CUET UG Accountancy Booster Test 2 Cash and Cash Equivalents -

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CUET UG Accountancy Booster Test 1 Cash and Cash Equivalents

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Accountancy Booster Test 1 Cash and Cash Equivalents

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QUESTION 1 OF 20

An enterprise has Opening Cash ₹15,000 and Bank Balance ₹25,000. During the year, Cash in Hand increased by ₹10,000. What is the new total of Cash in Hand?

Answer Review

1 An enterprise has Opening Cash ₹15,000 and Bank Balance ₹25,000. During the year, Cash in Hand increased by ₹10,000. What is the new total of Cash in Hand?

A ₹15,000

B ₹25,000

C ₹40,000

D ₹50,000

💡 Short Explanation

Opening Cash in Hand = ₹15,000. Increase = ₹10,000. New Cash in Hand = ₹25,000.

✅ Correct Answer Explanation

Cash in Hand after increase: = Opening Cash + Increase = ₹15,000 + ₹10,000 = ₹25,000 Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Ignores increase.
Option C → Includes bank balance incorrectly.
Option D → Adds all balances together.

🎯 Strategy

Used: Substitution

Application: Apply the increase directly to opening cash.

Final Logic: ₹15,000 + ₹10,000 = ₹25,000.

🧠 Memory Trick

New Cash = Old Cash + Increase

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Cash in Hand

2 Arrange the sequence of how depositing excess cash into a bank demand deposit impacts the cash flow statement:
1. Treat the balance as a cash equivalent/cash component.
2. The enterprise deposits physical cash into a demand deposit.
3. No net cash flow is reported as it's a movement between cash items.

A 1 → 2 → 3

B 2 → 1 → 3

C 2 → 3 → 1

D 3 → 2 → 1

💡 Short Explanation

Cash is deposited. No cash flow arises. Deposit remains within cash/cash equivalent category.

✅ Correct Answer Explanation

The enterprise first deposits cash into a demand deposit. Since both are components of cash and cash equivalents, no cash flow is reported. The resulting balance continues to be treated as cash/cash equivalent.

❓ Why Other Options Are Incorrect

Options A, B, and D do not follow the logical sequence.

🎯 Strategy

Used: Sequence Analysis

Application: Follow the actual flow of the transaction.

Final Logic: Deposit → No Cash Flow → Classification.

🧠 Memory Trick

Cash to Bank = No Cash Flow

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Bank Deposits

3 Assertion (A): Short-term investments with a 5-month maturity from acquisition are normally classified as cash equivalents.
Reason (R): Cash equivalents must be highly liquid and readily convertible to known amounts of cash.

A Both A and R are true and R is the correct explanation.

B Both A and R are false.

C A is true but R is false.

D A is false but R is true.

💡 Short Explanation

Cash equivalents normally mature within 3 months. Five-month maturity exceeds the limit. Reason is correct.

✅ Correct Answer Explanation

AS-3 states that cash equivalents generally have a maturity period of three months or less from acquisition. Therefore, a 5-month investment is not normally a cash equivalent.

❓ Why Other Options Are Incorrect

Option A → Assertion is false.
Option B → Reason is true.
Option C → Assertion is not true.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Check maturity rule and liquidity criteria separately.

Final Logic: Assertion false; Reason true.

🧠 Memory Trick

More than 3 Months = Not Cash Equivalent

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Short-Term Investments

4 Match the criterion with its purpose in cash equivalents:

List 1	List 2
1. Short maturity (≤ 3 months)	a. Eliminates danger of major value changes
2. Readily convertible	b. Ensures quick availability of funds
3. Known amount of cash	c. Avoids liquidity bottlenecks
4. Insignificant risk	d. Provides certainty of the receipt value

A 1-b, 2-c, 3-d, 4-a

B 1-a, 2-b, 3-c, 4-d

C 1-d, 2-a, 3-b, 4-c

D 1-c, 2-d, 3-a, 4-b

💡 Short Explanation

Short maturity ensures quick access. Convertibility avoids liquidity issues. Known amount ensures certainty. Low risk protects value.

