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Chapter 6: Problem 57

Marketable securities are usually shown on the balance sheet as current assets. Based on what you have learned, under what circumstances might they be shown as noncurrent assets? Why do you think a firm might hold its investments in marketable securities for more than a year?

Short Answer

Expert verified
Marketable securities are shown as noncurrent assets when the company intends to hold them for over a year for investment purposes. Firms might hold these investments for more than a year for reasons such as strategic planning, potential for high returns, dividend benefits, interest, increase in market value, or portfolio diversification.

Step by step solution

01

Identification of Marketable Securities

Marketable securities are liquid financial instruments that can be quickly converted into cash, usually within a year, thus, they are often considered as current assets in the balance sheet. However, they can be classified as noncurrent assets under certain circumstances.
02

Classification as Noncurrent Assets

If the firm plans to hold these marketable securities for more than one year for investment purposes, they are considered as noncurrent assets. The key factor for this classification is the company's intention, not the nature of the securities.
03

Reasons for Long-Term Investment

A firm might hold its investments in marketable securities for more than a year for various reasons. These include strategic planning, potential for higher long-term gains, taking advantage of potential dividends, interest, or increases in market value, or to maintain a diversified and balanced portfolio.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Balance Sheet
Understanding the balance sheet is crucial when analyzing a company's financial health. It provides a snapshot of a company's assets, liabilities, and shareholders鈥� equity at a specific point in time. The balance sheet is divided into three sections:
  • Assets: These are resources owned by the company that have economic value and can provide future benefits.
  • Liabilities: These are obligations the company owes to outside parties, such as loans or bonds.
  • Shareholders' Equity: This is the residual interest in the assets of the company after deducting liabilities.
By examining the balance sheet, investors can assess factors such as liquidity, financial strength, and profitability.
Companies categorize their assets into current and noncurrent assets to safely manage their financial strategy.
Current Assets
Current assets are essential when evaluating a company鈥檚 liquidity. These are assets expected to be converted into cash or consumed within one year. Examples of current assets include cash, marketable securities, accounts receivable, and inventory.
This category plays a vital role for companies to fulfill their short-term financial obligations and manage operational activities smoothly.
  • Cash and Equivalents: The most liquid assets available for immediate use.
  • Marketable Securities: Though typically current assets, they can become noncurrent based on company strategies.
  • Accounts Receivable: Money owed to the company by customers for products or services sold.
Understanding current assets helps in assessing a company's ability to meet short-term liabilities without having to liquidate long-term assets.
Noncurrent Assets
Noncurrent assets are vital for long-term success and often involve significant investment. They include resources not expected to be liquidated within the next year. Examples include property, plant, equipment, intellectual property, and sometimes marketable securities, if held beyond a year.
  • Property, Plant, and Equipment (PPE): Tangible, long-term assets used in the production of goods and services.
  • Intangible Assets: Non-physical assets like patents and trademarks providing future economic benefits.
  • Marketable Securities: When held with the intent to retain for longer than a year, they are recorded here to reflect the investment strategy.
By investing in noncurrent assets, companies plan for sustainable growth and competitive edge. It showcases the company's future earning power and strategic placement.
Investment Strategy
An investment strategy is a plan to allocate resources efficiently over time to achieve specific financial objectives. Companies may hold marketable securities as both current and noncurrent assets based on their strategies.
  • Short-term Perspective: Holding securities as current assets for quick returns or liquidity management.
  • Long-term Perspective: Holding as noncurrent to benefit from dividends, capital appreciation, and portfolio diversification.
Adopting robust investment strategies helps businesses achieve growth by balancing between risk and return. Balancing short-term needs with long-term goals is crucial for maintaining financial health and stability.
Through a thoughtful investment strategy, companies leverage different asset classes to enhance their overall financial performance.

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Most popular questions from this chapter

Pioneer Resource, Inc., reported the following in its Notes to Consolidated Financial Statements for 1999.Material and Supplies: Inventories of new and reusable material and supplies are stated at the lower of cost or market with cost determined on a FIFO or average cost basis. For certain large individual items, however, cost is determined on a specific identification basis.a. Identify and explain, in your own words, all of the inventory costing methods used by Pioneer Resource. b. Why might Pioneer Resource use these different methods? Do these various inventory methods enhance the internal consistency and usability of Pioneer Resource's financial data? Why?c. If inventories comprised only \(1 \%\) of Pioneer Resource's assets, how would that change your views on Pioneer's use of these different inventory costing methods? What if inventories were \(15 \%\) of Pioneer Resource's assets? d. If the inventory balances reported by Pioneer Resource in 1999 and 1998 were \(\$ 212.3\) and \(\$ 212.2\) million, respectively, how would that change your view of Pioneer Resource's choice of reporting methods? Note that Pioneer Resource's 1999 total assets exceeded \(\$ 22.4\) billion. If in subsequent years you found that Pioneer Resource's inventories had increased by \(300 \%\), how would that change your views of these diverse inventory costing methods?

Identify the best answer to each of the following multiple-choice questions, and explain why it is the best answer: 1\. To help achieve internal control over the assets of a company: a. Segregate authorization and execution b. Segregate authorization and review c. Segregate custody and record keeping d. Segregate custody and payment 2\. Which of the following internal control statements is correct? a. Internal control does not ensure that collusion will be detected. b. Internal control design is the responsibility of the outside auditors. c. The costs of internal control often exceed the benefits. d. A strong system of internal control should be enough to show that the financial statements "present fairly."

What does the term \(c a s h,\) as shown on financial statements, usually include? Discuss \(c a s h,\) and \(c a s h,\) equivalents separately.

Owens-Corning values its inventories using LIFO.This presents a problem when comparing its current ratio against that of a company using FIFO. Locate the latest financial statements for Owens-Corning at the company page (www.owenscorning.com) or from the 10 -K filed in the EDGAR archives (www.sec.gov/ edgarhp.htm).a. Compute the current ratio and the number of days' sales (NDS) in ending inventory based on numbers reported on the balance sheet. b. Find the FIFO value of inventory reported in the Notes to the Financial Statements and recompute the current ratio and NDS. c. Compare the ratios based on LIFO to those based on FIFO. How different are they? Do you think that the observed differences are great enough to have an impact on a decision?

Describe two different methods of accounting for marketable securities.Why is one method preferable?
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