Financial Accounting: An Introduction

Long term investments 

Equity and debt securities are the two assets that the 10 th chapter focuses on. Essentially, equity refers to the assets that a firm acquires when it invests in another company (Schroeder, Clark & Cathey, 2014). As it obtains equity, a firm acquires a stake in determining the operations of the other company. There are various platforms where equity securities may be issued. The stock exchange is the main market for obtaining these securities. A company may also obtain security directly from the issuing company. There are also over-the-counter platforms from where equity securities can be obtained (Schroeder, Clark & Cathey, 2014). While money is usually exchanged for equity security, a company may also purchase equity using non-monetary items. Debt securities are instruments that such organizations as companies and governments issue. When a company purchases debt security, it obtains the right to expect a return upon the maturity of the security (Schroeder, Clark & Cathey, 2014). However, such returns are not guaranteed since the issuer of the security may default. Government bonds are the most secure since governments are almost always able to settle their obligations. It should be noted that while they are more secure, government bonds offer lower returns. On the other hand, corporate bonds which are less secure carry the promise of higher return. Certificate of deposit and municipal bond are other types of debt securities. While equity and debt securities present unique advantages, an argument can be made that equity securities are better. This is because these securities offer companies more than just additional assets. They also allow the company to acquire control over the affairs of other companies (Schroeder, Clark & Cathey, 2014). A company may purchase equity security in a rival firm to lower the threat of competition.

Revenue recognition and matching principle in accounting 

Revenue recognition and matching principle are critical concepts that facilitate financial accounting. Revenue recognition goes beyond merely appreciating that a transaction or event has taken place. It involves making a report of the event or transaction in the financial statements of the firm (Schroeder, Clark & Cathey, 2014). In nearly all businesses, revenue is earned in a continuous fashion. This has forced the accounting profession to identify points in time where the revenue earned is recognized and documented. For instance, a carmaker may recognize revenue quarterly. Revenue recognition depends on the particular activities that a firm participates in (Schroeder, Clark & Cathey, 2014). For example, a manufacturing firm may recognize revenue after purchase of raw materials, settlement of debt and collection of cash from buyers. These activities have the effect of enhancing the firm’s assets. It is for this reason that the resulting revenue is recognized and recorded. As already noted, the matching principle is another concept that enhances accounting. Basically, this principle directs firms to ensure that all expenses are reported in a time period similar to related revenues (Schroeder, Clark & Cathey, 2014). This principle seeks to account for the cause-effect relationship in most transactions that yield revenues and expenses. For example, when a firm purchases raw materials, it has incurred an expense while obtaining some revenue in the form of the raw materials. According to the matching principle, the revenue and the expense resulting from this transaction should be recorded in the same period.

FASB and IASB statement of comprehensive income format 

In an effort to improve accounting and curb fraud, the FASB and IASB are seeking to introduce a new format for comprehensive income. One of the anticipated changes that the new format will introduce is doing away with how net income is defined currently (Schroeder, Clark & Cathey, 2014). The new format will demand that companies offer detailed accounts of their operations. The new format will provide companies with various categories for reporting their operations. The categories include investments, financing activities and tax payments. The format that is currently in use possesses flaws that provide unscrupulous individuals with the opportunity for fraud. This format allows businesses to present incomes in any one of three ways (Schroeder, Clark & Cathey, 2014). The fact that businesses have alternatives for presenting income has been blamed for fraud. This is an issue that the new format will address. Since it will introduce a uniform mechanism for recoding income, the new format is better than the current one. The fact that it promises to curb fraud is another issue that makes the new format better.

References 

Schroeder, R. G., Clark, M. W. & Cathey, J. M. (2014). Financial Accounting Theory and

Analysis. Texts and Cases. 11 th Edition. Hoboken, NJ: Wiley.