✅ Correct Answer Explanation

Each criterion aligns directly with its purpose in defining cash equivalents.

❓ Why Other Options Are Incorrect

Other options mismatch one or more criteria.

🎯 Strategy

Used: Option Grouping

Application: Match definition to purpose.

Final Logic: Option A provides correct matches.

🧠 Memory Trick

Maturity–Quick, Convertible–Liquid, Known–Certain, Risk–Stable

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Liquidity Criteria

5 The three-month rule for cash equivalents implies the maturity is measured from:
1. The date of the financial year-end balance sheet.
2. The date of acquisition of the investment.

A Only 1 is correct

B Only 2 is correct

C Both 1 and 2 are correct

D Neither 1 nor 2 is correct

💡 Short Explanation

AS-3 uses acquisition date. Not measured from year-end.

✅ Correct Answer Explanation

The maturity period is calculated from the acquisition date of the investment, not from the balance sheet date.

❓ Why Other Options Are Incorrect

Statement 1 is incorrect.

🎯 Strategy

Used: Recall-Based Elimination

Application: Apply AS-3 maturity rule.

Final Logic: Acquisition date is the correct basis.

🧠 Memory Trick

Acquire First, Count Later

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Three-Month Rule

6 A company acquired a 10-year government bond exactly 2 months before its final maturity date. How is this classified under AS-3?

A Financing Activity

B Long-term Investment

C Cash Equivalent

D Operating Activity

💡 Short Explanation

Remaining maturity = 2 months. Within three-month rule. Highly liquid.

✅ Correct Answer Explanation

Although originally issued as a long-term bond, if acquired only two months before redemption, it qualifies as a cash equivalent because maturity is within three months from acquisition.

❓ Why Other Options Are Incorrect

Not operating or financing.
Classification depends on maturity from acquisition.

🎯 Strategy

Used: Application of Rule

Application: Compare remaining maturity with 3-month requirement.

Final Logic: 2 months qualifies.

🧠 Memory Trick

Less than 3 Months = Cash Equivalent

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Acquisition Date Basis

7 Why is the purchase of marketable securities (maturing in 2 months) not considered a cash outflow in the cash flow statement?

A Because it is merely the investment of excess cash into cash equivalents.

B Because it represents an extraordinary loss.

C Because it is a non-cash transaction like issuing shares for machinery.

D Because marketable securities are long-term assets.

💡 Short Explanation

Cash moves into cash equivalent. No reportable cash flow. Cash management activity.

✅ Correct Answer Explanation

The purchase of short-term marketable securities qualifying as cash equivalents is merely a movement within cash and cash equivalents and is therefore excluded from the Cash Flow Statement.

❓ Why Other Options Are Incorrect

Not an extraordinary loss.
Not a non-cash transaction.
Not a long-term asset.

🎯 Strategy

Used: Concept Classification

Application: Determine whether the item is a cash equivalent.

Final Logic: Cash to cash equivalent is excluded.

🧠 Memory Trick

Cash ↔ Cash Equivalent = No Cash Flow

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Marketable Securities

8 Which logical formula represents the inclusion of preference shares as cash equivalents?

A Preference Shares + High Risk = Cash Equivalent

B Preference Shares + >1 Year Maturity = Cash Equivalent

C Preference Shares + Equity Shares = Cash Equivalent

D Acquisition Date + <3 months to redemption + Insignificant Risk = Cash Equivalent

💡 Short Explanation

Near redemption. Minimal risk. Meets AS-3 conditions.

✅ Correct Answer Explanation

Preference shares qualify as cash equivalents only when acquired shortly before redemption and where repayment risk is insignificant.

❓ Why Other Options Are Incorrect

High risk disqualifies.
Long maturity disqualifies.
Equity share inclusion is irrelevant.

