There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the codes provided below-

Assertion: An investment normally qualifies as a cash equivalent only when its maturity is of 3 months or less from the date of acquisition.
Reasoning: There is significant risk of change in value in cash equivalents.

Assertion (A) is true but Reasoning (R) is not correct.

The correct answer is option 3- Assertion (A) is true but Reasoning (R) is not correct.

Assertion: An investment normally qualifies as a cash equivalent only when its maturity is of 3 months or less from the date of acquisition. THIS IS TRUE.
Reasoning: There is significant risk of change in value in cash equivalents. THIS IS FALSE as there is insignificant risk of change in value.

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.