It is a well-known practice for a company with excess cash to invest it in short-term or long-term investments as a way of increasing their profit. In fact, Apple has a separate office designated for the reinvestment of their profits located in Reno, Nevada. This is a strategic way to maintain a positive cash flow.
When a company considers reinvesting some of its profits, it must wisely select from among short-term and long-term investments. Management must establish the time frame of the investment and its purpose. This will aid in determining a proper selection.
Short-term investments are defined as investments by a company that can be converted to cash within the year. There are two types of short-term investments: Held-to-Maturity Securities and Trading Securities.
- Held-to-Maturity Securities: These securities are purchased with the goal of earning interest or of reselling in the future for profit. They are debt securities that the company is able to hold to maturity. Most often, these securities are classified as noncurrent assets like bonds. Occasionally, they are recorded as a current asset such as when a company purchases Treasury Bills or Corporate Notes that will mature within one year. To report these securities, enter the cost less any impairment like amortized cost plus any accrued interest.
- Trading Securities: These include debt and equity securities purchased with the purpose of reselling with a quick turn around, usually within days or weeks. At the end of a reporting period, enter the trading securities at fair market value based on the mark-to-market principle. This established principle requires that securities reflect the current market value rather than the book value. Trading securities are classified as current assets on the balance sheet. Don’t forget to adjust the Trading Securities account for unrealized gain or loss in market value.