Debt versus equity securities Case Study Assignment
These are the two security types that are significant factors to consider when accounting for an investment. Debt securities entail the borrower repaying the principal the initial principal, while equity entails ownership of the company’s net assets. However, a very recent finding shows that managers do not reduce the risk of equity investment portfolios (Kim et al., 2022).
An example of debt security is a bond, while stock is equity security. When buying a bond in a company, they are repaid both the principal and the interest accrued. However, when it comes to stocks, if an individual buys stocks in a particular company, they buy a piece of the specific company. Therefore, the investors profit in the case of profits, and the same applies to losses.
Various types of investments
Classes of debt securities are held to maturity, trading, and available for scale, while those of equity include insignificant influence, major influence, and controlling influence. Additional examples of debt securities include corporate bonds, municipal bonds, government bonds, and collateralized bonds. In contrast, more examples of equity securities would include common preference shares, warrants, convertible bonds, and depository receipts.
An extensive look at the types of equity security is that the preference shares are mostly chosen by many people over the common shares while claiming company earnings. Preference shares can either be progressive or non-progressive and either engaging or non-engaging. In contrast, in common shares, the investors are required to participate in the decision-making and operations of the organization.
How to account for investments
Accounting for investments in securities is categorized under short (current liabilities) and long term. Under current liabilities investments -held to maturity are reported to be costly, with no discount or surcharge remuneration, debt investments trading category is a fair value possessing equitable market value to earnings as well as debt investments under available for sale and stock investments-insignificant influence only differing on adjustment to equity and accustoming to earnings respectfully.
On interminable long-term investment in debt securities, investments held to maturity (HTM) are accounted at cost with reduction or surcharge amortized; liability investments available for sale are equitable value accustoming to equity like stock investments (with fair value adjustment to income). Equity method investment-major influence is reported as an equity method with no equitable value adjustment like consolidated investments -controlling influence under the integrated procedure.
To sum it up, it is vital to keep track of its financial condition. This tracking can be done in diverse ways, such as analyzing the consequences of managerial decisions, which can be done through a tool for prospective analysis of companies’ financial statements (Osadchy et al.,2018). Others include recovering outstanding debt and reducing or rearranging company expenses, seeking advice from professionals and more experienced financial experts who would also help. Nonetheless, constant education in this area is needed. Employees in the finance department would require this training to keep up with constant growth.
Wild, J. & Shaw, K (2021). Principles of Financial Accounting 25th ed plus Connect. *New York, NY: Mc-Graw Hill.
Scott, G. (2020). Debt security. Investopedia. https://www.investopedia.com/terms/d/debtsecurity.asp
Kim, S., Kim, S., Marquardt, C. A., & Shin, D. (2022). Managerial and Investor Responses to Changes in Fair Value Accounting for Equity Securities. Available at SSRN 4030099.
Osadchy, E. A., Akhmetshin, E. M., Amirova, E. F., Bochkareva, T. N., Gazizyanova, Y., & Yumashev, A. V. (2018). Financial statements of a company as an information base for decision-making in a transforming economy.