Long Term Assets
Everything we've discussed up until now has been a current asset or current liability. Now, we are going to take a look at the long term assets that are found on the balance sheet. These are the things that a business owns but can't be used to fund day-to-day operations.
Long Term Investments
Long Term investments and funds are investments a company intends to hold for more than one year. They can consist of stocks and bonds of other companies, real estate, and cash that has been set aside for a specific purpose or project. In addition to investments a company plans to hold for an extended period of time, Long Term Investments also consist of the stock in a company's affiliates and subsidiaries.The difference between short term and long term investments lie in the company's motive for owning them. Short term investments consist of stocks, bonds, etc. a company has bought and will sell shortly. The investments made under long term investments may never be sold. An excellent example would be Berkshire Hathaway's relationship with Coca-Cola. Berkshire owns 200 million shares of the soft-drink giant, and will most likely continue to hold them forever, regardless of the price they are selling for in the open market.
Carrying Values of Stock Investments
As you now know, when a business purchases common stocks as an investment, they will go into either the short term or long term investment categories on the balance sheet. These are normally carried on the balance sheet at cost or market value (whichever is less). This means that most of the time, the stocks the company owns are worth far more than they are on the balance sheet (for example, if a business owned 50,000 shares of Sprint and they paid $10 per share, they would have $500,000 on the balance sheet under either short term or long term investments. If Sprint rose to $35 per share, the value of their holdings would be $1,750,000, yet the balance sheet would continue to carry $500,000. Thus, the difference of $1,250,000 would not be included in the book value of the company. (This is a prime example of how financial statements are only the beginning of the valuation process. They have their limitations, but without them, we would have no basis to calculate intrinsic value.)Next page > Property, Plant and Equipment > <<back, 15, 16, 17, 18, 19, 20, 21, more >>
This page is part of Investing Lesson 3 - Understanding the Balance Sheet. To go back to the beginning, see the Table of Contents. If you have already read this lesson, you can skip directly to the Balance Sheet Quiz.
