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Financial Assets: Short-Term Investments and Accounting for Marketable Securities - YouTube
Channel: Learn Accounting with Iana Zemniakova, CPA
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hello everyone and welcome to financial
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accounting today we continue talking
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about financial assets and we'll take a
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closer look at short-term investments
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including accounting for marketable
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securities
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we will discuss how short-term
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investments are reported on the balance
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sheet how to record purchases of
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marketable securities how to record
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recognition of investment revenue sale
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of investment and how to adjust
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marketable securities to market value
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companies with large amounts of liquid
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resources usually hold many of these
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resources in the form of marketable
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securities rather than cash to maximize
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revenue
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marketable securities consist mostly of
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investments in the securities of
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publicly owned corporations
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as the name implies a basic
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characteristic of marketable securities
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is that they can be purchased and sold
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quickly and easily at quoted market
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prices
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short-term investments are investments
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in bonds or stock that are readily
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marketable they are classified as
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current assets on the balance sheet
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due to their liquidity investments in
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marketable securities are listed
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immediately after cash in the balance
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sheet and are most often classified as
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available for sale
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before we move on to recording
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transactions let's revisit the rules of
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debit and credit
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let's first look at the accounting
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equation assets equal liabilities plus
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owner's equity
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note that assets are on the opposite
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side from liabilities and owner's equity
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and therefore the rules are the opposite
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assets are increased by debit while
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liabilities and owner's equities
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are increased by credit
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expenses and revenues are a part of
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owner's equity
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revenues are increased by credit because
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they increase owner's equity
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the rules of revenues and owner's equity
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are the same
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on the contrary expenses are increased
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by debit because they decrease owner's
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equity
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today we will use the following accounts
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cash and marketable securities are asset
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accounts
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they are increased by debit and
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decreased by credit
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loss on sale of investments is an
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expense account
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it is increased by debit and decreased
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by credit
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dividend revenue and gain on sale of
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investment
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are revenue accounts
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they are increased by credit and
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decreased by debit
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unrealized holding gain or loss on
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investments
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appears as a special owner's equity
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account in the balance sheet
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unrealized holding gain is increased by
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credit same as revenue accounts
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and unrealized holding loss is increased
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by debit same as expense accounts
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unrealized holding gain increases
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owner's equity and unrealized holding
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laws decreases owner's equity
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and now let's look at how purchases of
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marketable securities are recorded
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foster corporation purchases as a
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short-term investment 4 000 shares of
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the coca-cola company on december 1st
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foster paid 48.98
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per share plus a brokerage commission of
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80
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the entry to record this purchase is a
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debit to marketable securities and the
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credit to cash for 196
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000
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the cost of the securities include the
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price per share of
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48.98
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plus the 80 brokerage commission
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thus the cost per share for the 4 000
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securities is 49 dollars
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the next transaction is to record
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investment revenue
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on december 15th poster corporation
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receives a 30 cents per share a dividend
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on its 4 000 shares of coca-cola
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the entry to record this dividend is a
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debit to cash and a credit to dividend
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revenue for 1200
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the dividend amount is calculated as 4
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000 shares times 30 cents per share
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now let's see how the sale of
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investments is recorded
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on december 18th foster corporation sold
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500 shares of its coca-cola stock for
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fifty dollars and four cents per share
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less than twenty dollars brokerage
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commission
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the entry to record the sale includes a
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debit to cash for 25 000 a credit to
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marketable securities for twenty four
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thousand five hundred dollars and the
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credit to gain on sale of investment for
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five hundred dollars
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a credit to marketable securities of
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twenty four thousand five hundred
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dollars is calculated as
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500 times 49 dollars which is a cost
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basis
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a credit to gain on sale of investment
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of 500
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is the difference between the sale
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proceeds and the cost basis the gain
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increases net income and is close to
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income summary at the end of the period
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the same as all revenue accounts
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if the cash proceeds amount is less than
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the cost basis the investments are sold
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at a loss
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a loss is recorded as a debit to loss on
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sale of investments
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this account reduces net income and is
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close to income summary at the end of
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the period the same as expense accounts
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our last transaction is adjusting
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marketable securities to market value
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securities classified as available for
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sale are presented in the balance sheet
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at their current market value as of the
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balance sheet date
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therefore this valuation principle is
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often called mark to market
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the adjustment of marketable securities
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to their current market value requires
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the use of an account called unrealized
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holding gain or loss on investments
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as i previously mentioned this account
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appears as a special stockholders equity
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account in the balance sheet
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on december 31st foster corporations
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remaining shares of coca-cola capital
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stock have a current market value of 47
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000
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prior to any adjustment the company's
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marketable securities account has a
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balance of forty nine thousand dollars
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which is one thousand shares times forty
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nine dollars per share
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the entry to record the current market
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value includes a debit to unrealized
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holding loss on investments and the
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credit to marketable securities for two
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thousand dollars
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the unrealized loss is the difference
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between the current market value of 49
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000 and the cost basis of the shares of
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forty seven thousand dollars
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the unrealized holding loss on
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investments account will appear on the
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balance sheet in the stockholders equity
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section as a reduction in equity
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an unrealized holding gain on investment
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would appear in the same section but as
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an addition to equity
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before we look at the balance sheet i
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need to mention that unrealized holding
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gains and losses are not subject to
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income taxes income taxes are levied
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only when realized gains and losses are
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recognized when investments are sold
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yet unrealized holding gains and losses
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are actually reported in the balance
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sheet net of expected future income tax
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effects
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the computation on future tax effects is
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beyond the scope of our introductory
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discussion
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marketable securities are reported on
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the balance sheet in the assets section
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at the market value
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retained earnings has been reduced by
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two thousand dollars to reflect the
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decline in the market value of
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marketable securities
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let's look at the real world example
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facebook's 2020 form 10k which is
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published on their website
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as you can see marketable securities are
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reported on the balance sheet as a
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separate line item next to cash and cash
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equivalents
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facebook also discloses the details of
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what is included in marketable
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securities in the notes to financial
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statements
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further they disclose their unrealized
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gains and losses on marketable
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securities
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this is a partial disclosure if you are
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interested to learn more you can find
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additional information on their 10k form
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thank you for watching this video and
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feel free to share it with anyone who
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might also be interested in learning
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accounting
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in the next video we will continue
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talking about financial assets and we'll
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take a closer look at accounts
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receivable
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don't forget to subscribe so you don't
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miss the next video and i will see you
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soon
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