Which of the following best qualifies as a "cash equivalent?"
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A. B. C. D. E.D
Only a firm's investment in U.S. treasury bills is correct because it is readily converted to cash. U.S. treasury bills have a maximum maturity of six months.
The best answer that qualifies as a "cash equivalent" is option D: A firm's investment in U.S. treasury bills.
Cash equivalents are highly liquid assets that can be easily converted into cash without a significant risk of price changes. They typically have a maturity period of three months or less from the date of purchase. Cash equivalents are considered to be almost as good as cash in terms of their ability to meet short-term obligations.
Option A, which mentions a firm's investment in "held to maturity" U.S. treasury bonds that mature in 5 years, does not qualify as a cash equivalent. The maturity period of 5 years is longer than the typical maturity period of cash equivalents, which is three months or less.
Option B states that all of the answers qualify as cash equivalents. This is incorrect because option C, which mentions a firm's equity investment in an unconsolidated subsidiary of a privately held firm, does not qualify as a cash equivalent. Equity investments represent ownership stakes in a company and are not readily convertible into cash.
Option C, a firm's equity investment in an unconsolidated subsidiary of a privately held firm, does not qualify as a cash equivalent for the reasons mentioned above.
Option D, a firm's investment in U.S. treasury bills, is the correct answer. U.S. treasury bills are short-term debt securities issued by the U.S. government with a maturity period of one year or less. They are considered to be one of the safest investments and are highly liquid, making them suitable as cash equivalents.
Therefore, the best option that qualifies as a "cash equivalent" is D: A firm's investment in U.S. treasury bills.