What is a fundamental distinction between cash equivalents and cash?

• A. Cash equivalents are longer-term investments.
• B. Cash equivalents are the same as cash in hand.
• C. Cash equivalents never include government securities.
• D. Cash equivalents are short-term, highly liquid investments readily convertible to known cash, maturing within three months.

Answer: (D)

Cash and cash equivalents are both highly liquid, but the distinction is that cash equivalents are short‑term investments that are readily convertible to known cash and have very small risk of changing value. They are not cash themselves, but they behave like cash for planning liquidity because they can be converted quickly and with little loss of value.

This is why the statement that cash equivalents are short-term, highly liquid investments readily convertible to known cash, maturing within three months is the best description. It captures the essential criteria: quick convertibility to cash, minimal risk, and a very short original maturity.

Other options don’t fit: investments with longer maturities aren’t cash equivalents, and cash equivalents can include short‑term government securities if they meet the three‑month threshold. Also, they’re not exactly the same as cash since they are investments.