Definition
Current-Asset Investment refers to investments made by businesses or individuals that are intended to be held for less than one year. These typically include marketable securities, short-term bonds, Treasury bills, and shares. The primary objective of current-asset investments is liquidity and flexibility, allowing investors to convert these assets into cash quickly to meet imminent financial obligations or seize short-term opportunities.
Examples
- Marketable Securities: Stocks and bonds that can be easily bought and sold on public exchanges and are considered highly liquid.
- Short-term Bonds: Government or corporate bonds that mature within one year, offering a fixed interest income for a short period.
- Treasury Bills: Short-term government securities with maturities ranging from a few days to one year.
- Certificates of Deposit (CDs): These are time deposits at banks with fixed interest rates and fixed maturity dates that are less than one year.
Frequently Asked Questions
What distinguishes current-asset investments from long-term investments?
Current-asset investments are intended to be held for less than one year. In contrast, long-term investments, such as real estate or long-term bonds, are typically held for more than one year to potentially achieve higher returns.
Why do businesses make current-asset investments?
Businesses make current-asset investments to maintain liquidity, ensuring they have readily available funds to meet short-term expenses, manage cash flows, or take advantage of quick investment opportunities.
Are current-asset investments risk-free?
No investment is entirely risk-free. While current-asset investments are generally considered safer compared to long-term investments, they still carry some level of risk, including market and interest rate risks.
How are current-asset investments reported in financial statements?
Current-asset investments are reported under “Current Assets” on a company’s balance sheet, showcasing them as liquid assets capable of being converted to cash within a year.
What is the advantage of investing in Treasury bills as current-asset investments?
Treasury bills are considered low-risk investments because they are backed by the government. They provide a safe and quick option for investors to park their funds temporarily.
Related Terms
- Fixed-Asset Investment: Investments in long-term assets like property, plant, and equipment that are expected to be used for more than one year.
- Marketable Securities: Financial instruments that are liquid and can be quickly converted into cash, such as stocks and bonds.
- Liquidity: The ease with which an asset can be converted into cash without affecting its price.
- Treasury Bills: Short-term government securities with maturities ranging from a few days to one year.
Online Resources
- Investopedia: What is a Current Asset?
- Accounting Coach: Current Assets
- The Balance: Understanding Current Assets
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield – Provides comprehensive coverage of financial accounting concepts, including current assets.
- “Financial Accounting: An Integrated Approach” by Ken Trotman and Michael Gibbins – A great resource to understand financial accounting thoroughly.
- “Corporate Finance (The Mcgraw-Hill/Irwin Series in Finance, Insurance, and Real Estate)” by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey F. Jaffe – Offers detailed insights into corporate finance practices, including asset management.
Accounting Basics: “Current-Asset Investment” Fundamentals Quiz
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