Chapter C, Problem 3DQ

To determine

Short Term Investments:

Short term investments are basically the type of investments in which the funds are blocked for comparatively much lesser time period than the long term investments. Also, such investments generate output within a very short time span but their value, on the other hand also is comparatively lesser than the long term investments. The idea behind the motive of short term investments is to promote liquidity so that the investors who require funds within a couple of months or a year may invest in them. Generally, the maximum period of a short term investment is one year.

Trading Securities:

An active investment in debt or equity to earn short term profits or gains is known as trading securities. Also, trading securities are divided on the basis of the motive behind them. There are three different aspects of trading securities that are trading, for sale and holding till maturity.The trading securities are traded in open market and are always valued at fair market value in the books of accounts.

Short-term investments in trading securities are a part of short term assets and are valued at their current market value. As by its very basic nature the trading securities are generally meant to be sold within a short period of time, so any incomes or losses due to such events would form part of the income statement under retained earnings. And trading securities which are available for sale, such gains and losses would form part of balance sheet under shareholder's equity. There is comparatively longer time for available-for-sale securities to be sold than trading securities, there is a greater scope for changes in the fair market value of the same.

The difference between the in available-for-sale securities and the manner of recording it.