Understanding Long-Term Investments
Let me explain what a long-term investment really is—it's an asset that a company intends to hold onto for more than a year, things like stocks, bonds, or real estate. On the balance sheet, you'll find this as an account on the asset side, covering the company's investments in these areas that aren't meant for quick turnover.
This is different from short-term investments, which you might sell soon. Long-term ones stick around for years, and sometimes they're never sold at all. If you're thinking like a long-term investor, you're okay with some risk because you're chasing bigger rewards, and you can afford to tie up your capital for a while until you actually need it.
Key Takeaways
- A long-term investment is an account for assets like stocks, bonds, and real estate that a company plans to keep for at least a year.
- It shows up on the asset side of the balance sheet.
- Long-term investors accept more risk for the chance of higher returns.
- These differ from short-term investments, which are sold within a year.
How Long-Term Investments Work
You often see long-term investing when one company puts a lot into another and gains influence without full control—think of it as recording the purchase price as a long-term investment. When a firm buys bonds or stocks, deciding if it's short-term or long-term affects the balance sheet big time. Short-term ones get marked to market, so value drops show as losses, but gains aren't counted until sold. That classification directly hits the net income on the income statement.
Held-to-Maturity Investments
If a company plans to hold a financial product until it matures and can prove they can do it, we call it 'held to maturity.' Record it at cost, and amortize any premiums or discounts over time. Take the eBay purchase of PayPal in 2002— that's a prime example. PayPal grew, then spun off in 2015, but eBay benefited from owning a top payment processor for years. Companies might write down long-term assets if they're impaired, but ignore short market dips. Equity securities can't be held-to-maturity since they don't mature.
Remember, managing these is part of capital budgeting—planning a firm's long-term investments.
Available for Sale and Trading Investments
Investments you hold to resell within a year for quick profit are current, not long-term. But if you might sell later, beyond 12 months, classify them as 'available for sale.' Buy them at cost, then adjust to fair value each period—unrealized gains or losses go to other comprehensive income until sold.
Examples of Long-Term Investments
Real estate is a solid example on a balance sheet—companies hold land or buildings for years to gain from value increases, plus rental income and capital gains. It boosts financial health. Equity in other companies is another—hold shares long-term for dividends and appreciation, diversifying your portfolio and potentially delivering big returns for stability.
Impact on Company Finances
Can these affect liquidity? Yes, they're hard to sell quickly at full value, so too many might cause cash-flow issues. On strategy, they diversify and provide steady income like bond yields or rents, cushioning if your main business dips. They can boost creditworthiness—agencies look at them against liabilities for ratings. For profitability, extras like rental income or yields add to the bottom line, helping meet obligations.
The Bottom Line
Long-term investments like stocks, bonds, real estate, or stakes in other firms are key for stability and growth. Hold them over a year, and you get income from dividends, rents, or appreciation. This approach strengthens financial health and aids expansion.
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