II is true.

• Statement I is true, and Statement II is false.

Answer 1

Statement I is true, and Statement II is false.

Explanation:

Statement I is a correct definition of cash equivalents as per accounting standards, as they must be easily convertible to cash with minimal value risk. However, Statement II is false because an investment only qualifies as a cash equivalent if it has a short maturity of three months or less, not “three months or more.” The purpose of this strict time limit is to ensure the investment is liquid enough to be treated almost like actual cash.