The question asked:
Planting
Haven has excess cash of $15,000 at the end of the harvesting season.
Planting Haven will need this cash in four months for normal operations.
Requirements
1. What are some reasons why Planting Haven may choose to invest in debt or equity securities?
2. What type of classification would Planting Haven’s investment fall within—short-term or long-term? Why?
The company Planting Haven has an excess of cash at the end of their
period and does not need it for normal operations for the next 4 months.
The company intends to invest the money into a debt or equity security. Why would a company do this?
Student 1 (Josh)“The company wants to make the best use of its excess cash, so it
invests in debt or equity securities to generate investment income”
(Horngreen 2018). The company decides that they did not need this cash
laying around not working for them, so they decide to profit off the
money. They may also want to increase the relationship that they have
with another company by investing in them for the period, which may help
the company later on down the road on things such as discount rates on
merchandise or similar etc.
There are two different types of
investments, they are either short-term or long-term investments. The
usual way of telling the difference is determining if the company wants
to hold onto the investment for greater than a 12-month (1 year) period.
The company already stated that they do not need this investment for 1
year but rather a shorter term of 4 months. This investment would be
classified as a Short-Term investment due to the amount of time the
company intends on holding it.
The main purpose of this is to, instead
of gathering dust and not working for the company, the money can be put
to good use. It can make the company more money, than just sitting in a
cash account gathering dust. They can generate more wealth for their
year end income statement, which in turn could lure investors to their
company. It is a win-win scenario and is highly encouraged.
I do hope that I explained this topic, and the coverage that I provided can help someone else.
Works Cited:
Miller-Nobles, Tracie L., Brenda Mattison, Ella Matsumura. Horngren’s Accounting, 12th Edition. Pearson, 2018. [VitalSource]. Student 2 (Gabriel)
Well the Planting Haven has the choice to invest in either a debt or
equity securities, this depends on the business strategy. Do they want
to invest in debt securities that can make a quick profit or hold out
for big profit later on. Debit securities is a “investment in notes or
bonds payable issued by another company” (Miller-Nobles, p.801). If they
want to to invest in an equity securities plan, this means having
control ownership in other companies. Equity securities is a “investment
in stock ownership in another company that sometimes pays cash
dividends or issues stock dividends” (Miller-Nobles, p.801).
A short-term investment is a “investment in debt and equity
securities that the investor intends to sell in a year or less”
(Miller-Nobles, p. 802). This means selling debt and equity
securities for profit that Planting Haven can use to grow their company
right instead of waiting a later time. A long-term investment is a
“investment in debt and equity securities that the investor intends to
hold on for longer than one year” (Miller-Nobles, p. 802). A long-term
investment is used for the long-term strategy for company growth and
also the money is not needed for anything at this time.
The best strategy for Planting Haven to invest $15,000 during normal
operations and receive some return on invest within four months. The
strategy that should be used is a short-term investment, because it can
be sold in less than a year.
Reference
Miller-Nobles, T., Mattison, B., & Matsumura, E. M. (2018). Horngreen’s Accounting, 12th Edition (12th ed.). Pearson.
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