Accounting for Investments: Stocks, Bonds, and DerivativesInvestments in stocks, bonds, and derivatives are common financial instruments heldby companies and individuals for various purposes, including generating returns anddiversifying investment portfolios. Accounting for these investments involvesrecording them on the balance sheet at fair value and recognizing any changes invalue 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 recordsthe investment on its balance sheet as an asset at fair value. Changes in the fair valueof 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, itrecords the investment on its balance sheet as an asset at fair value. The interestincome earned from bonds is recognized in the income statement, and any changesin the fair value of the bonds are recorded as gains or losses.3. Derivatives: Derivatives are financial contracts whose value is derived from anunderlying asset, index, or reference rate. Common types of derivatives includeoptions, futures, and swaps. Accounting for derivatives involves recording them onthe balance sheet at fair value, with changes in fair value recognized in the incomestatement as gains or losses.Objective Type Question:Which financial instrument represents ownership interests in a company?A) BondsB) DerivativesC) StocksD) Commodities

A financial instrument is a tradable asset that represents a legal agreement between two parties. It…

Answered: Which financial instrument represents…

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter10: Auditing Cash, Marketable Securities, And Complex Financial Instruments

Section: Chapter Questions

Problem 28RQSC

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Owners equity represents which of the following? A. the amount of funding the company has from issuing bonds B. the sum of the retained earnings and accounts receivable account balances C. the total of retained earnings plus paid-in capital D. the business owners/owners share of the company, also known as net worth or net assets
The cost of equity is _______. A. the interest associated with debt B. the rate of return required by investors to incentivize them to invest in a company C. the weighted average cost of capital D. equal to the amount of asset turnover
Stockholders equity consists of which of the following? A. bonds payable B. retained earnings and accounts receivable C. retained earnings and paid-in capital D. discounts and premiums on bond payable
In the context of the different types of securities for investment, match each sentence to the correct type of security. * Bonds Stocks Mutual funds Exchange-Traded Funds (ETFs) Real estate Alternative and complex products Collectibles A financial company receives money from different investors and invests the money in the financial markets, providing professional management, diversification, affordability, and liquidity. Pooled investment funds that offer an investor an interest in a professionaly managed and diversified portfolio of investments, and their shares are traded on stock exchanges. Securities representing a loan an investor makes to the issuer in exchange for interest payments and the repayment of principal at its maturity date. Investments in assets such as rare coins, works of art, old stamps, paintings, that appeal to collectors and investors. Securities that represent ownership in a company, usually providing dividends and the right to vote in the…
__________ securities are investments in preferred or common stock that represent ownership in a company. a.Equity b.Debt c.Market d.Investment
Companies often invest in the common stock of other corporations. The way we report these investments depends on the nature of the investment and the investor’s motivation for the investment. The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. Required: 1. Obtain the relevant authoritative literature on accounting for a change from the cost method to the equity method for investments in common stock using the FASB Accounting Standards Codification at the FASB website ( asc.fasb.org ). 2. What is the specific citation that describes how to account for a change from the cost method to the equity method for investments in common stock? 3. What are the specific requirements?
For accounting purposes, the method used to account for investments in common stock is determined by: a. the amount paid for the stock by the investor b. whether the acquisition of the stock by the investor was "friendly" or "hostile" c. the extent of an investor's influence over the operating and financial affairs of the investee d. whether the stock has paid dividends in past years
How does a company utilize stocks and bonds in financing growth? Identify the major sources of external financing for companies.
1. Investments in debt and equity securities that are held for current resale by banks and stockbrokerage firms are termed a. available-for-sale securitiesb. trading securitiesc. held-to-maturity securitiesd. marketable securities
Describe the accounting for bonds payable, including bonds issued at face amount, bonds issued at a discount, and bonds issued at a premium? Describe how bonds are reported on the balance sheet? Describe how the times interest earned ratio is used to evaluate a company’s financial condition? Describe the advantages and disadvantages of the corporate form of business ownership? Describe the characteristics of corporate stock, the classes of stock, and the accounting entries for stock issuance? Search entries or author .
When an investor uses the equity method to account for investments in common stock, the investor’s share of cash dividends from the investee should be recorded as A deduction from the investor’s share of the investee’s profits. Dividend income. A deduction from the stockholders’ equity account, Dividends to Stockholders. A deduction from the investment account. (AICPA adapted)
Home Depot company to analyze common stock, and treasury stock explain what their balances might indicate about how the company is utilizing the investment by its stockholders. Would you want to purchase stock in the company based on the analysis. providing your opinion as to whether you would purchase the company’s stock. Compare your opinions and note any significant similarities or differences.

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Which financial instrument represents ownership interests in a company? A) Bonds B) Derivatives C) Stocks D) Commodities