Intermediate Financial Reporting 1 Practice Exam

Cash refers to the most liquid funds a company can use right away to settle obligations. It includes currency and coins on hand and amounts in bank accounts that can be withdrawn on demand, such as checking or savings account balances. In practice, it also covers cash equivalents—short-term, highly liquid investments that can be quickly converted to known amounts of cash with little risk of loss. Because these near-cash items function like cash in terms of liquidity, they are reported together as cash and cash equivalents on the balance sheet. That’s why the best answer includes both cash and cash equivalents. The other options pick out only part of what qualifies as cash and cash-like assets: cash on hand misses on-demand deposits, bank deposits alone misses cash on hand, and cash equivalents alone misses actual cash.