What are cash equivalents in accounting?

Cash equivalents in accounting refer to short-term investments that are readily convertible to cash and have insignificant risk of changes in value. This category typically includes items such as money market funds, treasury bills, and other highly liquid financial instruments that can be converted into cash within a short period, usually within three months.

These assets are critical for financial reporting because they contribute to the liquidity of an entity, indicating the availability of cash or near-cash resources to meet short-term obligations. Recognizing cash equivalents alongside cash provides a clearer picture of a company’s liquidity position.

The other options illustrate assets or investments that do not fit the definition of cash equivalents. For instance, investments with high risk and long-term maturity are not easily convertible to cash, which disqualifies them. Physical cash generated from sales pertains to actual cash rather than investments or liquid assets, and investment properties held for resale refer to real estate assets that are not classified as cash equivalents due to their inherent illiquidity and potential for value fluctuation.