Multiple Choice
When a stock is sold at a higher price than that for which it was purchased, it is called a:
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1. Introduction to Accounting
Types of Accounting
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following would be classified as cash equivalents on the balance sheet?
A
Inventory
B
Accounts receivable
C
Prepaid insurance
D
Treasury bills with an original maturity of 2 months
Verified step by step guidance1
Understand the definition of cash equivalents: Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and have an original maturity of three months or less from the date of purchase.
Analyze each option provided in the problem: Inventory, accounts receivable, and prepaid insurance are not considered cash equivalents because they are not highly liquid investments and cannot be readily converted to cash within three months.
Focus on the correct answer: Treasury bills with an original maturity of 2 months qualify as cash equivalents because they meet the criteria of being short-term, highly liquid, and having an original maturity of less than three months.
Relate the concept to the balance sheet: Cash equivalents are reported under the 'Cash and Cash Equivalents' section of the balance sheet, alongside cash.
Conclude by emphasizing the importance of understanding the criteria for cash equivalents to correctly classify items on the balance sheet.
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