Where are cash equivalents reported on financial statements?

• A. With cash, as part of cash and cash equivalents.
• B. On the income statement as part of revenue.
• C. In long-term investments.
• D. In prepaid expenses.

Answer: (C)

Cash equivalents are short-term, highly liquid investments that are readily convertible to a known amount of cash and have an insignificant risk of changes in value. Because they are essentially cash in the near term, they are reported with cash on the balance sheet, under current assets as part of cash and cash equivalents. They’re not carried separately as long-term investments, since they are expected to be converted to cash within a short period. They also aren’t prepaid expenses, which are payments made in advance for goods or services to be received later. Think of examples like Treasury bills, money market funds, and short-term notes with maturities of three months or less. Including cash equivalents with cash helps users assess liquidity—the ability to meet short-term obligations.