The financial accounting term short-term investments refers to securities the company has purchased that can, and will be, sold in less than twelve months. Also known as temporary investments, short-term investments typically include marketable equity and debt securities as well as short-term paper.
Short-term investments are classified as a current asset, and appear on the company's balance sheet.
In the course of normal business operations, companies require cash to pay for goods and services, including salaries of employees. Sound financial management techniques go beyond holding cash in bank accounts. Companies with significant financial flexibility, and a strong cash position, may purchase short-term investments as an alternative to placing money in a savings account at a financial institution such as a bank. While these investments are associated with a higher level of risk, the rewards can be greater too.
To be considered a short-term investment, the security must possess the following characteristics:
Marketability: there must be a robust and active market, allowing the investment to be quickly turned into cash.
Intent: the company is holding the security with the intent to convert it into cash within one year or one operating cycle, whichever is longer.
These short-term investments are classified as current assets, and normally fall into one of the following three categories:
Marketable Equity Securities: includes common or preferred stock investments held by a company in another large corporation. Since there is an active market for these securities, they are considered liquid investments; nearly as liquid as cash.
Marketable Debt Securities: includes short-term bonds held by one company in another large corporation. These debt securities are held by companies as an alternative to cash, and there should be an active market to ensure liquidity of the investment.
Short-Term Paper: includes investments with original maturities that are less than 270 days. Examples include U.S. Treasury bills, commercial paper, as well as promissory notes.
SFAS 159 allows companies to value its securities at fair market value. This option is available on a security-by-security basis. When sold, the company will report the gain or loss in earnings in the current accounting period.
balance sheet, current assets, marketable securities, financial flexibility, long-term investments, short-term paper
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Regarding the concept of short-term investments in financial accounting, I can provide information based on the given article.
Definition of Short-Term Investments
Short-term investments, also known as temporary investments, refer to securities that a company has purchased and can be sold within a period of less than twelve months. These investments are classified as current assets and appear on the company's balance sheet .
Purpose of Short-Term Investments
Companies may choose to invest in short-term investments as an alternative to keeping excess cash in bank accounts. These investments provide companies with financial flexibility and the potential for higher returns, although they also come with a higher level of risk. Short-term investments are typically held with the intent to convert them into cash within one year or one operating cycle, whichever is longer .
Characteristics of Short-Term Investments
For a security to be considered a short-term investment, it must possess the following characteristics:
- Marketability: There must be a robust and active market that allows the investment to be quickly converted into cash.
- Intent: The company holds the security with the intention of converting it into cash within one year or one operating cycle, whichever is longer .
Types of Short-Term Investments
Short-term investments can fall into one of the following three categories:
- Marketable Equity Securities: These include common or preferred stock investments held by a company in another large corporation. Since there is an active market for these securities, they are considered liquid investments, nearly as liquid as cash.
- Marketable Debt Securities: These include short-term bonds held by one company in another large corporation. Companies hold these debt securities as an alternative to cash, and there should be an active market to ensure liquidity.
- Short-Term Paper: This category includes investments with original maturities of less than 270 days. Examples include U.S. Treasury bills, commercial paper, and promissory notes .
Valuation of Short-Term Investments
Under SFAS 159, companies have the option to value their securities at fair market value. This valuation is done on a security-by-security basis. When these investments are sold, any gain or loss is reported in the current accounting period's earnings.
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