Question

What are the general criteria for an asset to be classified as a cash equivalent?

Apple Inc. 2016 (chapter 4, problem 1FF)

Answer 1

Cash equivalents are those assets which can be easily and readily converted into cash. They may be commercial paper, treasury bills or money market securities. These money market securities shall have a maximum investment duration of 90 days.

To qualify as a cash equivalent, the asset must be very much liquid and should be easy to sell it off in the market. Hence there must be readily available buyers at any given point of the time.

All cash equivalents will have a market price and mustn't be exposed to price variations as much ie., market prices must not have any significant fluctuations before its redemption or maturity. There must be nothing or minimum impact of changes in interest rates over the market value of the cash equivalents.