MARKETABLE SECURITIES
The business entity has varying cash needs throughout the year. Because an inferred cost arises from
keeping money available, management does not want to keep all of the entity’s cash needs in the
form of cash throughout the year. The available alternative turns some of the cash into productive
use through short-term investments (marketable securities), which can be converted into cash as the
need arises.
To qualify as a marketable security, the investment must be readily marketable, and it must be
the intent of management to convert the investment to cash within the current operating cycle or one
year, whichever is longer. The key element of this test is managerial intent.
It is to management’s advantage to show investments under marketable securities, instead of
long-term investments, because this classification improves the liquidity appearance of the firm.
When the same securities are carried as marketable securities year after year, they are likely held for
a business purpose. For example, the other company may be a major supplier or customer of the firm
being analyzed. The firm would not want to sell these securities to pay short-term creditors. Therefore,
to be conservative, it is better to reclassify them as investments for analysis purposes.
Investments classified as marketable securities should be temporary. Examples of marketable
securities include treasury bills, short-term notes of corporations, government bonds, corporate
bonds, preferred stock, and common stock. Investments in preferred stock and common stock are
referred to as marketable equity securities.
Debt and equity securities are to be carried at fair value. An exception is that debt securities can
be carried at amortized cost if classified as held-to-maturity securities, but these debt securities would
be classified under investments (not classified under current assets)
A security’s liquidity must be determined in order for it to be classified as a marketable security.
The analyst must assume that securities classified as marketable securities are readily marketable.
The business entity has varying cash needs throughout the year. Because an inferred cost arises from
keeping money available, management does not want to keep all of the entity’s cash needs in the
form of cash throughout the year. The available alternative turns some of the cash into productive
use through short-term investments (marketable securities), which can be converted into cash as the
need arises.
To qualify as a marketable security, the investment must be readily marketable, and it must be
the intent of management to convert the investment to cash within the current operating cycle or one
year, whichever is longer. The key element of this test is managerial intent.
It is to management’s advantage to show investments under marketable securities, instead of
long-term investments, because this classification improves the liquidity appearance of the firm.
When the same securities are carried as marketable securities year after year, they are likely held for
a business purpose. For example, the other company may be a major supplier or customer of the firm
being analyzed. The firm would not want to sell these securities to pay short-term creditors. Therefore,
to be conservative, it is better to reclassify them as investments for analysis purposes.
Investments classified as marketable securities should be temporary. Examples of marketable
securities include treasury bills, short-term notes of corporations, government bonds, corporate
bonds, preferred stock, and common stock. Investments in preferred stock and common stock are
referred to as marketable equity securities.
Debt and equity securities are to be carried at fair value. An exception is that debt securities can
be carried at amortized cost if classified as held-to-maturity securities, but these debt securities would
be classified under investments (not classified under current assets)
A security’s liquidity must be determined in order for it to be classified as a marketable security.
The analyst must assume that securities classified as marketable securities are readily marketable.
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