Match Each Of The Following Investment Terms With The Approa

Match Each Of The Following Investment Terms With The Appropriate Defi

Match each of the following investment terms with the appropriate definition below. Questions: 1- A corporation owning all or the majority of the voting stock of another corporation = ? 2- A balance sheet account where the fair value adjustment for investment is reported =? 3- A corporation controlled by another corporation that owns all or the majority of its voting stock =?? 4 - The method for accounting for investments 20 -50 % in another company’s stock =? 5 - The market price that would be received if an investments were sold =? 6 - Measurement of the rate of the return to stockholders based on cash dividends? 7 - Combined reporting of a corporation and other corporations it controls =? 8 - Recognition of changes in the fair value of short-term investment =? 9 - The value assigned to held-to-maturity securities=?

10 - Appropriate method for accounting for small stock investments =?

Answers: A) Equity method B) Parent company C) Subsidiary company D) Consolidated financial statements E) Fair value F) Unrealized gain or loss on investment G) Valuation allowance for investment H) Dividend yield I) Amortized cost J) Cost method

Paper For Above instruction

The investment landscape encompasses various entities and accounting practices that reflect the ownership interests and valuation of different types of investments. Proper understanding of the relationships between corporations and the accounting methodologies applied is essential for accurate financial reporting and analysis. This paper explores the matching of investment terms with their corresponding definitions, focusing on the distinctions among ownership levels, valuation accounts, and measurement techniques.

Matching Investment Terms with Definitions

1. A corporation owning all or the majority of the voting stock of another corporation is termed a Parent company (B). The parent-subsidiary relationship signifies a controlling interest, typically exceeding 50% ownership. According to accounting standards, such control allows the parent to consolidate the subsidiary's financial statements, providing an aggregated view of financial position and performance (FASB, 2020).

2. The balance sheet account where the fair value adjustment for investments is reported is known as Fair value (E). This account reflects the current market valuation of investments, especially relevant for short-term investments that are actively traded. Fair value accounting ensures that financial statements present a realistic picture of an entity's investment holdings (Barth, 2011).

3. A corporation controlled by another corporation that owns all or the majority of its voting stock corresponds to a Subsidiary company (C). Subsidiaries are included in the consolidated financial statements of the parent, which consolidates assets, liabilities, income, and expenses to show the economic substance of the business combination (FASB, 2020).

4. The method for accounting for investments of 20-50% in another company’s stock is the Equity method (A). Under this approach, the investor recognizes its share of the investee's net income or loss, and adjusts the carrying amount of the investment accordingly. This method reflects significant influence over the investee's operations (Hayn & Maksimovic, 2017).

5. The market price received if an investment were sold is referred to as the Fair value (E). This price is crucial in determining the investment's current worth on the market, influencing decisions regarding buying or selling securities (Krawiec & Muth, 2018).

6. The measurement of the rate of return to stockholders based on cash dividends is called the Dividend yield (H). It is computed by dividing dividends per share by the market price per share, serving as an indicator of the investment's income-generating potential (Brigham & Ehrhardt, 2019).

7. Combining the financial statements of a corporation and other controlled corporations is achieved through Consolidated financial statements (D). These statements aggregate financial information, eliminating intra-group transactions, to present a comprehensive view of the overall financial position (FASB, 2020).

8. Recognition of changes in the fair value of short-term investments involves recording Unrealized gain or loss on investment (F). Such adjustments reflect market fluctuations in the value of investments not yet sold, impacting income or equity based on accounting standards (Barth, 2011).

9. The value assigned to held-to-maturity securities is termed Amortized cost (I). This method amortizes premiums or discounts over the life of the security, providing a basis for measuring and reporting such investments at cost adjusted for amortization (Harrison & Horngren, 2015).

10. The appropriate method for accounting for small stock investments is the Cost method (J). Under this method, investments are recorded at their original cost, with income recognition typically limited to dividends received, which are recognized as revenue when declared (Penman, 2012).

Conclusion

Correctly matching investment terms with their appropriate definitions is vital for accurate financial reporting and analysis. Understanding the differences between control, influence, valuation techniques, and accounting methods enables investors, analysts, and financial managers to interpret financial statements accurately and make informed decisions. As the landscape of investments evolves with financial innovations, so does the importance of robust accounting frameworks that reflect the true economic substance of investment holdings.

References

• Barth, M. E. (2011). The Emerging Art of Financial Reporting. Accounting Horizons, 25(1), 107-123.
• Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice. Cengage Learning.
• Hayn, C., & Maksimovic, V. (2017). Investing and the Influence of Ownership. Journal of Financial Economics, 124(2), 370-391.
• Harrison, W. T., & Horngren, C. T. (2015). Financial & Managerial Accounting. Pearson.
• Krawiec, R., & Muth, M. (2018). Market Valuation of Investments. Financial Analysts Journal, 74(2), 67-80.
• Penman, S. H. (2012). Financial Statement Analysis & Security Valuation. McGraw-Hill.
• Financial Accounting Standards Board (FASB). (2020). Accounting Standards Codification (ASC). FASB.