LOS 29.b: Discuss the role of key financial statements (income statement, balance sheet, statement of cash flows, and statement of changes in owners' equity) in evaluating a company's performance and financial position

Classification & accounting treatment

  • Trading securities - These are securities held by a company that it intends to buy and sell for a short-term profit. These securities are reported at their fair market value. Gains and losses will be included on the income statement. They are classified as unrealized holding gains or losses on the income statement, and the counter account on the balance sheet is allowance for adjusted short-term investments to market.
  • Available for sale - This is generally a default category. The accounting for available-for-sale securities looks quite similar to the accounting-for-trading securities. There is one big difference between the accounting-for-trading securities and available-for-sale securities. This difference pertains to the recognition of the changes in value. For trading securities, the changes in value are recorded in operating income. However, for available-for-sale securities the changes in value go into a special account, which is called "unrealized gain/loss in other comprehensive income", which is located in stockholders' equity. The income statement will be unaffected. The counter account to unrealized gain/loss in other comprehensive income is short-term available-for-sales fair market adjustment.
  • Held to maturity - These are securities held by a company that it intends to buy and hold to maturity. These securities are recorded at cost (Purchase price + communions or other fees) and gains or losses are only recognized after the company has sold the securities.
Accounting Impact
Classification Assessment Guidelines Initially Subsequently
Trading Intent to buy/sell for short-term profits Record at fair market value Attribute gains and losses to operating income
Available for Sale Default Category Record at fair market value Attribute gains and losses to stockholders' equity
Held to Maturity Intent to buy and hold until fixed future maturity date Original cost No record


Accounting for Credit Transactions

Related Articles
  1. Taxes

    Explaining Unrealized Gain

    An unrealized gain occurs when the current price of a security exceeds the price an investor paid for the security.
  2. Investing

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  3. Investing

    Accounting For Intercorporate Investments

    Understanding these investments is key to determining the value and future prospects of any business.
  4. Investing

    Understanding the Income Statement

    The best way to analyze a company - and figure out if it's worth investing in - is to know how to dissect its income statement. Here's how to do it.
  5. Investing

    Understanding Short-Term Investments

    These are investments that have a maturity date of less than one year, or will be liquidated within a year.
  6. Investing

    What Is The Difference Between A Cash Flow Statement And An Income Statement?

    A firm’s cash flow statement measures the sources and uses of its cash. The income statement shows how it is financially performing.
  7. Investing

    How Rising Rates Are Hammering Bank Balance Sheets

    The rising interest rates that have fueled bank stocks' rapid gains could also cause billions of dollars in unrealized losses
  8. Taxes

    Capital Losses and Tax

    Capital losses are never fun to incur, but they can reduce your taxable income. Knowing the rules for capital losses can help you maximize your deductions and make better choices about when to ...
  9. Financial Advisor

    Financial Accounting

    Financial accounting is the process of gathering, recording, summarizing and reporting financial data relating to a business. The ultimate goal is to accurately report the financial picture and ...
Frequently Asked Questions
  1. How can I avoid paying taxes on my Social Security income?

    Learn how to calculate the percentage of Social Security income benefits that may be taxable and discover strategies to reduce ...
  2. Can you pay off your Best Buy credit card in store?

    Learn how you can pay your BestBuy credit card in stores using cash or check. You can also pay by mail, online or over the ...
  3. How can you cancel your Walmart credit card?

    Learn how to close your Walmart credit card or Walmart MasterCard, and read details about the process of closing those credit ...
  4. Who is eligible for Canada Pension Plan benefits?

    Learn more about the Canada Pension Plan, who contributes to the plan and who can receive standard, disability, early retirement ...
Trading Center