Any increase or decrease in the fair value of marketable securities will be recognized in the income statement as unrealized gains or losses.
The fair value measurement of financial assets, such as marketable securities, is often required by accounting standards such as U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
Unrealized gains or losses on marketable securities are generally reported on the income statement as a component of "other comprehensive income" or "comprehensive income." This is because these gains or losses have not yet been realized through an actual sale or disposition of the securities, and are therefore considered non-operating or non-core to the company's primary business activities.
Balance Sheet Statement
A change in the fair value of marketable securities will have a direct impact on the asset section by increasing or decreasing the value of the marketable securities line item on the asset section of the balance sheet.
If the company has elected to report the marketable securities at fair value, there may be a corresponding liability reported on the balance sheet related to the obligation to sell or settle the securities at their fair value.
This liability would offset some of the impact on equity from the increase in the fair value of the securities.
If the marketable securities are being used as collateral for a loan, then the change in their fair value could have an impact on the liability side of the balance sheet.
The liability would be reduced as the loan is paid off, and the asset value would also decrease if the market value of the security decreases.
The change in the fair value of marketable securities will first impact the income statement as an unrealized gain or loss, which will then affect thenet income.
The change in net income will ultimately impact the equity section of the balance sheet, specifically the retained earnings account.
This refers to a situation where there is an indirect effect on a company's equity or retained earnings.
The impact starts with the net income of the company before eventually affecting its equity.
Cash Flow Statement
When a company buys or sells marketable securities during an accounting period, it can impact the cash flow statement.
This is because any cash inflows or outflows resulting from these transactions will be reflected in the cash flow statement's operating, investing, or financing sections, depending on the specific nature of the transaction.
Therefore, changes in marketable securities' fair value can impact the cash flow statement indirectly.
Unrealized gains or losses from changes in marketable securities' fair value that are reported on the income statement do not affect the cash flow statement because they do not involve actual cash inflows or outflows.
They are merely accounting adjustments to reflect changes in the value of the securities.
However, realized gains or losses from the sale of marketable securities during the accounting period will be reflected in the cash flow statement.
If the sale resulted in a cash inflow, it would be reported in the operating or investing section, depending on whether the securities were held for trading or investment purposes.
If the sale resulted in a cash outflow, it would be reported in the financing section if the securities were purchased with borrowed funds.
When marketable securities are acquired using cash or cash equivalents, the transaction will be reflected in the cash flow statement as an outflow of cash in the investing section.
Conversely, when marketable securities are sold, resulting in cash being received, the transaction will be reflected in the cash flow statement as an inflow of cash in the investing section.
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