Cash equivalents are best described as which?

• A. Long-term, illiquid investments
• B. They include cash and cash equivalents only
• C. Short-term, highly liquid investments readily convertible to known amounts
• D. Non-current assets used in operations

Answer: (C)

Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash and carrying little risk of value changes. They usually have original maturities of three months or less from the date of purchase, so they can be quickly turned into cash if needed. Because of this near-cash liquidity, they’re reported with cash as current assets on the balance sheet. Examples include Treasury bills and money market funds. They aren’t long-term or illiquid investments, they aren’t just cash, and they aren’t non-current operating assets, which is why this description best fits.