Accountancy Part BCash Flow Statement

Which one of the following can be called cash equivalents?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Short-Term Investment

Cash equivalents are short-term, highly liquid investments readily convertible into a known amount of cash with little risk of change in value, normally maturing within three months.

Option (1) Cash in Hand — Incorrect. Cash in hand is ‘cash’ itself, not a cash equivalent.

Option (2) Cash at Bank — Incorrect. Demand deposits with banks are also part of ‘cash’.

Option (4) Short-term loans — Incorrect. Loans given are receivables, not investments readily convertible into a known amount of cash.

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.”

NCERT (2026-27 edition):
Cash Flows – “… Cash management includes the investment of excess cash in cash equivalents. Hence, purchase of marketable securities or short-term investment which constitutes cash equivalents is not considered while preparing cash flow statement.”