🎯 Strategy

Used: Elimination

Application: Apply AS-3 conditions.

Final Logic: Only Option D satisfies all requirements.

🧠 Memory Trick

Near Redemption = Near Cash

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Preference Shares Conditions

9 Equity shares are fundamentally excluded from cash equivalents because:

A They are part of operating activities.

B They are considered cash in hand.

C They lack a specific redemption date and face significant risk of value changes.

D They are always classified as short-term borrowings.

💡 Short Explanation

No fixed maturity. Value fluctuates significantly. Fails cash equivalent criteria.

✅ Correct Answer Explanation

Equity shares generally do not have a fixed redemption date and are subject to substantial market risk. Therefore, they do not qualify as cash equivalents.

❓ Why Other Options Are Incorrect

Not operating activity.
Not cash in hand.
Not borrowings.

🎯 Strategy

Used: Concept Identification

Application: Compare equity shares with cash equivalent requirements.

Final Logic: Risk and maturity conditions are not met.

🧠 Memory Trick

No Maturity + High Risk = Not Cash Equivalent

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Equity Shares Exclusion

📄 Passage

Cash management includes the investment of excess cash in cash equivalents. Hence, purchase of marketable securities or short-term investment which constitutes cash equivalents is not considered while preparing cash flow statement.

Based on the passage's logic, long-term investments are not cash equivalents because they:

A Are used to pay dividends.

B Relate to investing activities rather than excess cash management.

C Are part of cash in hand.

D Represent short-term borrowings.

💡 Short Explanation

Long-term investments are not for immediate liquidity. They belong to investing activities. Do not qualify as cash equivalents.

✅ Correct Answer Explanation

Long-term investments are acquired for investment purposes rather than short-term cash management and therefore are classified as investing activities, not cash equivalents.

❓ Why Other Options Are Incorrect

Not used for dividend payments.
Not cash in hand.
Not borrowings.

🎯 Strategy

Used: Passage-Based Analysis

Application: Apply the distinction between cash management and investing activities.

Final Logic: Long-term investments are investing assets.

🧠 Memory Trick

Long-Term Investment = Investing Activity

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Long-Term Investments

📄 Passage

According to the passage, managing excess cash involves:

A Investing it into cash equivalents which inherently have insignificant risk.

B Purchasing long-term fixed assets.

C Issuing new equity shares to the public.

D Paying interest on long-term loans.

💡 Short Explanation

Excess cash is parked in liquid investments. Cash equivalents carry insignificant risk. Supports efficient cash management.

✅ Correct Answer Explanation

The passage states that excess cash is invested in cash equivalents. Such investments are highly liquid and subject to insignificant risk of changes in value.

❓ Why Other Options Are Incorrect

Option B → Long-term asset acquisition is investing activity.
Option C → Financing activity.
Option D → Financing outflow.

🎯 Strategy

Used: Passage-Based Analysis

Application: Identify the purpose of excess cash management.

Final Logic: Excess cash is invested in cash equivalents.

🧠 Memory Trick

Excess Cash → Cash Equivalents

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Insignificant Risk

12 Assertion (A): Value stability is guaranteed when a company invests its excess cash in equity shares.
Reason (R): Equity shares are short-term highly liquid investments.

A A is true but R is false.

B A is false but R is true.

C Both A and R are true.

D Both A and R are false.

💡 Short Explanation

Equity shares fluctuate in value. They are generally not cash equivalents. Value stability is not guaranteed.

✅ Correct Answer Explanation

Equity shares carry market risk and do not normally qualify as cash equivalents. Therefore, value stability cannot be guaranteed and the reason is also incorrect.

❓ Why Other Options Are Incorrect

Option A → Assertion is false.
Option B → Reason is false.
Option C → Both statements are false.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Evaluate risk and liquidity characteristics.

