Introduction to Investments

Companies may have cash balances that exceed their current operating needs. If the extra cash is not needed for a short period of time, the company may invest the excess cash to generate interest or dividend revenue. A company may also have a strategic purpose for accumulating cash, such as acquiring stock in another corporation. The investment of cash in each of these circumstances results in an investment being reported on the balance sheet. Investments are usually reported on a separate line from cash and may appear as short‐term or long‐term assets depending on the type of investment and management's plan for keeping the investment.
In choosing an investment, a company has many choices, including certificates of deposit, U.S. Treasury bills, bonds and notes, mutual funds, bonds of other companies, and stock of other companies. The types of accounting entries made are different for investments in bonds and stocks.