Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Accounting for Investments: Stocks, Bonds, and Derivatives
Investments in stocks, bonds, and derivatives are common financial instruments held
by companies and individuals for various purposes, including generating returns and
diversifying investment portfolios. Accounting for these investments involves
recording them on the balance sheet at fair value and recognizing any changes in
value in the income statement.
1. Stocks (Equity Investments): Stocks represent ownership interests in a company.
When a company purchases stocks of another company as an investment, it records
the investment on its balance sheet as an asset at fair value. Changes in the fair value
of the stocks are recorded in the income statement as gains or losses.
2. Bonds (Debt Investments): Bonds are debt securities issued by governments,
municipalities, or corporations to raise capital. When a company invests in bonds, it
records the investment on its balance sheet as an asset at fair value. The interest
income earned from bonds is recognized in the income statement, and any changes
in the fair value of the bonds are recorded as gains or losses.
3. Derivatives: Derivatives are financial contracts whose value is derived from an
underlying asset, index, or reference rate. Common types of derivatives include
options, futures, and swaps. Accounting for derivatives involves recording them on
the balance sheet at fair value, with changes in fair value recognized in the income
statement as gains or losses.
Objective Type Question:
Which financial instrument represents ownership interests in a company?
A) Bonds
B) Derivatives
C) Stocks
D) Commodities
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