Final Logic: Equity shares fail both criteria.

🧠 Memory Trick

Equity Shares = Risk, Not Stability

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Value Stability

13 An asset is "readily convertible" if it can be:

A Traded for machinery over a 5-year period.

B Liquidated immediately without a considerable change in value.

C Converted into long-term bank loans.

D Exchanged for inventory from suppliers exclusively.

💡 Short Explanation

Immediate convertibility is essential. Value should remain stable. Key feature of cash equivalents.

✅ Correct Answer Explanation

A readily convertible asset can be converted into cash quickly and without significant loss in value.

❓ Why Other Options Are Incorrect

Option A → Too long-term.
Option C → Not convertibility into cash.
Option D → Restrictive and incorrect.

🎯 Strategy

Used: Concept Matching

Application: Identify the definition of ready convertibility.

Final Logic: Quick conversion with stable value.

🧠 Memory Trick

Readily Convertible = Quickly Cashable

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Readily Convertible Assets

14 Instruments providing immediate liquidity without significant risk are classified as:

A Operating Outflows

B Intangible Assets

C Cash Equivalents

D Financing Inflows

💡 Short Explanation

Highly liquid. Low risk. Easily convertible into cash.

✅ Correct Answer Explanation

Cash equivalents are short-term highly liquid investments that can be readily converted into known amounts of cash with insignificant risk.

❓ Why Other Options Are Incorrect

Option A → Activity classification.
Option B → Asset category unrelated.
Option D → Financing classification.

🎯 Strategy

Used: Definition Matching

Application: Match characteristics with category.

Final Logic: Immediate liquidity defines cash equivalents.

🧠 Memory Trick

Liquid + Safe = Cash Equivalent

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Immediate Liquidity

15 A company has ₹50,000 excess cash. It uses ₹20,000 to buy 60-day marketable securities and ₹30,000 to buy a new machine. How much is reported as cash used in investing activities?

A ₹50,000

B ₹20,000

C ₹0

D ₹30,000

💡 Short Explanation

Marketable securities qualify as cash equivalents. Purchase of machine is an investing outflow. Only machine purchase is reported.

✅ Correct Answer Explanation

The ₹20,000 invested in 60-day marketable securities represents a movement into cash equivalents and is not reported. The ₹30,000 used to purchase machinery is an investing cash outflow.

❓ Why Other Options Are Incorrect

Option A → Includes cash equivalent purchase.
Option B → Wrong classification.
Option C → Ignores machinery purchase.

🎯 Strategy

Used: Classification + Calculation

Application: Separate cash equivalents from investing activities.

Final Logic: Only ₹30,000 is reported.

🧠 Memory Trick

Machine = Investing, Cash Equivalent = Excluded

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Excess Cash Investment

16 The basic equation that aids liquidity planning in the Cash Flow Statement is:

A Net Cash Flows (from all activities) + Beginning Cash & Equivalents = Ending Cash & Equivalents

B Operating Profit − Current Liabilities = Ending Cash

C Fixed Assets + Current Assets = Liquidity

D Long-term Loans − Interest Paid = Cash Equivalents

💡 Short Explanation

Opening balance is the starting point. Net cash flows adjust the balance. Result gives ending cash.

✅ Correct Answer Explanation

Ending Cash & Cash Equivalents = Beginning Cash & Cash Equivalents + Net Cash Flows from Operating, Investing and Financing Activities This equation is the basis of liquidity planning.

❓ Why Other Options Are Incorrect

Options B, C and D are not AS-3 equations.

🎯 Strategy

Used: Formula Recall

Application: Apply the standard cash flow equation.

Final Logic: Opening + Net Change = Closing.

🧠 Memory Trick

Beginning + Net Flow = Ending

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Liquidity Planning

17 Regarding 90-day Treasury Bills (as short-term highly liquid securities):
1. Their purchase is reported as a cash outflow in investing activities.
2. They are classified as cash equivalents.

