Let's maximize profits through FASB statement NO. 115
Fasb statement no. 115 is another example of the boards emphasis on the balance sheet as contrasted with the income statement . As treasurer of diamond instrument , you desire to maximize income over the short run . Diamond has had excess cash , and you have chosen to invest it in both marketable debt and equity securities. What classification policy could you follow to maximize your investments impact on net income? How would you justify this policy to your auditors?© BrainMass Inc. brainmass.com October 24, 2018, 6:42 pm ad1c9bdddf
This Statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows:
* Held to Maturity: Debt securities the enterprise has the positive intent and ability to hold to maturity are classified as "Held to Maturity" securities and reported at amortized cost
* Trading: Debt and equity securities that are purchased and held principally for the purpose of selling in the near term ...
This explains the FASB statement no. 115 and its impact on accounting and reporting on investment in securities
Bad Smell Cigar Manufacturing holds a large portfolio of debt and equity securities as an investment. The fair value of the portfolio is greater than its original cost, even though some securities have decreased in value. I.M. Stinky, the financial vice president, and Irene Totheright the controller, are near year-end in the process of classifying for the first time this securities portfolio in accordance with FASB Statement No. 115. I.M. Stinky wants to classify those securities that have increased in value during the period as trading securities in order to increase net income this year. He wants to classify all the securities that have decreased in value as available-for-sale (the equity securities) and as held-to-maturity (the debt securities). Irene Totheright disagrees. She wants to classify those securities that have decreased in value as trading securities and those that have increased in value as available-for-sale (equity) and held-to-maturity (debt). She contends that the company is having a good earnings year and that recognizing the losses will help to smooth the income this year. As a result, the company will have built-in gains for future periods when the company may not be as profitable.
Answer the following questions.
a. Will classifying the portfolio as each proposes actually have the effect on earnings that each says it will?
b. Is there anything unethical in what each of them proposes? Who are the stakeholders affected by their proposals?
c. Assume that I.M. Stinky and Irene Totheright properly classify the entire portfolio into trading, available-for-sale, and held-to-maturity categories. But then each proposes to sell just before year-end the securities with gains or with losses, as the case may be, to accomplish their effect on earnings. Is this unethical?View Full Posting Details