Temporary Investments Example

Generally, temporary investments consist of short-term documents (certificates of deposit, treasury bonds and negotiable documents), negotiable debt securities (government and company bonds) and marketable equity securities (preferred and common stocks), purchased with cash that is not immediately needed for operations.

These investments can be held temporarily, instead of having the cash, and can be quickly convert to cash when current financial needs make that conversion.

Temporary investments must be:

1. Quickly negotiable or realizable.
2. Intended to be converted into cash when needed, within a year or a cycle of operations, whichever is longer.

The fact that they are quickly negotiable means that the security can be sold easily. For example, if stocks are highly restricted (not publicly traded) they may not have market or have it very limited and in this case it may be more appropriate to classify the securities as long-term investments term. Trying to convert them is a very difficult principle in practice. In general, the intention to convert them is justified when the cash invested is considered a contingency fund for use when necessary or when it is an investment made with cash temporarily idle due to the rhythm of the deal. When classifying investments, management's intent should be supported by relevant evidence, such as the history of investment activities. investment of the company, events subsequent to the date of the statement of financial position, as well as the nature and purpose of the investment.

The fundamental objective is to absorb opportunity costs, and the benefit can arise from income, as well as from the price difference between buying and selling.