Reasons why Corporations Invest in Securities As per business essay help experts, there are several reasons due to which corporations invest in securities like debt and equity, these are as below:
Excess Cash: Some time corporations have excess cash that they do not need for the immediate purchase of operating assets (Weygandt, Kimmel & Kieso, 2010). At that time, they are interested to invest the excess amount in securities.
To Generate Earnings: Second reason is that corporations want to generate earnings from investment income and it is the reason that they invest in securities. For example, mutual fund companies primarily invest in equity securities in order to benefit from stock-price appreciation and dividend revenue.
Strategic Reasons: Companies also make investment in securities for strategic reasons. In this concern, by purchasing a significant, but not controlling, interest in the company, a firm can exercise influence over a customer or supplier (Weygandt, Kimmel & Kieso, 2010). Similarly, a company can also purchase a non-controlling interest in another company in a related industry. It will help the company to establish its presence in that industry. Thus, these are some strategic reasons for which companies invest in securities. Impact on Market Investment in securities primarily serves to capitalize organizations, so that they can easily expand the business as well as regularly produce goods and services to benefit the world. If corporations stopped the practice of making investment in securities, it will affect the market.
For example given by our Australia Online Business Management Assignment Help experts , most of private institutions are not capable on their own level to arrange the funds required to develop a large-scale manufacturing process as it requires larger investment. Such companies issue millions of shares to the investing public and arrange large amount of capital quickly. If corporations will not make investment in securities, it would be difficult for private institutions to run-their large scale manufacturing process (Warren, Reeve & Duchac, 2011). Finally, if corporations stopped making investment in securities, it will affect the market liquidity and negatively impact on the business of different small and medium-sized organizations. Compare and contrast of Valuation Guidelines for Investment Debt and stock investments are classified into three categories of securities such as trading securities, available-for-sale securities and held-to-maturity securities for the purposes of valuation on a balance sheet date (Porter & Norton, 2007).
For these securities, there are different valuation guidelines that are as below:
Trading Securities: These securities are valued at fair value with changes reported in net income.
Available-for-Sale Securities: These securities are valued at fair value with changes reported in the stockholders’ equity section (Porter & Norton, 2007).
Business Essay Help On Corporations Invest in Securities Held-to-Maturity Securities: These securities are valued at amortized cost. There are some similarities and differences among the valuation guidelines for investment at a balance sheet date.Trading securities and available-for-sale securities are valued at fair value on balance sheet date. On the other side, held-to maturity securities are valued at amortized cost on the ending balance sheet date (Kimmel, Weygandt & Kieso, 2011).
For held-to maturity securities, unrealized holding gains and losses are not recorded and realized gains and losses on sales and interest revenue all are included in net income (Nikolai, Bazley & Jones, 2009). Similarly, for available-for-sale securities, unrealized profits or losses are not recorded in the income statement, but, it is valued as a separate component of stockholders’ equity. In contrary to this, for the valuation of trading securities, changes in cost are reported as part of net income. The changes are also reported as unrealized gains or losses as the securities have not been sold (Kimmel, Weygandt & Kieso, 2011). The difference between the total cost of trading securities and their total fair value is termed as unrealized gains or losses. Trading securities are classified as a current asset on balance sheet while available-for-sale securities and held-to-maturity securities are either classified as current or non-current asset on balance sheet date (Warren, Reeve & Duchac, 2011). Thus, there are differences and similarities among valuation guidelines for investment securities as some guidelines are applied to both trading and available-for-sale securities but not applied to held-to-maturity securities and so on.
References- Kimmel, P. D., Weygandt, J. J. & Kieso, D. E. (2011). Accounting: Tools for Business Decision Making. USA: John Wiley & Sons. Nikolai, L. A., Bazley, J. D. & Jones, J. P. (2009). Intermediate Accounting. USA: Cengage Learning. Porter, G. A. & Norton, C. L. (2007). Financial Accounting: The Impact on Decision Makers. USA: Cengage Learning. Warren, C. S., Reeve, J. M. & Duchac, J. (2011). Accounting. USA: Cengage Learning. Weygandt, J. J., Kimmel, P. D. & Kieso, D. E. (2010). Accounting Principles. USA: John Wiley and Sons.
Get 24×7 US,UK and Australia business assignment help from our expert. Our US, UK and Australian assignment help experts assure you that you will get perfect assignment help services within the deadline.