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CA Intermediate · Advanced Accounting · AS 3 Cash Flow Statement

Kaveri Textiles Ltd, a manufacturing company, is preparing its cash flow statement under AS 3. The treasurer holds four short-term investments at the year end. Which one qualifies as a cash equivalent?

The 90-day treasury bill acquired at issue is a cash equivalent. AS 3 looks at the original maturity at acquisition, which must be three months or less. The old bond, the equity shares and the 6-month deposit do not meet this test, so they are not cash equivalents.

  1. AA one-year government bond bought three years ago that now has 2 months left to maturity
  2. BA treasury bill with an original maturity of 90 days, acquired by the company at issueCorrect
  3. CEquity shares of a listed company that the company intends to sell within one month
  4. DA fixed deposit with a bank, placed for 6 months

Explanation

AS 3 treats a short-term, highly liquid investment as a cash equivalent only if its original maturity at the date of acquisition is three months or less. The 90-day treasury bill meets this test. The bond has only 2 months left, but its original maturity was long, so it fails. Equity shares are not fixed-maturity instruments, and the 6-month deposit exceeds three months.

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