Question

Short-term highly liquid investments qualify as cash equivalents if they are realisable into known amounts of cash from the date of acquisition within a period of :

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

Hint:

The key criteria for cash equivalents are: 1. Short-term (maturity of 3 months or less from acquisition date). 2. Highly liquid. 3. Readily convertible into a known amount of cash. 4. Subject to insignificant risk of change in value. Examples include treasury bills, commercial paper, and money market funds meeting these criteria.

Answer 1

The Correct Option is D

Step 1: Recall the Definition of Cash Equivalents (AS-3/Ind AS-7):
Cash equivalents are defined as 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.
Step 2: Identify the Time Criterion:
Accounting Standard 3 (AS-3) on Cash Flow Statements (and similarly Ind AS-7) specifies that for an investment to qualify as a cash equivalent, it must be short-term, typically meaning it has a maturity of *three months or less* from the date of acquisition.
Step 3: Select the Correct Option:
Based on the definition, the period within which such investments should be convertible into cash from the date of acquisition is 3 months or less.
Conclusion:
Short-term highly liquid investments qualify as cash equivalents if realisable within 3 months or less from the date of acquisition.