Which of the following pertaining to cash equivalents is false?
Cash equivalents are a crucial component of a company’s financial health, representing highly liquid assets that can be readily converted into cash. Understanding the characteristics and classification of cash equivalents is essential for investors, analysts, and financial professionals. However, amidst the various statements about cash equivalents, one may be false. Let’s explore the options to determine which one it is.
Option A: Cash equivalents include money market funds, Treasury bills, and certificates of deposit.
Option B: Cash equivalents must be readily convertible into cash within 90 days or less.
Option C: Cash equivalents are included in the current assets section of a company’s balance sheet.
Option D: Cash equivalents are not subject to any risk of loss.
Option E: Cash equivalents are used to measure a company’s liquidity.
Now, let’s analyze each option to determine which one is false.
Option A is true, as money market funds, Treasury bills, and certificates of deposit are commonly considered cash equivalents. These instruments are highly liquid and have a maturity of three months or less.
Option B is also true. Cash equivalents are required to be readily convertible into cash within 90 days or less to be classified as such. This criterion ensures that these assets can be accessed quickly when needed.
Option C is true as well. Cash equivalents are typically included in the current assets section of a company’s balance sheet, as they are expected to be converted into cash within a short period.
Option D, however, is false. While cash equivalents are considered to be low-risk investments, they are not entirely free from risk. For instance, fluctuations in interest rates can affect the value of money market funds, and there is always a slight risk of default, although it is minimal.
Option E is true. Cash equivalents are a measure of a company’s liquidity, as they indicate the availability of cash and cash-like assets to meet short-term obligations.
In conclusion, the false statement among the given options is Option D: Cash equivalents are not subject to any risk of loss. While they are considered low-risk investments, they are not entirely free from risk.
