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Available-for-Sale Securities Available-for-sale securities are equity securities that have readily determinable market prices that are not considered trading securities. Available-for-sale securities are classified as current or long term depending on whether they meet the ARB NO. 43 definition of current assets. Accordingly, these securities should be classified as current if they are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business or one year, whichever is longer. All other available-for-sale securities should be classified as long-term investments. (Schroeder, Clark, and Cathey, 2014) “Debt securities classified as trading or available for sale are to be treated in the same manner as equity securities that are similarly classified. That is, the fair value method described above for trading and available-for-sale equity securities also applies to trading and available-for-sale debt securities.” (Schroeder, Clark, and Cathey, 2014) b.Trading securities are classified as current assets on the balance sheet. With respect to available-for-sale securities these classifications are deciphered by management’s intent with these securities. Available-for-sale securities can be categorized as either current assets or noncurrent assets. This divergence in classification is due to whether or not the available-for-sale securities meets the definition of current assets. Thus, if the security will be spent or sold during the standard operating cycle of the entity or one year, whichever happens to be lengthier. Any remaining available-for-sale securities that do not meet the definition of a current asset, these should be classified as noncurrent assets on the balance sheet. c.With respect to trading securities these unrealized gains/losses are reported in earnings on the income statement in the period in which they occur. Whereas with available-for-sale securities, these unrealized gains/losses are not reported in earnings until they have been reclassified as trading securities and dispensed or sold. However, the collective gains/losses for available-for-sale securities are recorded as a modification to stockholders’ equity (included in other comprehensive income). d.According to the text, Financial Accounting Theory and Analysis: Text and Cases, there are many reasons why companies might invest in these securities. These include, “obtaining additional income, creating desirable relationships with suppliers, obtaining partial or full control over related companies, or adding new products.” (Schroeder, Clark, and Cathey, 2014) In addition, there are a few additional reasons that an organization might maintain a portfolio of current and noncurrent equity securities. This includes, “(1) As a safety cushion, to maintain a
large enough liquid investment balance to tide the company over in an emergency. (2) To meet cyclical cash needs (for companies in highly seasonal businesses). (3) To gain a return on idle investment. (4) To gain influence over decisions of the company being invested in.