## Cash and Cash Equivalents (AS 3)

### What Counts as Cash or Cash Equivalent?

Component	Examples
Cash in Hand	Physical currency
Demand Deposits with Bank	Savings A/c, Current A/c
Short-term Fixed Deposits	Maturity ≤ 3 months from date of acquisition
Highly Liquid Investments	Subject to insignificant risk of change in value

### Critical Rule: Equity Shares Are NEVER Cash Equivalents

Equity shares carry significant risk of change in value (market prices fluctuate). Therefore they are always excluded from cash and cash equivalents.

### Decision Framework

```

Is the instrument maturing within 3 months of acquisition?

└─ YES → Is the risk of value change insignificant?

└─ YES → Cash Equivalent ✓

└─ NO → Not a Cash Equivalent ✗

```

> Note: The 3-month test applies from the date of acquisition, not from the balance sheet date.

Worked example

### Example 1

Fixed Deposit (short-term): A company places a Fixed Deposit on 1 November 2024, maturing on 31 January 2025 (3 months). Is it a cash equivalent? → Yes. Maturity ≤ 3 months from acquisition and FDs carry insignificant value risk.

### Example 2

Equity shares: A company holds ₹5,00,000 worth of listed equity shares. Are these cash equivalents? → No. Equity shares have significant market-price risk, so they are excluded regardless of holding period.

### Example 3

Treasury Bills (91-day): Government Treasury Bills maturing in 91 days are purchased. Cash equivalent? → Yes. ≤ 3 months maturity and near-zero risk of value change — classic cash equivalent.

⚠️ Common exam mistakes

Measuring the 3-month window from the balance sheet date instead of the date of acquisition.
Treating preference shares or equity shares as cash equivalents — only debt-type instruments with insignificant value risk qualify.
Forgetting that demand deposits (savings and current accounts) are always cash equivalents regardless of interest rate or tenure.
Including Fixed Deposits with original maturity > 3 months even if they now have < 3 months remaining to maturity.

Bare-Act text Para 6 – Definitions · AS 3 – Cash Flow Statements · click to expand

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

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AS 3 – Cash and Cash Equivalents: Definition and Scope

Worked example

⚠️ Common exam mistakes