What are cash equivalents defined as?

Cash equivalents are defined as highly liquid investments with maturities of three months or less from the date of acquisition. This definition emphasizes two key characteristics: liquidity and maturity.

Liquidity refers to how easily an asset can be converted into cash without a significant loss in value, which is crucial for cash equivalents since they are intended to be used as a readily available source of cash. The short maturity period of three months ensures that any changes in value due to interest rate fluctuations or market conditions have minimal effect, making these investments very safe and stable.

In essence, cash equivalents are instruments like treasury bills, money market funds, or commercial paper that provide safety and quick access to cash, fulfilling the needs of businesses for short-term financial management. Other options either misstate the maturity period or describe characteristics that do not align with the concept of cash equivalents.