An important element in accounting for investment securities concerns the distinction between its noncurrent and current classification. Required: a. Why do most companies maintain an investment portfolio consisting of both current and noncurrent securities? b. What factors should an analyst consider when evaluating whether investments in marketable equity securities are properly classified as current or noncurrent? How do these factors affect the accounting treatment for unrealized losses?

An important element in accounting for investment securities concerns the distinction between its noncurrent and current classification. Required: a. Why do most companies maintain an investment portfolio consisting of both current and noncurrent securities? b. What factors should an analyst consider when evaluating whether investments in marketable equity securities are properly classified as current or noncurrent? How do these factors affect the accounting treatment for unrealized losses?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Q: What documents would a company need to correctly account for its investment securities, and what…

A: Investment Securities: Investment securities can be stated as those securities that are acquired…

Q: Define materiality. How does materiality come into play when assessing financial statement…

A: Materiality is the threshold above which missing or incorrect information in the financial…

Q: xplain what is meant by the term ‘financial distress’. If we assume that financial distress exists,…

A: Explain what is meant by the term ‘financial distress’ Answer: Meaning of 'Financial distress' -…

Q: Which of the following statementsregarding the importance or information provided by accounting to…

A: Financial Statement:— It is the statement that presents the financial performance of a company. It…

Q: When comparing fi nancial statements prepared under IFRS with those prepared underUS GAAP, analysts…

A: IFRS and US GAAP follows similar accounting policies when it comes to realized losses and unrealized…

Q: Investments in equity securities for which the investor has insignificant influence over the…

A: Fair value: Fair value is the price at which, both seller and buyer agree to exchange the asset. So,…

Q: For fi nancial assets classifi ed as trading securities, how are unrealized gains and lossesrefl…

A: Trading securities are debt or equity assets that management expects to aggressively sell for gain…

Q: Consider our requirement to provide ‘true’ accounting information (the ‘true and fair’ requirement).…

A: A cash flow hedge is a method used by the investor in order to offset the risks of cash flow with…

Q: Dividend revenue is recognized for trading securities and available for sale securities even if held…

A: Solution Concept Dividend is recognized in income statement for trading securities if they are held…

Q: Which statement is not true?

A: In the above question, there are four statements; we must identify which of the four statements is…

Q: Which of the following statements related to securities is not true: O Unrealized gains and losses…

A: The statement that is not true related to securities is given below

Q: Which of the following is a false statement about applying the equity method? O A. One of the…

A: In accounting, the equity method is used to account for investments when one company holds…

Q: What is the classification of Equity investments for which the investor does not have significant…

A: When a equity investment is made and if such investment does not result in significant influence,…

Q: Identify the term being referred to: A theory that states that how high or low an entity pays out…

A: Solution:- There are two theories related to dividend- Dividend relevance theory and dividend…

Q: The acquisition of assets by issuing securities would be classified as an operating activity. an…

A: Issuing securities for the acquisition of assets doesn't involve any cash flows.

Q: In accounting, we usually use historical cost (i.e. original price) on the balance sheet. However,…

A: Investment in equity securities is the current or non-current investment made by the firm in the…

Q: Which of the following statement is INCORRECT? Question 15 options: 1) The finance manager…

A: Finance manager is for management of funds and increase return on assets and maximize value of…

Q: In relation to investments and fair value, what are the two categories of investments that companies…

A: Investment: It refers to the process of using the currently held excess cash to earn profitable…

Q: Balance Sheet Insolvency occurs when Liabilities are greater than the Assets resulting in negative…

A: Insolvency Risk: Insolvency risk is a probability that an enterprise cannot satisfy its debt…

Q: Financial assets include stocks and bonds. These are fairly simple securities that can often be…

Q: What are the ethical considerations in making subjective valuations of these complex…

Q: Which of the following statements is false? A. Mutual funds are pool investor funds to…

A: Working capital is the capital which is required to operate day to day working of a business. It…

Q: How do creditors assess risk when lending funds to a company? a. By establishing covenants in the…

A: Creditors assess Risk when lending funds to a company using credit rating .

Question

An important element in accounting for investment securities concerns the distinction between its noncurrent and current classification.

Required:

a. Why do most companies maintain an investment portfolio consisting of both current and noncurrent securities?

b. What factors should an analyst consider when evaluating whether investments in marketable equity securities are properly classified as current or noncurrent? How do these factors affect the accounting treatment for unrealized losses?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Similar questions

Discuss the arguments for each position. Some individuals maintain that the only proper accounting treatment for all marketable securities is current value, while others maintain that this treatment might allow companies to manage earnings.
What are some advantages of matching the maturities of claims against assets with the lives of theassets financed by those claims? Is it feasible for afirm to match perfectly the maturities of all assetsand claims against assets? Why might a firm deliberately mismatch some asset and claim maturities?
Explain the classification of SHORT-TERM INVESTMENTS in the corporate balance sheets while differentiating the valuation approaches followed as for the types of short-term investments.
All investments in debt securities and investments in equity securities for which the investor lacks significant influence over the operation and financial policies of the investee are classified for reporting purposes in one of three categories, and can be accounted for differently depending on the classification. What are these three categories?
Which of the following statements is false? A. Internal controls are the processes by which the firm ensures that it presents accurate financial statements. B. Greenfield investments provide uncertain cash flows with high yields and high growth potential. C. Footnotes allow investors or any users to improve their assessments of the amount, timing, and uncertainty of the estimates reported in financial statements. D. Secondary markets are the markets in which existing, already outstanding securities are traded among investors.
Why are unrealized gains and losses from available-for-sale securities not reported as a component of net income? Select one: a. Because goodwill exists that must be separately accounted for b. Because the investor has the ability to exercise significant influence over the investee c. Because consolidated financial statements must be prepared d. Because large swings in market value over which management has no control may distort current period performance as measured by net income
An auditor’s analytical procedures indicate a lower than expected return on an equity methodinvestment. This situation most likely could have been caused bya. An error in recording amortization of the excess of the investor’s cost over the investment’s underlying book value.b. The investee’s decision to reduce cash dividends declared per share of its commonstock.c. An error in recording the unrealized gain from an increase in the fair value of availablefor sale securities in the income account for trading securities.d. A substantial fluctuation in the price of the investee’s common stock on a national stockexchange.
Case Study: Accounting Assets and Liabilities Introduction: In the realm of accounting, understanding and managing assets and liabilities are fundamental for assessing the financial health and stability of an organization. This case study delves into the accounting practices of XYZ Corporation, a manufacturing company, to illustrate the significance of proper asset and liability management. XYZ Corporation's Asset Management: XYZ Corporation, in its commitment to effective asset management, carefully categorizes its assets into current and non-current. Current assets, such as cash, accounts receivable, and inventory, are monitored closely for liquidity and short-term financial health. Non-current assets, including property, plant, and equipment, are assessed for their long-term value and depreciation. Liability Management and Debt Ratio: To ensure a healthy balance between assets and liabilities, XYZ Corporation meticulously manages its liabilities. Current liabilities, like accounts…