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Adamson University Intermediate Accounting 1 - Cash Equivalents Prof. Judith Francisco - Luna
Adamson University Intermediate Accounting 1 - Cash Equivalents Prof. Judith Francisco - Luna
Cash equivalents are short-term, highly liquid investments that are both
a. readily convertible to known amounts of cash, and
b. so near their maturity that they present insignificant risk of changes in value because of
changes in interest rates.
Generally, only investments with original maturities of three months or less should
qualify as cash equivalents.
Original maturity means original maturity to the enterprise holding the investment,
meaning maturity from the date of acquisition by the enterprise.
Question:
Which is not a cash equivalent?
a. Three-month Central Bank treasury bill.
b. Three-year Treasury note purchased three months from maturity.
c. Treasury note purchased three years ago when its remaining maturity is three months.
d. None of the above.
Answer: C
The Treasury note purchased three years ago is not a cash equivalent even if its
remaining maturity is three months.
Original maturity means maturity from the date of acquisition by the enterprise.