Accountancy Part BCash Flow Statement

Which of the following will be treated as cash and cash equivalents w…

Which of the following will be treated as cash and cash equivalents while preparing Cash Flow Statement?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Current Investment

Cash equivalents are short-term, highly liquid investments readily convertible into known amounts of cash, such as marketable securities held as current investments.

Option (1) Short term borrowings — Incorrect. They are a liability; their cash flows are financing activities.

Option (3) Other Current Assets — Incorrect. Prepaid items and similar assets are not investments convertible into cash.

Option (4) Surplus i.e. Balance in statement of profit and loss — Incorrect. It is part of shareholders' funds, not an asset.

NCERT (2026-27 edition):
Cash and Cash Equivalents – “As stated earlier, cash flow statement shows inflows and outflows of cash and cash equivalents from various activities of an enterprise during a particular period. As per AS-3, ‘Cash’ comprises cash in hand and demand deposits with banks, and ‘Cash equivalents’ means short-term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. An investment normally qualifies as cash equivalents only when it has a short maturity, of say, three months or less from the date of acquisition.”

NCERT (2026-27 edition):
Cash and Cash Equivalents – “… Similarly, short-term marketable securities which can be readily converted into cash are treated as cash equivalents and is liquidable immediately without considerable change in value.”