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

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

How does an investment's time horizon affect the after-tax rate of return on investments that are taxed annually?

A longer time horizon increases the after-tax rate of return because taxes are only paid at the end of the investment period.

A longer time horizon generally reduces the after-tax rate of return due to the compounding effect of annual taxes.

A shorter time horizon always results in a higher after-tax rate of return for investments taxed annually.

The time horizon has no impact on the after-tax rate of return for investments taxed annually.

Previous problemNext problem

Verified step by step guidance

Understand the concept of after-tax rate of return: This is the return on an investment after accounting for taxes paid on income or gains generated by the investment. Taxes reduce the effective return, and the timing of taxation can influence the compounding effect.

Analyze the impact of annual taxation: When taxes are paid annually, the compounding effect is reduced because a portion of the investment's earnings is removed each year to pay taxes. This diminishes the growth potential of the investment over time.

Consider the time horizon: A longer time horizon means the investment is subject to annual taxation for a greater number of years. This repeated reduction in earnings due to taxes compounds over time, generally leading to a lower after-tax rate of return compared to a shorter time horizon.

Evaluate the incorrect statements: The claim that a longer time horizon increases the after-tax rate of return is incorrect because taxes are paid annually, not deferred to the end of the investment period. Similarly, the assertion that a shorter time horizon always results in a higher after-tax rate of return is not universally true, as it depends on the specific investment and tax structure.

Conclude the correct answer: A longer time horizon generally reduces the after-tax rate of return due to the compounding effect of annual taxes. This is because the annual taxation interrupts the compounding process, leading to a lower effective return over time.