Question 1
The company you work for has a large amount of disposable cash and very little debt on its books. The board of directors has expressed an interest in taking this money and investing in equity and debt securities of other companies. Please explain the characteristics of each type of security and how your company will need to record and value these on their books.
Respond to this... Debt and equity securities are two ways in which a company can invest when they have disposable cash. The primary difference between the two securities is in the financial interest they represent. Debt securities represent a creditor relationship with another company. Debt securities frequently involve less risk than equity investments with similar lower returns. Probably the most recognizable form of a debt security is the bond. Equity securities, on the other hand, represent an investment into another company. Unlike debt securities, there is more volatility in equity markets leading to the potential for greater losses and gains. Equity in businesses is traded via the use of stock.
There are three types of investments represented by these securities. Trading securities are investments in debt and equity securities that are purchased and then held mainly to sell in the near term. Available-for-sale securities are debt securities that are not classified as held-to-maturity and further debt or equity securities that are not classified as trading securities.Held-to-maturity debt securities are debt securities for which the company has the intent to hold until the maturity date.
For equity securities, when there is no significant influence, meaning less than 20% ownership, trading securities are reported using the fair value method and unrealized gains and losses are reported in net income. Available-for-sale securities are reported at the fair value method, and unrealized holding gains and losses are reported in other comprehensive income. When there is a significant influence, 20% to 50% ownership, the equity method is used, and unrealized gains and losses are not reported. When there is total control, understood to be 50% or more ownership, the consolidation method is used, and unrealized holding gains and losses are not reported.
For debt securities, trading debt securities are valued by the fair value method and unrealized holding gains, and losses are reported in net income. Available-for-sale debt securities are valued using the fair value method, and unrealized gains and losses are reported in other comprehensive income. Held-to-maturity securities are reported at amortized cost, and unrealized gains and losses are not reported.
References
What are the differences between debt and equity markets?
Question 2
Hedging foreign currency is a concept that serves as a stabilizing factor when dealing with the global economy and transactions that are computed and fulfilled in a foreign currency.
However, hedging is used in many other situations than foreign currency. Conduct research to get a firm grasp on the concept of hedging. Feel free to research hedging in the stock market, futures market, or any other aspect of the business world that uses hedging as a risk offset.
In your own words, define hedging? Why is it important that you understand this concept? How is this concept utilized in the accounting industry?
Respond to this... In a way hedging is what insurance is for your car or house. "Hedging is an investment to reduce the risk of adverse price movements in an asset." A perfect hedge is one that eliminates all risk in a position or portfolio" (Hedge, n.d.). An asset in this case can be stocks, bonds, commodities, currencies, indices and interest rates (Hedge, n.d.). A hedge is useful because rates for all the assets listed fluctuate and if the rates fluctuate in the wrong direction the hedge is there to offset it.
"Hedge accounting involves matching a derivative instrument to a hedged item, and then recognizing gains and losses from both items in the same period" (Hedging, n.d.).
Hedge.(n.d.). Retrieved from Investopedia: https://www.investopedia.com/terms/h/hedge.asp
Hedging.(n.d.). Retrieved from Accounting Tools: https://www.accountingtools.com/dictionary-hedging
Question 3
Many companies believe that only product engineers should be involved in the design of product. Do you feel that accountants should be allowed to participate in the design process? What can the accountant contribute to the process? List other team players that you feel would be good contributors to the design process.
Respond to this...I feel like accountants should be involved in the design process. While they should be involved, they should be limited in what they participate in. The main contribution that the accounting department can bring to the process is funding ideas. While product engineers will focus on many different aspects of the design process, they may not take into consideration pricing. Having an accountant be able to price the costs associated with the new design. The accounting department will be able to tell if a design will be cost efficient for the company. Other departments would be good to consider including manufacturing, IT and operation departments.