Q1SE_2 - Horngren'S Financial And Managerial Accounting

Question

 Identifying why companies invest and classifying investments

Garden Haven has excess cash of $15,000 at the end of the harvesting season. Garden Haven will need this cash in four months for normal operations.

Requirements  

What type of classification would Garden Haven’s investment fall within—short-term or long-term? Why?

Step-by-Step Solution

Answer

The investment will be classified as a short-term investment.

Step 1: Definition of Short-Term Investment

The investment that can quickly generate cash for the business entity within one year is known as a short-term investment.

Step 2: Classification of Investment

Garden will invest in the security that can be converted into cash within four months because the business entity will require cash. Therefore, such investment will be classified as short-term as it will be converted into cash within one year.