A Only 1 is true

B Only 2 is true

C Both 1 and 2 are true

D Neither 1 nor 2 is true

💡 Short Explanation

Treasury Bills qualify as cash equivalents. Their purchase is not reported as investing outflow.

✅ Correct Answer Explanation

A 90-day Treasury Bill meets the criteria of a cash equivalent. Movements between cash and cash equivalents are excluded from the Cash Flow Statement.

❓ Why Other Options Are Incorrect

Statement 1 is false.
Therefore Options A and C are incorrect.
Statement 2 is true.

🎯 Strategy

Used: Statement Evaluation

Application: Apply cash equivalent rules.

Final Logic: Only Statement 2 is correct.

🧠 Memory Trick

90-Day T-Bill = Cash Equivalent

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Treasury Bills

18 Match the items regarding instruments like 60-day Commercial Papers (CPs):

List 1	List 2
1. 60-day CP Purchase	a. Financing Activity
2. 5-year Bank Loan	b. Operating Activity
3. Cash in Hand	c. Cash Management (Cash Equivalent)
4. Sale of Goods	d. Core Component of Cash

A 1-b, 2-c, 3-d, 4-a

B 1-d, 2-a, 3-b, 4-c

C 1-a, 2-b, 3-c, 4-d

D 1-c, 2-a, 3-d, 4-b

💡 Short Explanation

Commercial Paper → Cash Equivalent. Bank Loan → Financing. Cash in Hand → Cash Component. Sale of Goods → Operating Activity.

✅ Correct Answer Explanation

Each item correctly corresponds with its respective classification.

❓ Why Other Options Are Incorrect

They contain incorrect classifications.

🎯 Strategy

Used: Option Grouping

Application: Match each item correctly.

Final Logic: Option D is fully correct.

🧠 Memory Trick

CP–Cash Equivalent, Loan–Finance, Goods–Operate

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Commercial Papers

19 A firm's opening cash equivalents are ₹20,000. It generated ₹10,000 from operations, used ₹5,000 in investing, and generated ₹5,000 from financing. What is the ending liquidity measurement (Cash and Cash Equivalents)?

A ₹30,000

B ₹40,000

C ₹20,000

D ₹10,000

💡 Short Explanation

Net cash flow = ₹10,000. Add opening balance. Ending balance = ₹30,000.

✅ Correct Answer Explanation

Net Cash Flow = ₹10,000 − ₹5,000 + ₹5,000 = ₹10,000 Ending Cash & Cash Equivalents = ₹20,000 + ₹10,000 = ₹30,000

❓ Why Other Options Are Incorrect

Options B, C and D use incorrect calculations.

🎯 Strategy

Used: Substitution

Application: Calculate net cash flow first.

Final Logic: ₹20,000 + ₹10,000 = ₹30,000.

🧠 Memory Trick

Opening + Net Flow = Ending

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Liquidity Measurement

20 Arrange the steps users take to evaluate cash availability using the statement:
1. Review historical changes in cash and cash equivalents.
2. Assess the ability of the enterprise to generate cash.
3. Make economic decisions based on timing and certainty of future generation.

A 2 → 3 → 1

B 3 → 2 → 1

C 1 → 2 → 3

D 2 → 1 → 3

💡 Short Explanation

Start with historical cash information. Assess cash-generating ability. Make decisions afterward.

✅ Correct Answer Explanation

Users first analyze historical cash flow information, then assess the enterprise's ability to generate cash, and finally make economic decisions based on timing and certainty of future cash flows.

❓ Why Other Options Are Incorrect

They do not follow the logical decision-making sequence.

🎯 Strategy

Used: Sequence Analysis

Application: Follow the user decision process.

Final Logic: History → Assessment → Decision.

🧠 Memory Trick

Review → Assess → Decide

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Cash Availability

CUET UG Accountancy Booster Test 1 Cash and Cash Equivalents

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