When a company has excess cash, one of the ways in which it can use that cash is to invest in another company's shares. If a company owns investment shares, it must report the fair market value of the shares on its balance sheet. Fair market value is the market price of the shares multiplied by the number of shares you own. If a company plans to resell the investment shares in the near future, it classifies them as trading securities. If it plans to hold them longer, it is classified as available-for-sale securities.
1. Determine the number of investment shares the company owns, and the market price per share at the end of an accounting period. For example, assume it owns 1,000 shares of a stock with a market price of $10 per share, and 1,000 shares of a different stock with a market price of $15 per share.
2. Multiply the number of shares owned by the price per share. In this example, multiply 1,000 by $10 to get $10,000, and multiply 1,000 by $15 to get $15,000.
3. Add the amounts together to calculate the total fair market value of the investment shares. In this example, add $10,000 and $15,000 to get $25,000 in total investment shares.
4. Report the amount as trading securities in the current assets section of the balance sheet, if the company plan to resell the investment shares in the near future. Report the amount as available-for-sale securities in the long-term assets section of the balance sheet if the shares will be held longer. Continuing with the example, if the company plans to resell the investment shares in the near future, it must report “Trading Securities $25,000” in the current assets section of its balance sheet.