Chapter 9, Problem 9.1Q

To determine

The meaning of cash equivalents.

Answer to Problem 9.1Q

Cash equivalents are the negotiable instruments that can be converted into cash within an operating cycle of the company.

Explanation of Solution

Cash:

Cash is monetary value readily available for spending for the purpose of exchange of goods and services. Cash can be in the form of currency notes, amount deposited in the bank account, bank cheques.

Cash Equivalents:

• Cash equivalent are the negotiable instruments that can be converted into cash within a short period of time
•  Examples of cash equivalents are bills receivable, commercial paper, certificate of deposits.
• Generally cash equivalents are investments made for the purpose of earning interest out of the unused cash.
• Use of cash equivalents indicates that a company is financially sound.

Conclusion

Cash equivalents are the negotiable instruments that are substitutes for cash.