An attribute of an equity instrument is that:    A. it is always issued at par value.   B. the holder is not entitled to a fixed-rate return.   C. it always confers voting rights upon the holder.   D. the holder is entitled to a fixed-rate return.

How are derivatives valued on the balance sheet? How is the adjustment to fair value recorded differently for a cash flow hedge versus a fair value hedge? That is, how does the fair value adjustment of each type of hedge affect current period net income and the accounting equation? What are the three criteria that must be met for a derivative to be classified as a hedge?   Once entities decide to buy or sell derivatives to hedge economic risks, they then need to decide whether they want to use hedge accounting; it is an election, not a requirement, even when the derivatives are for the economic purpose of hedging. This election is reminiscent of inventory accounting. Just like when a company selects an inventory method, a company is not required to select the accounting method (LIFO, FIFO, weighted average, specific unit) that most closely corresponds with the physical movement of inventory, although they are free to do so. If entities decide to elect hedge accounting, the following…

What is a derivative?  Give an example. Why do companies purchase derivatives? Accounting for Derivatives             One reason accounting for derivatives is so complex is that different groups have different reasons for using them and those reasons affect whether the derivatives qualify for a particular type of accounting treatment. This treatment is called hedge accounting. Another reason for the complexity is that, even if an entity qualifies for hedge accounting treatment, it may choose not to implement hedge accounting treatment. Finally, derivatives are financial instruments with a vocabulary all their own, terms often covered in higher-level finance classes but not often encountered in our day-to-day lives. Together, these characteristics make understanding the intuition and accounting for derivatives particularly challenging.             Initial recognition is straightforward.  A purchaser records a financial instrument asset on the balance sheet at the purchase price. The…

5. Changes in the fair value of the effective portion of a hedging financial instrument are recognized as a part of current earnings of the period for which of the following?   Cash Flow Hedge Fair Value Hedge a. Yes Yes b. No Yes c. Yes No d. No No   Multiple Choice   a.   b.   c.   d.