Introduction to Investments in Securities quiz #1 Flashcards
Introduction to Investments in Securities quiz #1
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Why do companies invest in securities?
Companies invest in securities to earn extra income from excess cash or to influence other companies. What is a security in financial accounting?
A security is any financial instrument that holds monetary value, such as stocks or bonds. What are the two main types of securities companies can invest in?
The two main types are equity securities (ownership interest) and debt securities (creditor relationship). How do companies earn income from equity securities?
Companies earn income from equity securities through dividends and capital gains. What is a capital gain in the context of investments?
A capital gain is the profit earned when a security is sold for more than its purchase price. How is dividend income calculated for an investment in stock?
Dividend income is calculated by multiplying the dividend per share by the number of shares owned. If you buy 10 shares at $40 each and sell them at $55 each, what is your capital gain?
The capital gain is $150 ([$55 - $40] x 10 shares). What is the total investment income if you receive $10 in dividends and $150 in capital gains?
The total investment income is $160 ($10 + $150). What is a debt security?
A debt security is an investment where the investor lends money to another entity and earns interest. How do investors earn income from debt securities?
Investors earn income from debt securities through interest payments. What are the three main classifications of securities for accounting purposes?
The three classifications are Trading Securities (TS), Held to Maturity (HTM), and Available for Sale (AFS). What is a trading security?
A trading security is an investment intended to be sold in the near term and actively traded. How are trading securities reported on the balance sheet?
Trading securities are reported as current assets on the balance sheet. What is a held to maturity security?
A held to maturity security is a debt security that the investor intends to hold until its maturity date. Can equity securities be classified as held to maturity?
No, only debt securities can be classified as held to maturity. What is an available for sale security?
An available for sale security is not actively traded but can be sold if the opportunity arises. How are available for sale securities classified on the balance sheet?
Available for sale securities can be classified as either current or long-term assets, depending on management's intent. At what value are securities initially recorded on the balance sheet?
Securities are initially recorded at cost on the balance sheet. What is fair value in the context of investments?
Fair value is the current market value of a security. How are trading securities valued after initial recognition?
Trading securities are adjusted to fair value at each reporting date. Where are unrealized gains or losses on trading securities reported?
Unrealized gains or losses on trading securities are reported on the income statement. How are available for sale securities valued after initial recognition?
Available for sale securities are adjusted to fair value at each reporting date. Where are unrealized gains or losses on available for sale securities reported?
Unrealized gains or losses on available for sale securities are reported in other comprehensive income. How are held to maturity securities valued after initial recognition?
Held to maturity securities are maintained at amortized cost. Are unrealized gains or losses recognized for held to maturity securities?
No, unrealized gains or losses are not recognized for held to maturity securities. What does 'amortized cost' mean for held to maturity securities?
Amortized cost is the original cost of the security adjusted for principal repayments and amortization of any premium or discount. What is the main difference between trading and available for sale securities?
Trading securities are actively traded for short-term profit, while available for sale securities are not actively traded but can be sold if needed. What is the main purpose of classifying securities into different categories?
Classification determines how securities are reported on financial statements and how changes in value are recognized. What is other comprehensive income in relation to investments?
Other comprehensive income includes unrealized gains or losses on available for sale securities that are not included in net income. How does the intent of the investor affect the classification of a security?
The investor's intent (to trade, hold to maturity, or sell if needed) determines whether a security is classified as trading, held to maturity, or available for sale. What is the typical holding period for trading securities?
Trading securities are typically held for the short term and are expected to be sold soon. Can available for sale and held to maturity securities be classified as either current or long-term assets?
Yes, depending on the expected holding period or maturity date. What is the accounting treatment for interest earned on debt securities?
Interest earned on debt securities is recognized as income in the period it is earned. What is the impact of unrealized gains or losses on trading securities on net income?
Unrealized gains or losses on trading securities directly affect net income. What is the impact of unrealized gains or losses on available for sale securities on net income?
Unrealized gains or losses on available for sale securities do not affect net income; they are reported in other comprehensive income. Why are held to maturity securities not adjusted to fair value?
Because the intent is to hold them until maturity, so temporary changes in market value are not relevant. What is the significance of the 20% ownership threshold in investments?
Owning more than 20% of a company's stock generally indicates the ability to influence that company. What is the primary source of income from equity securities?
The primary sources are dividends and capital gains. What is the primary source of income from debt securities?
The primary source is interest income. How is the purchase of a security recorded in the accounting records?
The purchase is recorded at cost as an asset on the balance sheet.
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