Question 4 (a) Based on your understanding, give two major differences between cash equivalents and short-term...
Question 4
(a) Based on your understanding, give two major differences between cash equivalents and short-term investments. [4 marks]
(b) Define temporary investments and explain briefly the conditions that a financial asset is classified as “held for trading”. [4 marks]
Homework Answers
Answer to Q.no. 4(a)
Cash equivalents include currency on had and other deposits with banks or financial institutions that are repayable on demand.
The demand deposits that posses the characteristics of depositing any additional funds into it and at the same time withdrawing without any prior intimation are also included.
Cash equivalents excluding items classified as marketable securities, including short-term, highly liquid investments that are convertible into cash which implies minimal risk of change in the values because of varied interest rates at the time of maturity.
However, investments with maturity period of three months or less will be classifies as such. Short-term investments exclusive of cash equivalents are marketable securities intended to be sold less than a year and include
- trade securities
- Available for-sale securities and
- Held-to-maturity securities
Answer to Question 4(b)
Temporary investments are those that are acquired with the intention to sell in near future. Businesses opt for these when they have short-term excess funds on which it would earn interest and dispose of as and when needed.
Conditions for classifying as held for trading
- expected to be realized in cash or sold
- items are classified as trading securities
- expected to be sold or realized within 12 months of reporting date except for assets that are used to retire a non-current liability.
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