A short term investment is any investment made with the expectation to convert it into cash in one year or less. They are part of the account in the current assets section of a company’s balance sheet. Examples of such investments are marketable equity, debt securities, short term paper, stocks and bonds which can be quickly liquidated at any time.
This is actually the reason it is a short term investment; because the investors have it in mind to monetize the investment soon and will not expect any hassles in the way of that. As such, liquidity is a key factor in every short term investment.
Companies that go into this kind of ventures are the ones that are in a strong cash position. They can afford to invest in excess cash and bonds with the aim of earning higher interest than what would have been earned from a normal savings account. Since this sort of investments are very liquid, they are typically right below the cash and equivalents on a company’s balance sheet; which is where they have their short term investment account.
ACCOUNTING FOR SHORT TERM INVESTMENTS:
In the calculating short term investments with balance sheets, it is important to have a good idea (at least, the basics) of what it is all about and how to use it in such investments. The balance sheet provides an overview of what a company owns, known as assets; and what it owes, known as liabilities. It also shows the value of a stockholder’s investment in the company, known as the stockholders’ equity.
It is strange to wonder why a financial tool like this is termed “balance sheet”. The reason is because the two sides of it have to balance out. By s doing, the company gets to pay for all its properties (assets) either by borrowing money (liabilities), or from selling shares (equity).
All balance sheets are the same worldwide, and can be used to do a number of things as a way of keeping financial records, one of which is calculating short term investments. It makes use of the formula
Total assets = Total liabilities + Shareholder’s equity
On a typical balance sheet, under the assets section, currents assets of a company are listed. They include
- Cash and cash equivalents
- Net receivables
- Other current assets
- Short term investments
By the side of these items, their values are listed based on dates.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.