The financial accounting term short-term investments refers to securities the company has purchased that can, and will be, sold in less than twelve months. Also known as temporary investments, short-term investments typically include marketable equity and debt securities as well as short-term paper.
Short-term investments are classified as a current asset, and appear on the company's balance sheet.
In the course of normal business operations, companies require cash to pay for goods and services, including salaries of employees. Sound financial management techniques go beyond holding cash in bank accounts. Companies with significant financial flexibility, and a strong cash position, may purchase short-term investments as an alternative to placing money in a savings account at a financial institution such as a bank. While these investments are associated with a higher level of risk, the rewards can be greater too.
To be considered a short-term investment, the security must possess the following characteristics:
These short-term investments are classified as current assets, and normally fall into one of the following three categories:
SFAS 159 allows companies to value its securities at fair market value. This option is available on a security-by-security basis. When sold, the company will report the gain or loss in earnings in the current accounting period.