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CA Intermediate · Advanced Accounting · AS 3 Cash Flow Statement

Sagar Textiles Ltd is preparing its cash flow statement under AS 3. It invested surplus funds in the following on the same day: (i) a commercial paper with an original maturity of 60 days, (ii) a 5-year government bond that has only 2 months left to maturity, (iii) a 6-month fixed deposit with a bank, and (iv) equity shares of a listed company. Which of these is a cash equivalent?

The 60-day commercial paper is the cash equivalent. AS 3 looks at original maturity at acquisition, normally three months or less. The 5-year bond, the 6-month deposit and equity shares do not meet this test, so none of them is a cash equivalent.

  1. AOnly the 5-year government bond, because its remaining maturity is 2 months
  2. BThe commercial paper with original maturity of 60 daysCorrect
  3. CThe 6-month fixed deposit, because banks are safe counterparties
  4. DThe equity shares, because they can be sold quickly on the stock exchange

Explanation

AS 3 treats an investment as a cash equivalent only if it is short-term, highly liquid and has a short original maturity, normally three months or less from the date of acquisition. The 60-day commercial paper qualifies. The 5-year bond is not a cash equivalent because its original maturity is long, even though little time remains. The 6-month deposit exceeds three months. Equity shares are not cash equivalents because their value can change.

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