Which item is defined as cash or items that act like cash that a business holds?

Which item is defined as cash or items that act like cash that a business holds?

• A. Accounts payable
• B. Marketable securities
• C. Cash and equivalents
• D. Inventory

Answer: (C)

Cash and cash equivalents include cash on hand and assets that function like cash because they can be quickly converted to a known amount of cash with little or no risk of loss. This covers cash in hand and in bank accounts, plus short-term, highly liquid investments with maturities of three months or less from the date of purchase, such as certain Treasury bills or money market instruments. These are the most liquid assets a business holds to meet immediate obligations, so they’re classified together as cash and equivalents. Accounts payable is a liability, not an asset. Inventory is a current asset but not cash; it must be sold or converted to cash, which takes time. Marketable securities are investments; they can be cash equivalents only if they are extremely liquid with very short maturities—otherwise they’re classified separately as investments.

Cash and cash equivalents include cash on hand and assets that function like cash because they can be quickly converted to a known amount of cash with little or no risk of loss. This covers cash in hand and in bank accounts, plus short-term, highly liquid investments with maturities of three months or less from the date of purchase, such as certain Treasury bills or money market instruments. These are the most liquid assets a business holds to meet immediate obligations, so they’re classified together as cash and equivalents.

Accounts payable is a liability, not an asset. Inventory is a current asset but not cash; it must be sold or converted to cash, which takes time. Marketable securities are investments; they can be cash equivalents only if they are extremely liquid with very short maturities—otherwise they’re classified separately as investments.