Which of the following are cash and cash equivalents for the company while preparing the cash flow statement?

Cash Credit

The correct answer is option 3- Cash Credit.

Cash Credit is a 'cash and cash equivalents' for the company while preparing the cash flow statement. as it is for a very short period basically less than 3 months.

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. Investments in shares are excluded from cash equivalents unless they are in substantial cash equivalents. For example, preference shares of a company acquired shortly before their specific redemption date, provided there is only insignificant risk of failure of the company to repay the amount at maturity. 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.

OTHER OPTIONS-

* Sales of goods on credit- This is a non cash expense but make an increase in current asset (debtors).

* Cash sales- This is an operating activity as sale of goods is a routine core revenue generating activity as cash comes to the company.

* Purchase of machinery in cash- This is an investing activity as long term asset is purchased by company to increase the earning capacity.