Question

How are cash equivalents reported or disclosed in the financial statements?

a. They are included with cash under current assets on the balance sheet.
b. They are included with short-term investments under current assets on the balance sheet.
c. They appear only on the statement of cash flows.
d. They are disclosed only in a footnote to the balance sheet.

Answer 1

Cash equivalents are highly liquid short-term investments and are reported on the balance sheet under the current assets category, combined with cash.

Step-by-step explanation:

Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Typically, the maturity for cash equivalents is 3 months or less. On the financial statements, cash and cash equivalents are reported as a line item on the balance sheet. This line item is included as part of the current assets category.

It is essential for users of financial statements to know the amount of cash and cash equivalents held by a company. Understanding its high liquidity and the role it plays in a company's asset-liability management is crucial, especially considering potential situations such as the asset-liability time mismatch. The transparency in reporting cash and cash equivalents allows stakeholders to assess the company's ability to meet short-term obligations and manage its bank capital effectively.