The statement of cash flows explains the difference between beginning and ending balances of cash and cash equivalents. A cash equivalent must satisfy which of the following criteria?Multiple select question.Be backed by secured assetsBe readily convertible to a known amount of cashBe held at a local institutionBe close to maturity
Question
The statement of cash flows explains the difference between beginning and ending balances of cash and cash equivalents. A cash equivalent must satisfy which of the following criteria?Multiple select question.Be backed by secured assetsBe readily convertible to a known amount of cashBe held at a local institutionBe close to maturity
Solution
The correct criteria for a cash equivalent are:
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Be readily convertible to a known amount of cash: This means that the asset can be quickly and easily converted into a fixed amount of cash.
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Be close to maturity: Cash equivalents are typically investments that have a short-term maturity of three months or less. This ensures that they carry minimal risk of changes in value.
The options "Be backed by secured assets" and "Be held at a local institution" are not necessary criteria for a cash equivalent.
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