Accounting for Investments: Stocks, Bonds, and Derivatives

Investments in stocks, bonds, and derivatives are common financial instruments held by companies and individuals for various purposes, including generating returns and diversifying investment portfolios. Accounting for these investments involves recording them on the balance sheet at fair value and recognizing any changes in value in the income statement.

Stocks $($Equity Investments$)$: Stocks represent ownership interests in a company. When a company purchases stocks of another company as an investment, it records the investment on its balance sheet as an asset at fair value. Changes in the fair value of the stocks are recorded in the income statement as gains or losses.

Bonds $($Debt Investments$)$: Bonds are debt securities issued by governments, municipalities, or corporations to raise capital. When a company invests in bonds, it records the investment on its balance sheet as an asset at fair value. The interest income earned from bonds is recognized in the income statement, and any changes in the fair value of the bonds are recorded as gains or losses.

Derivatives: Derivatives are financial contracts whose value is derived from an underlying asset, index, or reference rate. Common types of derivatives include options, futures, and swaps. Accounting for derivatives involves recording them on the balance sheet at fair value, with changes in fair value recognized in the income statement as gains or losses.

Objective Type Question:

Which financial instrument represents ownership interests in a company?

A$)$ Bonds

B$)$ Derivatives

C$)$ Stocks

D$)$ Commodities