Firms can choose from two general types of securities. Equity securities represent ownership interests in other corporations. For example, General Motors (GM) can purchase shares of IBM stock, which would be reflected on GM’s balance sheet as an asset. Firms can also invest in debt securities, which result from lending transactions. For example, if GM were to lend funds to IBM, IBM would probably issue a debt security as written evidence of the indebtedness. The security might be commercial paper (indicating short-term borrowing) or a bond (indicating long term borrowing). In either case, the security would appear on GM’s balance sheet as an asset.
This chapter deals primarily with investments in equity securities that are classified as current assets. As you know, current assets are either consumed or converted into cash within one year. Thus, we cover only investments that will be held a relatively short period of time. Long-term investments are covered in Chapter, “Reporting Issues for Affiliated and International Companies.”