Question

Could someone please explain to me what is the definition of marketable securities? Moreover, what does their purchase reflect of an entity's investing decisions. Also what does the maturity of marketable securities mean? I am looking at those items from a cash flow statement.

Answer 1

Marketable securities are those securities that can be readily converted to cash.These are highly liquid financial instruments from which cash can be derived at almost no loss of value. These are generally short term in nature and are publicly traded. Generally they have a tenure of less than one year.Examples- Money market instruments, treasury bills etc.

It is a good idea to invest excess or surplus funds to generate additional income. Organizations also find various scope of investing their surplus funds. Entities keep an optimum cash balance to aid them in the time of need. A sudden investment opportunity may come or an emergency may arise when the need for the cash is urgent. But rather than keeping the cash in lockers that will give zero returns it is better to invest in certain securities which can be sold of immediately at the time of need. In these scenarios marketable securities are the ideal portfolio for investments which give a decent return along with the assurance of liquidity at the time of need.Also these securities are evaluated at the time of analysis of liquidity ratio by analysts which determine credibility of a concern.Thus, if an entity has purchased marketable securities it denotes that it has a fair amount of excess cash that is being invested in it.

Maturity of Marketable securities refer to the time after which the invested amount along with interest will be received.It is generally less than 1 year for marketable securities.Based on the reasons for uses these are classified under following types-

1. Held Until Maturity- Securities are retained till maturity. If maturity is less than 1year it is a short-term investment, and if maturity exceeds 1 year it is long term investment under non current asset.

2. For Trading- Held with the motive of earning profit and for less than a year. Temporary gains/losses are adjusted in income statement.

3. For Sale- If the investment does not fall under the above 2 categories, it is classified under the purchased to sell.Temporary gains/losses are not adjusted in income statement.