Final answer:
Cash equivalents are highly liquid investments with maturities of three months or less. They include assets like treasury bills and money market funds, expected to be converted to cash within 120 days. They are legal and recognized as part of M1, the most liquid category of financial assets.
Step-by-step explanation:
Cash equivalents are considered highly liquid investments that are so close to maturity that they present an insignificant risk of changes in value because of changes in interest rates. Typically, cash equivalents are investments with original maturities of three months or less and can include treasury bills, commercial paper, and money market funds. They are included in the most liquid category of the financial assets hierarchy, which is M1.
When considering cash equivalents:
- They earn interest and are highly liquid temporary investments.
- They are expected to be converted to cash within 120 days, not two years. This is much less than the two-year time frame that one of the choices suggests.
- Their legality is not a question; they are legal and utilized in all states.
- Since they are part of M1, cash equivalents are considered to be as liquid or nearly as liquid as cash itself.
Therefore, the correct statement regarding cash equivalents is they will be converted to cash within 120 days (d).