Accounting for Investments Case Study

Document Type:Case Study

Subject Area:Accounting

Document 1

Trading of securities can either be done directly or indirectly through an intermediary such as a stock exchange. The fair market value is used when accounting for trading securities. This is the amount that is recorded in the balance sheet and also in the financial statements. Reporting using the fair market value ensures that the time value is put into account. It also ensures that the value of a stock or bond would be recognized in case a sale is made at present. The buyers of these securities also have the option of holding the security especially if its maturation date is not specified like that of stocks. Investors who deal with available for sale securities have to be cautious of the market price fluctuations and ensure that they maximize on opportunities when they would get the most gains.

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These securities always have a ready market because people are always willing to buy such securities and are strategic in nature. Available for sale securities are the best for an investor because they have both options; to hold until maturity or to sell in case the gains recorded are higher than they could be at maturity. The sole purpose of investing in available for sale securities is to make profits in the short duration that the investor will be holding the security. The maturity of the held to maturity security defers in the length of time it will take for it to mature; some take a period of less than one year while others take five years and more. Traders who transact their sales in the short term do so with the intent of making a higher profit.

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Held to maturity securities has low risks. The investor of such securities is already aware of the returns that they seek to get in future hence they can easily plan for the incomes they await. These securities are hardly affected by market fluctuations because the price was already agreed upon when purchasing the security. The current value cannot be used to account for such securities because the values will not change. These values cannot also be used for accounting purposes unless the security in discussion has been sold. The revenue realization principle of the generally accepted accounting principles states that revenue is recognized when it is earned. The market values are just an assumption of the gains that an investor would have if the security is sold.

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