Final answer:
To be classified as a cash equivalent, an item must be readily convertible to a known amount of cash, have a close maturity that presents insignificant risk of value changes due to interest rates, and typically have an original maturity of three months or less. Therefore, the statement is false.
Step-by-step explanation:
The statement that an item must only be readily convertible to a liquid asset to be classified as a cash equivalent is false. Cash equivalents are not solely defined by their liquidity. In order for an item to be considered a cash equivalent, it must meet several criteria: it must be readily convertible to a known amount of cash, and it needs to be so close to its maturity that it presents an insignificant risk of changes in value due to changes in interest rates. Typically, only investments with an original maturity of three months or less qualify as cash equivalents. Examples include Treasury bills, money market funds, and commercial paper.
Liquidity is an essential aspect of cash and cash equivalents. It refers to how quickly you can use a financial asset to buy a good or service. Cash is the most liquid form, while other assets like checks or savings accounts may have lesser degrees of liquidity based on how readily you can convert them for use. Hence, liquidity, maturity, and low risk are pivotal in determining whether an asset is a cash equivalent or not.