Corporations purchase investments in debt or stock securities generally for one of three reasons. First, a corporation may have access cash that it does not need for the immediate purchase of operating assets. Many corporations experiences seasonal fluctuations in sales. At the end of an operating cycle, many corporations have cash on hand that is temporary idle until the start of another operating cycle. These companies may invest the excess funds to earn a greater return than they would get by just holding the funds in the bank. The role of that such temporary investments play in the operating cycle. Excess cash may also result from economic cycles. When the economy is booming and it generates considerable cash. It uses some of this cash to purchase new plant and equipment and play out some of the cash in dividends. But it may also invest access cash in liquid assets in anticipation of a future downturn in the economy. It can then liquids these investments during a recession, when sales slow down and cash is scarce. When investing access cash for short periods of time, corporations invest in low-risk highly liquid securities most often short term government securities. It is generally not wise to invest short term excess cash in shares of common stock because stock investments can experience repaid price changes. If you did invest your short term excess cash in stock and the prices of the stock declined significantly just before you needed cash again, you would be forced to sell your stock investment at a loss.

A second reason some corporations such as banks purchase investments as to generate earnings from investment income. Although banks make most of their earnings by lending money, they also generate earnings by investing in debt and equity securities. But loan demand varies both seasonally and with changes in the economic climate. Thus when loan demand is low, a bank must find other uses for its cash. Bank regulators severely limit the ability of banks to invest in common stock because of the risk involved. Therefore most investments held by banks are debt securities.

Pension funds and mutual funds are corporations that also regularly invest to generate earnings. However they do so for speculative reasons. They are speculating that the investment will increase in value and thus result in positive returns. Therefore they invest primarily in the common stock for other corporations. These investments are passive in nature. The pension fund or mutual fund does not usually take an active role in controlling the affairs of the companies in which they invest.
Companies also invest for strategic reasons. A company may purchase a non-controlling interest in other company in a related industry in which it wishes to establish a presence. A corporation may also choose to purchase a controlling interest in another company. This might be done to enter a new industry without incurring the tremendous costs and risks associated with starting from scratch or a company might purchase another company in its same industry. The purchase of a company that is in your industry, but involved in different activity is called a vertical acquisition.

Debt investments
Debt investments are investments in government and corporation bonds. In accounting for debt investments entries are required to record the acquisition, the interest revenue and the sale. When the bonds are sold it is necessary to credit the investment account for the cost of the bonds. Any difference between the net proceeds from the sale and the cost of the bonds is recorded as a gain or loss.

Stock investment
Stock investments are investments in the capital stock of corporations. When a company holds stock or several different corporations the group of securities is defined as an investment portfolio.
The accounting for investments in common stock is based on the extent of the investors influence over the operating and financial affairs of the issuing corporations. At acquisition the cost principle applies. Cost includes all expenditures necessary to acquire these investments such as the price paid plus any brokerage fees.

When an investor company owns only a small portion of the shares of stock of another company, the investor can not exercise control over the investee. But when an investor owns between 20% to 50% of the common stock of a corporation, it is reported that the investor has significant influence over the financial and operating activities of the investee. The investor provably has a representative on the investee board of directors. Through that representative, the investor begins to exercise some control over the investee. The investee company in some sense becomes part of the investor company. Under the equity method, the investor records its share of the net income of the investee in the year when it is earned.
A company that owns more then 50% of the common stock of another entry is known as the parent company. The entry whose stock is owned by the parent company is called the subsidiary. Because of its stock ownership, the parent company has a controlling interest in the subsidiary.

When a company owns more than 50% of the common stock of another company, consolidated financial statements are usually prepared. Consolidated financial statements present the total assets and liabilities controlled by the parent company. They also present the total revenues and expenses of the subsidiary companies. Consolidated statements are prepared in addition to the financial statements for the parent and individual subsidiary companies.
 

What has happened to the relative size of foreign stock and bond markets? What alternative securities are available, what are their cash flow and risk properties? What are the historical return and risk characteristics of the major investment instrument? What differs in the rate of return and foreign securities markets? Why should investors have a global perspective regarding their investments? What are the relationship among the returns for foreign and domestic investment instruments?

 

The value of debt and stock investments may fluctuate greatly during the time they are held. For purposes of valuation and reporting at a financial statement date, debt and stock investments are classified into three categories of securities.

Trading securities are securities bought and held primary for sale in the near term to generate income on short term price differences.
Available for sale securities are securities that are held with the intent of selling them sometime in the future.

Held to maturity securities are debt securities that the investor has the intent and ability to hold to maturity.
Trading securities are hold with the intension of selling them in a short period. Trading means frequent buying and selling. Trading securities are reported at fair value and changes from cost are reported as part of net income. The changes are reported as unrealized gains or losses because the securities have not been sold. The unrealized gains or loss is the differences between the total cost of trading securities and their total fair value. When the total cost of the trading securities is greater than total fair value, an unrealized loss has occurred. The market adjustment account is carried forward into future accounting periods. No entries are made to this account is carried during the period. At the end of each reporting period, the balance in the account is adjusted to the differences between cost and fair value.
Available for sale securities as indicated earlier Available for sale securities are held with the intent of selling them sometime in the future. If the intent is the sell the securities within the next year or operating cycle, the securities are classified as current asset in the balance sheet. Otherwise they are classified as long term assets in the investment sections selection of the balance sheet. Available for sale securities are also reported as fair value. The producer for determining fair value and the unrealized gain or loss for these securities in the same as for trading securities.

Short term investment
Short term investments are securities held by a company that are readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer. Investments that do not meet both criteria are classified as long term investments. An investment is readily marketable when it can be sold easily whenever the need for cash arises. Short term papers meet these criteria. It can be readily sold to other investors. Stocks and bonds traded on organized securities exchanges. They can be bought and sold daily. In contract these may be only a limited market for the securities issued by small corporations and no market for the securities of a privately hold company.

Long term investments
Long term investments are generally reported in a separate section of the balance sheet immediately bellow current assets. Long term investments in available for sale securities are reported at fair value. Investments in common stock accounted for under the equity method are reported at their equity value.