Question

Suve Answer 30 points You just got hired as a staff accountant at a reputational company. One of your job duties is to prepare memos to help with decision-making, especially when it involves different accounting choices a company could have made. Recently the company is contemplating purchasing bonds as an investment, due to the downturn of stock market. The company does NOT want to hold them until maturity date; it is unsure how long it will hold these bonds. Your supervisor notices that FASB allows two other categories, i.e., available-for-sale (AFS) versus trading securities (TS), to classify these bonds investment in. However, their accounting procedure and impact on financial statement seem to share some similarities and differences. Your supervisor assigns you to explore about this further. In your memo, analyze the similarities and differences between AFS and TS in the following aspects: 1. Accounting procedures during the year and at year-end 2. Financial statement presentation 3. Impact on the company's key ratio such as a. return on equity (net income/total stockholder' equity) b. return on assets (net income total assets)

please show all work.

Answer 1

In the present scenario, there are many financial instruments in market available for investors. Some of the examples are certificate of deposit, forward contracts, future, option, swap, mutual funds, etc. These enable investor to invest in smarter way and earn more and more profit. Available-for-sale and trade securities are two examples of such securities.

AFS are example of equity or debt instrument that are bought for resale before it's iaturity date. These are not held for the purpose of trading and are not veiwed as held-for-maturity. Also, these are available at market price.

TS are instruments held for buy and sell within a short period of time, i.e less than twelve months. Usually, financial institutions hold these for buying and selling in short term.

The similarity and difference between AFS and TS can be discussed on the basis of below aspects:

1. Accounting procedures during the year and at year end:

AFS securities are reported at fair value and unrealised holding gains and losses reported as part of Comprehensive Income (equity). Any discount or premium is amortized. When sold before maturity date, entry is made to remove the cost in AFS and securities fair value adjustment account. Any realised gain or loss on sale is reported in "Other expenses and losses" section of Income Statement.

TS are reported at fair value and unrealised holding gains and losses reported as part of Net Income. Any discount or premium is amortized. When a trading security is sold, it reults in realised gain or loss.

2. Financial Statement presentation : AFS are presented in the Balance Sheet under Investements in Asset.The change in value goes to comprehensive income unless they are sold. When sold, the unrealised profit or loss in other comprehensive income is reversed and realised profit or loss goes to Income Statement.

TS is originally recognised in FS at original cost and and with time the increase or decrese in value is transferred to unrealised gain or loss and the value at end of one accounting period is compared with last accounting period and any profit or loss recognised as income or expense.