With the development of economy, investment in financial assets has become an important way for companies and individuals to achieve asset growth. However, how to make wise investment decisions in the complex financial market is a question worth pondering. This article will analyze the key factors that need to be considered when investing in different types of financial assets, including cash, accounts receivable, equity investments, debt instruments etc., and provide suggestions on making prudent investment strategies based on investment purpose, risk preference and holding period. Proper investment in financial assets can bring considerable returns, while reckless actions may lead to significant losses. By reading through this article, investors can gain an comprehensive understanding of this field and avoid potential risks when managing their financial assets portfolio.
cash is the most liquid financial asset that requires active management
Cash, including cash on hand and bank deposits, is the most liquid financial asset that can be readily converted into known amount. Efficient cash management through preparing cash budgets, daily bank deposits, and timely bank reconciliations is essential to ensure adequate cash flow and prevent fraud. However, companies should not maintain excess idle cash, but rather invest temporary surplus cash in highly liquid and low risk instruments like money market funds to generate extra income.
accounts receivable needs close monitoring and valuation at net realizable value
Accounts receivable arises from credit sales and is valued at net realizable value considering estimated uncollectibles. While credit sales may boost revenue, it also leads to higher risks of bad debts. Companies should design appropriate credit policies, regularly assess customers’ creditworthiness, send invoices promptly and follow up any overdue payments to ensure timely collection of receivables.
equity investments can choose fair value or fair value through OCI depending on holding intent
For equity investments like stocks that do not provide control or significant influence, companies can elect to measure them at fair value through profit or loss or fair value through other comprehensive income (OCI) depending on the intention of holding. The former shows fair value gains and losses directly in net income, while the latter records fair value changes in OCI to avoid short-term fair value fluctuations affecting earnings.
debt instruments allow amortized cost or fair value through OCI based on business model tests
Debt instruments like bonds can be measured at amortized cost or fair value through OCI if they pass the business model and contractual cash flow characteristic tests. Amortized cost method is suitable for debt instruments held for collecting contractual cash flows, while fair value through OCI is applicable when assets are held for both collecting cash flows and selling.
In summary, companies and individuals should tailor their investment strategies and accounting policies based on the different attributes of major financial assets like cash, receivables, equities and debts. By understanding the nature, common valuation methods, risks and returns of various instruments, investors can make informed decisions to construct an optimal financial assets portfolio that aligns with their investment goals.