Multiple Choice
According to the Capital Asset Pricing Model (CAPM), which of the following best explains the expected return on a security?
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7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
Which of the following statements is true regarding investments in securities?
A
Only equity securities can be classified as held-to-maturity.
B
Investments in securities can be classified as trading, available-for-sale, or held-to-maturity.
C
Investments in securities are always recorded at their historical cost and never adjusted.
D
Debt securities cannot be classified as available-for-sale.
Verified step by step guidance1
Understand the classification of investments in securities: Investments in securities are categorized into three main types: trading, available-for-sale, and held-to-maturity. Each classification has specific accounting treatments and criteria.
Clarify the nature of held-to-maturity securities: Only debt securities can be classified as held-to-maturity because they must have fixed or determinable payments and a fixed maturity date. Equity securities cannot be classified as held-to-maturity.
Explain the accounting treatment for trading and available-for-sale securities: Trading securities are recorded at fair value, with unrealized gains or losses recognized in the income statement. Available-for-sale securities are also recorded at fair value, but unrealized gains or losses are reported in other comprehensive income.
Address the statement about historical cost: Investments in securities are initially recorded at their historical cost, but they are adjusted to fair value depending on their classification (trading or available-for-sale). Held-to-maturity securities are not adjusted to fair value unless impaired.
Clarify the classification of debt securities: Debt securities can be classified as trading, available-for-sale, or held-to-maturity, depending on the intent and ability of the investor to hold them.
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