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Explain the Difference Between Short-Term and Long-Term Investments. Cite Examples of Each

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Short term Investments are just that, a investment that is short term, which means that investors can only invest in this type of investment less than 1-year of period. Specifically, short-term investments are securities that (1) management intends to convert to cash within one year or the operating cycle, whichever is longer, and (2) are readily convertible to cash (Wild et al., 2007, p. 586). Examples of short term securities are certificate of deposits (CD), treasury bills, and commercial paper. These investments help in managing the idle funds in a better manner. In choosing these securities, the firm must keep in mind safety, maturity and marketability of its investment.

An example of how a CD would be if you purchase a $10,000 CD with an interest rate of 5% compounded annually and a term of one year. At year's end, the CD will have grown to $10,500 ($10,000 * 1.05).

Long term investments will include the financial investments and the physical assets which are not used for productive purposes or in the operations of the business. These investments are as those securities that are not to be converted to cash or are not intended to be converted into cash in the short term. Long-term investments can include funds earmarked for a special purpose, such as bond sinking funds and investments in land or other assets not used in the company's operations (Wild et al., 2007, p. 586).

The difference between long and short term is in the length of the investment, the safety of the investment and the marketability or liquidity of the investment risk of the security. Long term Investments tend to be more risky and illiquid.

Wild, J. J., Larson, K. D., & Chiapetta, B. (2007). Fundamental accounting principles (18th ed.). New York, NY: McGraw-Hill.



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