Discuss Marketable Securities

 Marketable securities are bonds or stocks

for which there is an active market and
hence a reliable market value.
 They are liquid assets in that they can
easily and quickly be converted into cash.
 Marketable securities held as a
temporary investment are classified as
current assets.
 Market Securities Classification
 Securities are properly classified as marketable
securities when
1. The firm can readily convert them into cash,
and
2. Intends to do so when it needs cash.
 If either of the two tests for marketable
securities do not apply, then the securities are
properly classified as investment in securities.
 Investment in securities are securities held for
long-term goals and are classified as long-term
assets.
 Valuation at Acquisition
 Marketablesecurities are initially
recorded at acquisition cost.
 Which includes purchase price plus
any commissions, taxes or other
costs related to the acquisition.
 Thisis the same rule as the general
rule for valuing assets at
acquisition.
 Valuation after Acquisition
 Because there exists a market value, marketable
securities can be reliably written up or down to
the market value giving a more current estimate
of economic worth.
 This also results in a holding gain or loss which is
not due to the normal operations of a firm.
 For the purposes of valuation after acquisition,
there are three classes of marketable securities:
1. Debt held to maturity
2. Trading securities
3. Securities available for sale
 Debt Held to Maturity
 Debt securities for which a firm has both the
positive intent & ability to hold to maturity.
 Shown on the balance sheet at the amortized
acquisition cost.
 Amortized acquisition cost means that the
securities are amortized like a mortgage or bond.
– The acquisition cost is assumed to be the present
value.
– The maturity value and maturity date are known
from the bond certificate.
– An internal rate of return can be calculated using PV
techniques.
 What are trading securities?
 Trading securities are assumed to be held for
short-term profit.
– Characterized by frequent & active buying &
selling with the object of generating profit.
– Typically only financial institutions hold trading
securities.
 Since trading securities are acquired for short-
term profit, unrealized gains or losses that
result from adjustments to market value pass
through the income statement and increase or
reduce net income before there is a sale of
the securities.
 Securities Available for Sale
 Securities available for sale are neither trading
securities or securities held to maturity.
– They are an intermediate class and are typically
tied to a specific cash need.
– They are held by non-financial companies.
 For example, a manufacturing firm may build
a large fund of securities to pay for a
renovation to its plant or to retire bonds that
will come due.
 Securities Available for Sale

 Since they are acquired for longer-term

return, unrealized gains or losses that
result from adjustments to market value
do not pass through the income statement
but stay on the balance sheet as an equity
account.