CFA Practice Question
Bay Co. purchased a 3-month U.S. Treasury bill. In preparing Bay's statement of cash flows, this purchase would ______
A. have no effect.
B. be treated as an outflow from investing activities.
C. be treated as an outflow from operating activities.
Explanation: The T-bill is a cash equivalent and has no effect on the statement of cash flows. Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturities that they present insignificant risk of changes in value because of changes in interest rates. They only include investments with original maturities to the holder of 3 months or less.
User Contributed Comments 13
| User | Comment |
|---|---|
| cahiz84 | tricky question |
| Dinosaur | what length of maturity counts as investment? |
| Kuki | got me! |
| julescruis | in my face |
| SuperKnight | wow.. thats really tricky! |
| staudinger | nice one. |
| boddunah | in cfa book page 252 of financial reporting and analysis it mentioned , i am quoting from the book "for the purpose of investment in equity and debt securities exclude: a) any securities considered cash equivalents (very short term, highly liquid securities) and b)dealing or trading securities(held for trading), the purchase and sale of which are considered operating activities even for companies where this is not a primary business activity". |
| Kashi2010 | So according to boddunah's quote 'c' would be correct? Since it doesnt specifiy at what point in the year (i.e. start, so out & in during FY vs end so out only during FY) I think we should be recording this in the CF statement? Just because it is short and easily convertable does not change the fact that a cash outflow occured at the time of purchase, right? |
| kutch | exactly my sentiments; kashl2010 |
| Nando1 | It's basically cash for cash. Therefore, there is no effect to the statement of cash flows. I got this wrong but after reading the quote boddunah provided it makes sense. |
| acemaj | splash! |
| madelinee | arrrgggghhhhh .... tricky! |
| praj24 | Damnnn! I won't forget that now. |