Question

Why should companies classify cash equivalents (e.g., money market accounts, commercial paper, and treasury bills) as cash in the statement of cash flows?

Answer 1

Ans. : Reasons are as follows :

* Cash equivalents are investments that can readily be converted into cash. The investment must be short term, usually with a maximum investment duration of three months or less.

* If an investment matures in more than three months, it should be classified in the account named "other investments." Cash equivalents should be highly liquid and easily sold on the market. The buyers of these investments should be easily accessible.

* The dollar amounts of cash equivalents must be known. Therefore, all cash equivalents must have a known market price and should not be subject to price fluctuations. The value of the cash equivalents must not be expected to change significantly before redemption or maturity.

* Certificates of deposit may be considered a cash equivalent depending on the maturity date. Preferred shares of equity may be considered a cash equivalent if they are purchased shortly before the redemption date and not expected to experience material fluctuation in value.