Which statement correctly describes cash and cash equivalents?

• A. Long-term investments are included in cash equivalents.
• B. Cash includes currency and demand deposits; cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash.
• C. Only physical currency is included in cash equivalents.
• D. Cash and cash equivalents include cash, demand deposits, and short-term investments readily convertible to known amounts of cash.

Answer: (D)

Cash and cash equivalents cover the most liquid resources a company can access. Cash includes currency on hand and demand deposits such as checking accounts, while cash equivalents are short-term, highly liquid investments that can be quickly converted to known amounts of cash with little risk of change in value, typically maturing within three months. Together, they form a single, near-cash pool reported on the balance sheet because they’re readily available for use. The best description is that cash and cash equivalents include cash, demand deposits, and short-term investments readily convertible to known amounts of cash. The other statements misstate the scope: long-term investments aren’t cash equivalents, and cash equivalents aren’t limited to physical currency.