Short Term And Long Term Securities Essay

Short Term And Long Term Securities Essay

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Long term securities are similar to short term securities, where a firm may invest in human resources, bonds, stocks, real estate, equipment, cash, etc… The advantage of long term investments is that they allow a firm to gain a steady income over a longer period of time than short term investments. Some people may question why a firm may invest in human resources, not realizing that having a staff of workers helps reduce cost. Although this an indirect cost to an entity, but it can be beneficial, because of the continuity of operations. An entity can save on the training of new personnel and supplies will continue to meet demand of the products or services provided by the firm. The main difference between short term securities and long term securities is that, short term securities are sold in a short period, whereas long term securities may never be sold (Schroeder et al, 2011). Firms may invest in long term securities, with the impression that the security will mature in ten to fifteen years. Some companies invest millions of dollars in long term securities risking the possibility of gaining a profit; however, over time there are so many changes in the economy, governmental regulations and policies and even the change in competition can prove challenging during a length of time. Therefore, managers should strategically make decisions on the type of long term investments that would benefit their firms and shareholders. Investors are particularly interested in forecasting a firm’s future cash flow and associated risks (Arora et al, 2014).

Schroeder et al (2011) stated that long term assets such as property, plant and equipment are assets not easily converted to cash and represents the main source of a firm’s future existence. ...

... middle of paper ...

...20 percent or more of stocks, may have an influence on the investee. However, FASB Interpretation No. 35 suggests that regardless if an investor own 20 percent of a firm, they might be refrained from using the equity method due to the following explanation from Schroder et al (2011);

• The investee opposes the investor’s rights to use the equity method, by governmental regulatory authority and challenging the investor’s ability to exercise significant influence.
• Both parties have a signed agreement that the investor relinquish their rights as shareholders.
• Ownership of the investee is controlled by a small group which operates without regard to the views of other investors.
• The investor need or want more financial information than available to the investee’s other shareholders.
• The investor tries and fails to obtain representation on the board of directors.

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