In CFAI Reading 35, Statement of Cash Flows, it states that cash inflow and outflows from the purchase or sale of trading securities are included in CFO. “Trading securities are a type of marketable security that a company buys and sells for the purpose of making a profit in the near term.” In the next paragraph, it states that “the acquisition and sale of short-term marketable securities, other than trading securities” is part of CFI. I don’t understand what the difference is between trading securities and other short-term marketable securities, and why is one considered CFO and the other classified as CFI.
Not exactly sure of the definitions of the two, but they should be in the glossary in back…if not, try investopedia or thestreet.com. From what I have seen in SEC filings, alot of it is up to the company’s defenition of what the securities are held as.
marketable securities mostly include commercial paper, banker’s acceptances, T bills and other money market instruments. Knew there was a slight difference, but this definition isn’t really a main point in Level 1. Focus on the what is included in CFO,CFI,CFF and the direct and indirect method in that section. Good luck.
Odd, I don’t recall having to deal with this until Level II. When a company invests in marketable securities, they’re classified in one of three ways for financial statement purposes, w/ different I/S, B/S and CF treatments, but we’ll just focus on the statement of cash flows implications. 1) trading securities 2) available-for-sale securities 3) held-to-maturity securities Material considerations w/r/t/ classification include 1) what is the company’s motivation for purchasing these securities? 2) what is the time-horizon for this investment? Within the year? Longer than a year? 3) in what industry does this company operate (related to motivation for purchase)? Let’s consider the time-horizon question. If my company purchases short-term marketable securities with the intent to sell them w/in the year, then they’re a current asset, much like accounts receivable or inventory, which makes it sensible to account for these cash flows as CFO. Recall that investments in long-lived assets (i.e. > one year or operating cycle), like property, plant & equipment get treated as CFI. Available-for-sale securities (i.e. not trading securities) may be sold to address liquidity needs, but otherwise might not be sold in the current period, these are long-term investments. Similarly for held-to-maturity securities (applicable only to fixed income instruments, clearly). The text you’ve reprinted seems misleading. There may be no difference in the actual marketable securities themselves, but rather the difference lies in how they’re classified by the company for financial reporting purposes, which is dictated by some of the considerations I’ve discussed above. Hopefully others can clarify further. I’ll await the wraith of JoeyD or TMurf, who certainly have a stronger grounding in FSA. This post is just blood in the water
Well, it’s 10:00 Pm which means that JoeyD has had his wine which means he knows nothing of FSA
hiredguns did a good job explaining. Classification between trading and available for sale has a lot to do with management’s intention. Available for sale can be treated as either short-term or long-term assets. These are the other marketable securities that the original post is referring to.