Updated July 17, 2023
Definition of Marketable Securities in Balance Sheet
The term marketable securities refer to those securities held by an entity that are capable of being converted into cash quickly usually within a period of twelve months. Since these securities represent assets of the entity that are expected to be realized within a period of twelve months, they are shown as current assets in the balance sheet of the entity.
Explanation
An entity can hold securities with different features; while some securities might be liquid in nature some others might not be liquid. In order to maintain liquidity companies usually maintain a level of their funds in such securities that can be easily converted to cash as and when the need arises. These kinds of securities are known as marketable securities and they are of a highly liquid nature. The maturity period if any in the case of marketable securities is less than one year. Marketable securities can either be in the form of debt or equity.
In the balance sheet, marketable securities are shown as “current assets” under the broad heading of “assets”. The logic is simple; the marketable securities are to be liquidated within a period year and thus they are classified as “current assets”.Further, they are presented at their fair value i.e. current market value. However, if some securities are marketable and the intention of the company’s management is to hold them for a period of more than one year then such securities can be classified as “non -current assets”.
Examples of Marketable Securities in Balance Sheet
Some common examples of marketable securities include stocks, bonds, money market instruments, and ETFs. Let us understand how marketable securities are shown in the balance sheet of a company. Following is the extract of a company’s balance sheet
|
Particulars |
Year 2019 ($) |
Year 2018($) |
| ASSETS | ||
| Current Assets | ||
| Cash and cash equivalents | 28000 | 19500 |
| Short-term investments | 54000 | 48000 |
| Trade receivables | 25000 | 36000 |
| Inventory | 32000 | 24000 |
| Other current assets | 8600 | 7200 |
| Total Current Assets | 147600 | 134700 |
Here, short-term investments refer to the marketable securities owned by the company. Same are reflecting under current assets in the company’s balance sheet.
Importance of Marketable Securities in Balance Sheet
Marketable securities are important to be shown separately in a company’s balance sheet so that the user of the financial statements can identify the level of liquidity maintained by the company. A user can match the value of current liabilities with the level of cash and cash equivalents and marketable securities to understand how much liquid funds are available with the company to meet its current obligations.
It also forms part of the calculation of important liquidity ratios such as current ratio, quick ratio, cash ratio, and so on. The ratio helps an analyst to understand the company’s position is handling its short-term liabilities.
Benefits
Following are some benefits of marketable securities:
- It helps an entity to maintain a certain level of liquidity and thereby reduce the liquidity risk. Liquidity risk refers to the risk that an entity might not have enough resources to fund its present obligations. By investing in marketable securities, the funds of the entity are arranged in such sources out of which funds can be realized as and when required.
- Marketable securities present better returns than cash equivalents. Thus, it is better for entities to invest an adequate portion of their cash in marketable securities so that higher returns are achieved by the entity on its cash funds.
- The liabilities of any entity are divided into short-term and long-term liabilities. The quantum of marketable securities helps the entity in meeting its short-term liabilities. An entity can match the maturity of its marketable securities with the due dates of its short-term liabilities and analyze if any gap is there so that the same can be filled by infusing funds.
- The marketable securities can be used by the analysts in calculating various liquidity ratios for understanding the financial standing of the company.
Disadvantages
There are some limitations attached to marketable securities.
- An entity may still face a liquidity crisis even if marketable securities are maintained as it becomes difficult to match assets and liabilities date by date. To counter this, entities can keep reserves so that those funds can be utilized as and when an emergency arises.
- If there is any statutory requirement to maintain a minimum level of funds in marketable securities then it may become non-feasible for entities since the companies might be losing on higher returns which they could have earned had they invested in other opportunities.
Conclusion
Marketable securities are short-term investments that can be easily converted into funds by the entity within one year. If the intention of the management is to hold them for more than a year, it is correct to classify them as “non-current assets”, else they shall be classified as “current assets”.
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