Test 13a Concluded 11th Edition Financial Managerial Account

Test 13a Concluded11th Editionfinancial Managerial Accountingcorpo

Complete the following statements by writing the appropriate words in the Answers column. For scoring, each correct answer is assigned a weight of 4%.

Principles and Terminology

1. Investment by one corporation in the controlling interest of another corporation is called a(n) business combination.

2. Securities that represent ownership in the company are called equity securities.

3–5. The three categories of securities that a company may own that affect their valuation on the balance sheet are: trading securities, held-to-maturity securities, and available-for-sale securities.

6. The valuation allowance account is used to record discounts and impairments.

7. Debt investments that a company plans to hold until maturity are classified as held-to-maturity.

8. Debt and equity securities that a company has purchased to earn short-term profits are called trading securities.

9. Held-to-maturity investments are reported at amortized value on the balance sheet.

10. Trading securities are reported at fair value on the balance sheet.

11. Equity and debt securities that are not classified as trading securities or held-to-maturity securities are classified as available-for-sale securities.

12. Excess cash can be invested until it is needed to earn interest.

13. Strategic investments, such as an acquisition, are considered to be long-term investments.

14. The accounting for an equity investment by an investor depends upon the percentage of ownership and influence.

15. A company that owns between 20% and 50% of another company must use the equity method.

16. Dividends received from marketable securities are reported on the income statement as dividend income.

17. Dividends received from equity-method securities are recorded as reductions of the investment account.

18. The equity method records the investor’s share of the net income of the affiliate or investee.

Paper For Above instruction

Investments in securities are vital to a company’s financial strategy and can significantly influence financial statements. These investments are categorized based on the intent and the degree of influence an investor has over the invested entity. Understanding these classifications—trading securities, held-to-maturity securities, and available-for-sale securities—is essential for accurate financial reporting and decision-making.

Trading securities are bought primarily for short-term profit and are actively traded in the market. These securities are reported at fair value on the balance sheet, with unrealized gains and losses recognized in earnings. The objective is to reflect current market conditions, providing investors and management a clear view of the company’s short-term investment performance (FASB, 2020).

Held-to-maturity securities represent debt investments that a company intends to hold until maturity. These are recorded at amortized cost, which approximates their fair value at purchase. This classification requires the company to genuinely intend and be able to hold the securities until maturity, emphasizing a long-term investment horizon (Kieso et al., 2019).

Available-for-sale securities are debt or equity investments that do not meet the criteria for trading or held-to-maturity. They are reported at fair value, with unrealized gains and losses recognized in other comprehensive income until the securities are sold. This classification provides flexibility, allowing the company to manage its investment portfolio according to changing market conditions (Healy & Palepu, 2018).

The valuation allowance account plays a central role in managing impairments for debt securities, where the fair value declines below amortized cost. Companies record the difference as an impairment loss, reducing the carrying amount of the investment and affecting income statements (Revsine et al., 2019).

The classification and measurement of investments influence the accounting approach. For securities intended to be held to maturity, amortized cost provides a stable measure unaffected by short-term market fluctuations. Conversely, trading securities are marked-to-market to reflect current values, enhancing transparency (Warren et al., 2019).

Dividends from marketable securities are recognized as income when received, impacting net income directly. When dividends are received from securities accounted for by the equity method, they reduce the carrying amount of the investment, aligning the investor’s share of income with actual cash flows. The method of accounting depends on the level of influence, with the equity method applied for significant influence, usually indicated by ownership between 20% and 50% (Brealey et al., 2021).

In strategic investments such as acquisitions, more extensive evaluation is involved, often requiring consolidation, especially when ownership exceeds 50%. The accounting treatment depends on the level of influence, with a consolidated approach for control and the equity method for influence but no control. These distinctions are critical for accurate reporting and reflect the economic realities of the investment (Penman, 2020).

Overall, proper classification and valuation of securities are crucial for portraying a true and fair view of a company's financial position, helping stakeholders make informed decisions. Managers need to understand the implications of each investment type on financial statements to optimize portfolio management and comply with regulatory standards (Schipper & Vincent, 2019).

References

• Brealey, R. A., Myers, S. C., & Allen, F. (2021). Principles of Corporate Finance. McGraw-Hill Education.
• FASB. (2020). Financial Accounting Standards Board. Accounting Standards Codification (ASC) 320: Investments—Debt Securities, Equity Securities. (FASB, 2020)
• Healy, P. M., & Palepu, K. G. (2018). Business Analysis & Valuation: Using Financial Statements. South-Western College Pub.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting. Wiley.
• Penman, S. H. (2020). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.
• Revsine, L., Collins, W. W., Johnson, G., & Mittelstaedt, F. (2019). Financial Reporting & Analysis. Pearson.
• Schipper, K., & Vincent, L. (2019). Financial Reporting and Analysis. Routledge.
• Warren, C. S., Reeve, J. M., & Duchac, J. E. (2019). Financial & Managerial Accounting. Cengage Learning.
• Financial Accounting Standards Board (FASB). (2020). Accounting Standards Codification.
• Healy, P. M., & Palepu, K. G. (2018). Business Analysis & Valuation: Using Financial Statements. South-Western College Pub.