Short-Term Investments

Since we have some extra cash, we decided to invest $10,000 in a public traded company as short-term investment.

We record the cash invested $10,000, as Acquisition of quoted shares, in Cash Flows from Investing Activities on the Cash Flow Statement because this item does not impact a company’s taxes initially.

Cash Flow StatementYear 1Year 2
Cash flows from operating activities
Net Income28,804.0051,604.00
Changes in working capital
(Increase)/Decrease in Inventory0.00(22,000.00)
(Increase)/Decrease in Accounts Receivable0.00(45,000.00)
(Increase)/Decrease in Prepaid Expenses0.00(16,000.00)
Increase/(Decrease) in Accounts Payable0.004,000.00
Increase/(Decrease) in Deferred Revenue0.0011,500.00
Net cash from operating activities28,804.00(9,896.00)
Cash flows from investing activities
Capital Expenditures0.00(18,000.00)
Acquisition of quoted shares0.00(10,000.00)
Net cash from investing activities0.00(28,000.00)
Cash flows from financing activities0.000.00
Net Cash from financing activities0.000.00
Net Change in Cash28,804.00(37,896.00)

We also need to record this investment in our Balance Sheet as Short-Term Investment because this is our intent.

Balance SheetYear 1Year 2
Current Assets
Accounts Receivable0.0045,000.00
Prepaid Expenses0.0016,000.00
Short-Term Investments0.0010,000.00
Total Current Assets30,000.0085,104.00
Long Term Assets
Property, plant and equipment0.0012,000.00
Total Long Term Assets0.0012,000.00
Total Assets30,000.0097,104.00
Liabilities & Equity
Current Liabilities
Accounts Payable0.004,000.00
Deferred Revenue0.0011,500.00
Total Current Liabilities0.0015,500.00
Long Term Liabilities
Total Long Term Liabilities0.000.00
Toal Liabilities0.0015,500.00
Total Liabilities & Equity30,000.0097,104.00

If the public traded company pay us dividends, we will record the dividends as investment income in the Income Statement. That is because we must pay taxes on the income we earn from the investment.

There is no associated non-cash adjustment here. The interest or investment income is earned in cash and incurs cash taxes. Cash taxes represent taxes paid in cash (complicated topic).

Impact of Short-Term Investments to the Financial Statements in a Glance

Impact of Short-Term Investments to the Financial Statements in a Glance

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