Question

Investments (Amortized, FVTOCI, FVTPL)

Answer 1

Firms use various investment strategies to fund long-term assets, which are classified as Amortized, FVTOCI, and FVTPL for financial reporting. They can raise capital through savings bonds, IRAs, and more, and a stable inflation rate facilitates focusing on growth. Future values of these investments are predicted using a formula that factors in the present investment and estimated future returns at a given interest rate.

Step-by-step explanation:

Firms engage in various investment strategies to bolster their prospects for future profits by acquiring assets such as machinery, plants, or initiating research and development. These investments can be classified into different categories based on how they are treated in financial statements: Amortized (cost is gradually written off), Fair Value Through Other Comprehensive Income (FVTOCI), and Fair Value Through Profit or Loss (FVTPL). These accounting treatments determine how changes in the value of these investments are reflected in the company’s financials.

To finance these investments, firms might utilize capital markets, issuing government savings bonds, IRAs, or investing in money market mutual funds and small CDs, targeting various maturities and risk profiles. These financial tools are essential for maintaining liquidity and funding long-term projects. A stable inflation rate is crucial for investment, as it allows companies to concentrate on the real economy rather than safeguarding against inflation’s costs and risks, promoting long-term growth.

The future value of such investments is calculated using the formula ‘future value received years in the future = (1 + Interest rate) ^ (number of years t)’, where the present value and expected future payments from the firm are taken into account. For instance, a $15 million investment now could result in $20 million in one year and $25 million in two years, assuming a particular interest rate is applied.

Answer 2

The question deals with the classification of investments and investment strategies in the context of financial reporting. It includes the evaluation of different types of financial assets, the calculation of future values based on present investments, and references to financial instruments used for long-term financial planning.

Step-by-step explanation:

The student's question pertains to the classification of investments for financial reporting purposes and involves understanding investment strategies and various types of financial assets. Businesses require financial capital to fund long-term investments, such as purchasing machinery, building new facilities, or undertaking research and development projects. In accounting terms, these investments can be classified as amortized (typically loans that are paid down over time), FVTPL (Fair Value Through Profit or Loss), or FVTOCI (Fair Value Through Other Comprehensive Income). Additionally, the question includes an example of future value calculations based on investments of a specific size occurring at different times. The formula provided calculates the future value of money received, considering the interest rate and the number of years until receipt. Such calculations are crucial for evaluating the profitability of investment options. Furthermore, the question makes reference to key financial concepts such as capital and money markets, government savings bonds, IRAs, Money Market Mutual Funds, and Small CDs, which are important for understanding investment strategies and financial planning.