The Nature of Marketable Securities Many companies hold a significant portion of

Question

The Nature of Marketable Securities Many companies hold a significant portion of their financial assets in the forrn of marketable securities. For example, Microsoft Corporation recently reported investments in marketable securities totaling $56.1 billion, an amount equal to 71 percent of its total financial assets. In contrast, only 20 percent of its financial assets were in the form of accounts receivable. a. Define marketable securities (also referred to as short-term investments). What characteristics of these securities justify classifying them as financial assets? Microsoft corporation keeping financial assets in the b. What is the basic advantage of of marketable securities instead of cash? Is there any disadvantage? form c. Explain how Microsoft Corporation values these investments in its balance sheet. d. Discuss whether the valuation of marketable securities represents a departure from (1) the cost principle and (2) the objectivity principle e. Explain how fair value accounting benefits the users of Microsoft Corporation 's financial statements

Explanation / Answer

a. Marketable Securities: Marketable securities are those investment which are highly liduid with a maturity period of less than one year. It can be quickly converted into cash without major loss in value. Examples of marketable securities are stocks, short term bonds, tressury bill, commercial papers etc.

b. Basic advantage of Marketable securities is liquidity. Purchase of marketable securities does not impact the liquidity position of the business. It can be easily sold in secondary market to meet immediate cash requirement of the company. Another advantage is increase in market value will generate return for the company, also earn dividend and interest revenue for the company.

c. Microsoft corporation value these investments at fair market value in its balance sheet.

d. The valuation of marketable securities is done at fair market value, which is a exception to cost principle of accounting

Objectivity principle is the concept that the financial statement is based on solid evidence, fair market valuation is a departure from that.

e. Fair value accounting provide the accurate value of the assets and liabilities of the company to the users of the financial statement. When the marketable securities will go up or done, the company will mark up or down the value of assets, thus benefits the users to know the correct value of the company.

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