Question

An investment normally qualifies as cash equivalents only when it has a short maturity of or less from the date of acquisition:

• A. 12 months
• B. 3 months
• C. 6 months
• D. 9 months

Answer 1

The Correct Option is B

According to the definition provided in accounting standards, an investment qualifies as cash equivalents only if it has a short maturity of 3 months or less from the date of acquisition. This is because cash equivalents must be easily convertible into a known amount of cash and subject to an insignificant risk of changes in value.

Thus, the correct answer is (2): 3 months.

Answer 2

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and have an insignificant risk of changes in value. According to accounting standards, an investment typically qualifies as a cash equivalent when it has a maturity of three months or less from the date of acquisition. This ensures that the funds are readily available for use and can be easily converted into cash without significant risk of loss.