Question

E16-1 Mr. Taliaferro is studying for an accounting test and has developed the following questions about investments. 1. What are three reasons why companies purchase investments in debt or stock securities? 2. Why would a corporation have excess cash that it does not need for operations? 3. What is the typical investment when investing cash for short periods of time? 4. What are the typical investments when investing cash to generate earnings? 5. Why would a company invest in securities that provide no current cash flows? 6. What is the typical stock investment when investing cash for strategic reasons? Instructions Provide answers for Mr. Taliaferro.

Answer 1

Requirement 1

The causes would be that a company may have surplus cash that they do not need for an instant purchase of an asset, to make monies from venture income, and for calculated reason such as a purchasing a non-controlling company in the same industry.

Requirement 2

They may have met seasonal fluctuations in sales.

Requirement 3

A characteristic investment when financing cash for small periods of time is to stock excess cash until required.

Requirement 4

Debt securities are distinctive investments for banks and other financial institutions when financing cash to produce earnings

Stock securities are distinctive investments for mutual funds and pension funds when financing cash to produce incomes

Requirement 5

A company would finance in securities that offer no current cash flows, if the prospects looks hopeful. They can also use it to lock company loans.

Requirement 6

A distinctive stock investment for calculated reasons when financing cash would be to buy stocks of a company in a similar industry or in an dissimilar industry that the company desires to enter