Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

In the context of investments in securities, investors typically assess expected cash flows before making investment decisions. What is the primary reason for this assessment?

To determine the historical cost of the security

To comply with tax regulations

To estimate the potential return and risk associated with the investment

To calculate the book value of the investment

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Verified step by step guidance

Understand the concept of expected cash flows: Expected cash flows represent the anticipated inflows and outflows of money associated with an investment over a specific period. Investors use this information to evaluate the financial viability of the investment.

Recognize the purpose of assessing expected cash flows: The primary reason for this assessment is to estimate the potential return (profit) and risk (uncertainty) associated with the investment. This helps investors make informed decisions about whether the investment aligns with their financial goals and risk tolerance.

Eliminate irrelevant options: The historical cost of the security refers to its original purchase price, which is not determined by expected cash flows. Similarly, compliance with tax regulations is a separate consideration and does not directly involve assessing expected cash flows. Calculating the book value of the investment pertains to accounting records and is unrelated to the estimation of returns and risks.

Focus on the correct answer: The correct answer is 'To estimate the potential return and risk associated with the investment,' as this aligns with the purpose of analyzing expected cash flows in investment decision-making.

Apply this understanding to real-world scenarios: Investors often use tools like discounted cash flow (DCF) analysis or net present value (NPV) calculations to quantify expected cash flows and assess the attractiveness of an investment opportunity.