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After completing this chapter you should be able to: Distinguish between debt and equity securities and between short-term and long-term investments, describe how to report equity securities with controlling influence, compute and analyze the components of return on total assets,. | INVESTMENTS AND INTERNATIONAL OPERATIONS Chapter 15 Chapter 15: Investments and International Operations BASICS OF INVESTMENTS Companies transfer excess cash into investments to produce higher income. Some companies are set up to produce income from investments. Companies make investments for strategic reasons. Motivation for Investments C1 There are several reasons for a company to make investments. Some companies may wish to invest idle cash to receive a higher rate of return on money. Investment companies are established to seek returns through investing in other companies. Many companies make investments for strategic or competitive reasons. INVESTMENTS OF SELECTED COMPANIES This chart shows the relative proportion of short-term and long-term investments for four different corporations. Notice the difference between the investments as a percent of total assets between Gap and Microsoft. SHORT-TERM VERSUS LONG-TERM INVESTMENTS Short-term investments: are securities that management intends to convert to cash with one year or the operating cycle, whichever is longer. are readily convertible to cash. Long-term investments: are not readily convertible to cash. are not intended to be converted to cash in the short term. are reported in the noncurrent section of the balance sheet, often in its own category. C1 Part I When making an investment decision, the first thing a manager must do is decide on the investment horizon. Short-term investments may usually be converted into cash quickly. The rate of return received on the investment is generally higher for longer term investments. Part II Long-term investing is usually based on a strategic plan. In most cases, it is difficult to convert a long-term investment into cash within a short period of time. Short-term investments are usually classified in the current asset section of the balance sheet and long-term investments are shown in a separate category called investments. CLASSIFICATION AND REPORTING | INVESTMENTS AND INTERNATIONAL OPERATIONS Chapter 15 Chapter 15: Investments and International Operations BASICS OF INVESTMENTS Companies transfer excess cash into investments to produce higher income. Some companies are set up to produce income from investments. Companies make investments for strategic reasons. Motivation for Investments C1 There are several reasons for a company to make investments. Some companies may wish to invest idle cash to receive a higher rate of return on money. Investment companies are established to seek returns through investing in other companies. Many companies make investments for strategic or competitive reasons. INVESTMENTS OF SELECTED COMPANIES This chart shows the relative proportion of short-term and long-term investments for four different corporations. Notice the difference between the investments as a percent of total assets between Gap and Microsoft. SHORT-TERM VERSUS LONG-TERM INVESTMENTS Short-term investments: are securities that
