Cash and cash equivalents include:
Accounts receivable.
Accounts payable.
Postage stamps.
Customer checks, cashier’s checks, certified checks, and money orders.
Two-year certificates of deposit.
The correct answer and explanation is :
The correct answer from the list you provided is:
Postage stamps, customer checks, cashier’s checks, certified checks, and money orders.
Explanation:
Cash and Cash Equivalents refer to assets that are highly liquid, meaning they can be easily converted into cash within a short period (usually 3 months or less). These assets are essential for a business’s day-to-day operations, helping to manage short-term liabilities and expenses. Let’s break down the items provided:
- Accounts Receivable: These are amounts owed to a company by customers for goods or services provided on credit. Although receivables can eventually be converted into cash, they are not considered cash or cash equivalents because they are not yet liquid and involve some degree of uncertainty.
- Accounts Payable: These are amounts a company owes to suppliers for goods or services received on credit. Accounts payable are liabilities, not assets, so they do not qualify as cash or cash equivalents.
- Postage Stamps: While postage stamps are considered an asset, they are not easily convertible into cash. Therefore, postage stamps are not considered cash equivalents, even though they may have value and can be used to facilitate business operations.
- Customer Checks, Cashier’s Checks, Certified Checks, and Money Orders: These are all considered cash equivalents because they are near-cash instruments that can be readily used or deposited into the bank. They are essentially treated like cash because they represent guaranteed payments and can be quickly converted to actual cash with minimal risk.
- Two-year Certificates of Deposit (CDs): A CD with a maturity period of two years is not considered a cash equivalent. Cash equivalents must be short-term, usually with maturities of three months or less. Since a two-year CD has a long maturity period, it is not easily convertible into cash without incurring a loss of interest or other penalties.
Image:
Here is an infographic that summarizes the difference between cash and cash equivalents and other assets like accounts receivable, accounts payable, postage stamps, and two-year certificates of deposit.