Cash equivalents include :

(A) Commercial paper issue by a company
(B) Marketable Securities
(C) Demand deposit
(D) Cash in hand
(E) Investment in shares

Choose the correct answer from the options given below :

(B), (C) and (D) only

The correct answer is Option (4) - (B), (C) and (D) only.

Note: The given answer is as per NTA. However, this question contains a conceptual ambiguity as explained below:

a. The question asks specifically about “cash equivalents”. NCERT clearly distinguishes between “cash” and “cash equivalents” under AS-3.

b. According to the NCERT, “cash” includes cash in hand and demand deposits with banks. Therefore, Statement (C) “Demand deposit” and Statement (D) “Cash in hand” are technically classified as cash, not cash equivalents. 

c. On the other hand, “cash equivalents” refer to short-term, highly liquid investments that are readily convertible into known amounts of cash with insignificant risk of change in value. Hence, Statement (B) “Marketable Securities” appropriately falls under cash equivalents. 

d. Thus, strictly as per the NCERT definition, only Statement (B) clearly represents a cash equivalent, but such an option is not provided in the question. 

e. Generally, “cash and cash equivalents” are studied together in accounting, and it appears that the intention of the question was to identify items falling under the broader category of cash and cash equivalents collectively. On that basis, Option 4 has been considered as the most appropriate answer.

NCERT: According to Accounting Standard 3 (AS-3), 'Cash' encompasses physical cash on hand and demand deposits held in banks. 'Cash equivalents' refer to short-term, highly liquid investments that can be quickly converted into known amounts of cash with minimal risk of value fluctuations. Typically, an investment qualifies as a cash equivalent when it has a short maturity period, often three months or less from the acquisition date. Investments in stocks are not considered cash equivalents, unless they meet specific criteria. For instance, preference shares that are acquired shortly before their scheduled redemption date, provided there's minimal risk of the company failing to repay the amount upon maturity, can be treated as cash equivalents. Similarly, short-term marketable securities that can be readily converted into cash without significant changes in their value are also considered cash equivalents. These investments must be highly liquid and easily convertible into cash.

Why the others are not part of cash equivalents:

• (A) Commercial Paper: While often highly liquid, Commercial Paper is generally treated as a Short-term Investment or an operating/financing item depending on its maturity.

• (E) Investment in Shares: These are never considered cash equivalents. The value of shares fluctuates constantly (high risk of change in value), and there is no guarantee of a "known amount of cash" upon conversion.