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.

Examples of Cash Equivalents

1. Treasury Bills.
2. Central Bank certificates of indebtedness.
3. SEC registered commercial papers.
Not all investments that qualify are required to be treated as cash equivalents. An
enterprise shall establish a policy concerning which short term, highly liquid investments that
satisfy the definition are treated as cash equivalents.
For instance, an enterprise whose operations consists largely of investing in short term,
highly liquid investments might decide that all these items will be treated as investments rather
than cash equivalents.
A change in such policy is a change in accounting principle that shall be effected by
restating financial statements for earlier years presented for comparative purposes.

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.