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Marketable Securities

This document discusses the classification and valuation of marketable securities. Marketable securities are liquid assets like stocks and bonds that can be readily converted to cash. They are classified as current assets if held temporarily or long-term assets if held for investment purposes. At acquisition, marketable securities are recorded at cost, and after acquisition they can be written up or down to market value. There are three classes: debt held to maturity is shown at amortized cost; trading securities have unrealized gains/losses impacting net income; and securities available for sale have unrealized gains/losses impacting equity.

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Preeti Kumari
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111 views8 pages

Marketable Securities

This document discusses the classification and valuation of marketable securities. Marketable securities are liquid assets like stocks and bonds that can be readily converted to cash. They are classified as current assets if held temporarily or long-term assets if held for investment purposes. At acquisition, marketable securities are recorded at cost, and after acquisition they can be written up or down to market value. There are three classes: debt held to maturity is shown at amortized cost; trading securities have unrealized gains/losses impacting net income; and securities available for sale have unrealized gains/losses impacting equity.

Uploaded by

Preeti Kumari
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Discuss Marketable Securities

 Marketable securities are bonds or stocks


for which there is an active market and
hence a reliable market value.
 They are liquid assets in that they can
easily and quickly be converted into cash.
 Marketable securities held as a
temporary investment are classified as
current assets.
Market Securities Classification
 Securities are properly classified as marketable
securities when
1. The firm can readily convert them into cash,
and
2. Intends to do so when it needs cash.
 If either of the two tests for marketable
securities do not apply, then the securities are
properly classified as investment in securities.
 Investment in securities are securities held for
long-term goals and are classified as long-term
assets.
Valuation at Acquisition
 Marketablesecurities are initially
recorded at acquisition cost.
 Which includes purchase price plus
any commissions, taxes or other
costs related to the acquisition.
 Thisis the same rule as the general
rule for valuing assets at
acquisition.
Valuation after Acquisition
 Because there exists a market value, marketable
securities can be reliably written up or down to
the market value giving a more current estimate
of economic worth.
 This also results in a holding gain or loss which is
not due to the normal operations of a firm.
 For the purposes of valuation after acquisition,
there are three classes of marketable securities:
1. Debt held to maturity
2. Trading securities
3. Securities available for sale
Debt Held to Maturity
 Debt securities for which a firm has both the
positive intent & ability to hold to maturity.
 Shown on the balance sheet at the amortized
acquisition cost.
 Amortized acquisition cost means that the
securities are amortized like a mortgage or bond.
– The acquisition cost is assumed to be the present
value.
– The maturity value and maturity date are known
from the bond certificate.
– An internal rate of return can be calculated using PV
techniques.
What are trading securities?
 Trading securities are assumed to be held for
short-term profit.
– Characterized by frequent & active buying &
selling with the object of generating profit.
– Typically only financial institutions hold trading
securities.
 Since trading securities are acquired for short-
term profit, unrealized gains or losses that
result from adjustments to market value pass
through the income statement and increase or
reduce net income before there is a sale of
the securities.
Securities Available for Sale
 Securities available for sale are neither trading
securities or securities held to maturity.
– They are an intermediate class and are typically
tied to a specific cash need.
– They are held by non-financial companies.
 For example, a manufacturing firm may build
a large fund of securities to pay for a
renovation to its plant or to retire bonds that
will come due.
Securities Available for Sale

 Since they are acquired for longer-term


return, unrealized gains or losses that
result from adjustments to market value
do not pass through the income statement
but stay on the balance sheet as an equity
account.

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