Multiple Choice
Which type of receivable is created when a company sells goods or services to a customer on credit, such as when a customer owes payment for 6 quarters and 4 pennies worth of goods?
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7. Receivables and Investments
Types of Receivables
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Which of the following is classified as a cash equivalent?
A
Accounts receivable
B
Prepaid insurance
C
Treasury bills maturing in 60 days
D
Inventory
Verified step by step guidance1
Understand the concept of cash equivalents: Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. Examples include Treasury bills, commercial paper, and money market funds.
Analyze the options provided: Accounts receivable, prepaid insurance, inventory, and Treasury bills maturing in 60 days.
Evaluate each option: Accounts receivable represent amounts owed by customers and are not considered cash equivalents. Prepaid insurance is an asset representing payments made in advance for insurance coverage, not a cash equivalent. Inventory consists of goods held for sale and is not liquid enough to qualify as a cash equivalent.
Focus on Treasury bills maturing in 60 days: Treasury bills are short-term government securities. If they mature within 90 days from the date of purchase, they are classified as cash equivalents because they are highly liquid and have minimal risk.
Conclude that Treasury bills maturing in 60 days meet the criteria for cash equivalents, while the other options do not.
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