Study GuideAccounting PrinciplesII–Investments1.Introduction to InvestmentsCompanies often have more cash on hand than they need for their day-to-day operations. Instead ofletting this extra money sit unused, they may choose to invest it. Investing allows a company to earnadditional income, such asinterestordividends, while the cash is not immediately needed.1.Why Do Companies Invest?There are a few common reasons companies invest their excess cash:•To earn income:Short-term investments can generate interest or dividend revenue.•For strategic goals:A company might invest in another business, for example by buying itsstock, to support long-term plans such as expansion or partnerships.No matter the reason, once a company invests its cash, that investment must be reported in thecompany’sfinancial statements.2.How Investments Appear on the Balance SheetInvestments are shown on thebalance sheet, but they are usually listed separately from cash. Thishelps users of financial statements clearly see how much money is tied up in investments rather thanavailable for immediate use.Investments are classified as:•Short-term assetsif the company plans to sell or use them soon.•Long-term assetsif the company intends to hold them for a longer period.The classification depends on both the type of investment and management’s plan for how long it willbe held.Preview Mode
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