Many companies hold a significant portion of their financial assets in the form of marketable securities. For example, Microsoft Corporation recently reported investments in marketable securities (short-term investments) totaling $90.9 billion, an amount equal to 84 percent of its total financial assets. In contrast, only 16 percent of its financial assets were in the form of accounts receivable.
a. Define marketable securities (also referred to as short-term investments). What characteristics of these securities justify classifying them as financial assets?
b. What is the basic advantage of Microsoft Corporation keeping financial assets in the form of marketable securities instead of cash? Is there any disadvantage?
c. Explain how Microsoft Corporation values these investments in its balance sheet.
d. Discuss whether the valuation of marketable securities represents a departure from (1) the cost principle and (2) the objectivity principle.
e. Explain how fair value accounting benefits the users of Microsoft Corporation's financial statements.