Short-Term & Long-Term Securities

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, you will learn about short- and long-term securities, their definitions, requirements, and how to differentiate between them. We will also discuss the yield curve for short and long-term securities.

The Three Investments

Imagine you own an auto body shop. Your business has grown recently, and your company has found itself with a little extra cash. You don't want to dividend the extra cash to the shareholders because then they will have to pay taxes on the distributions. Instead, you plan to invest the extra cash in three investments. For the first investment, you are going to invest in treasury notes that mature in 3 months. The second investment is in a publicly traded company that you think is currently undervalued. You want to buy some shares and hold them for at least 12-months, but after that, you intend to sell them. And lastly, there are some energy company bonds that you think are a good investment and you plan to buy the bonds and hold them to their 10-year maturity.

We will learn how accountants treat the three investments mentioned above. We'll define short- and long-term investments, go into further detail on each, then list the requirements for short-term investments and describe the different types of long-term investments.

Short-term Investments

Short-term securities are investments (usually in equity and debt securities) that are expected to be sold and converted to cash within one year or within the company's operating cycle. These funds are included in a company's current assets, usually right after the disclosure of the cash. Companies will decide to invest excess cash in short-term investments to generate some return while still maintaining flexibility. If need be, they can sell the short-term investments, to deploy the cash into something else. There are two basic requirements for an investment to be considered short-term:

  1. The investment must be liquid. This means it can be sold quickly. Examples of this are publicly traded equity and debt securities. A significant ownership stake in a small, local company would not be considered liquid. In fact, it would be considered illiquid because it will most likely take substantial time to find another buyer for that investment.
  2. The company must expect to sell the investment within the next 12 months or within the company's operating cycle. This is the same with other current assets - there needs to be an expectation that they will be liquidated soon.

Short-term investments generally have maturities of between three months and one year. Those investments in securities with maturities of less than three months are simply included with Cash as ''Cash equivalents.'' In our auto body shop, the company's investment in treasury notes that have a 3-month maturity would be classified as a short-term investment and included in that company's current assets.

Long-term Investments

Long-term investments, unlike short-term investments, are not expected to be sold and converted to cash within one year or within the company's operating cycle. In fact, the investments may be made with an indefinite holding period in mind. These investments can include everything from equity and debt securities to real estate, and they are included in the non-current asset section of the balance sheet.

There are three main types of long-term securities:

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