Generally, under GAAP, market value is not used as the valuation basis for assets. Cost is used instead. For marketable securities, however, market value is frequently used. What’s different about marketable securities that make it reasonable for this class of asset to be reported at market value when most other assets are reported at cost? Explain. (This is an accounting class, so the answer has to be referenced to accounting terms.)
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Marketable securities are anything that are highly lucrative, in demand, and that can be sold (preferably at a profit). These include, but are not limited to, short-term stocks and bonds that can be traded on the market. It is this hopeful scenario of making money on future gains in value and profitability that funds and drives our economy.
In a business, short-term investments are shown at their current market value on the balance sheet. Any difference between the historical cost and the selling price is listed as either an unrealized loss or gain. As stated in financial-accounting-us . . .
"The term unrealized indicates that the gain or loss has not been confirmed by an actual sale."
Because the securities are highly marketable, it is assumed they will always have a value change resulting in a loss or gain in wealth. This is reflected on the Balance Sheet in Shareholder's Equity.
A special account, called Allowance for Unrealized Loss or Gain, is kept to record these fluctuations in value. The change is computed every thirty days by comparing the difference between the market value at the beginning of the month versus the end of the month.
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