Research Exercise 2

The goal of this research assignment is to become more familiar with the FASB Accounting Standards Codification website, as
you will be using it in future chapters to find the answers to Research Exercises and Cases that reflect situations often arising in
practice. Please answer the following 3 multi-part questions that are distributed throughout the narrative below.
First, log into the Codification website using the instructions in D2L on the Content page under the link for the Research
Exercise 1. Within the Codification, you will note on the left-hand side of the screen that the Codification is arranged
topically. If you allow your cursor to hover over Assets, you will see that all Asset topics are numbered in a 300 series.
1. What number series is used for all
a. Liabilities: 400 series
b. Equity: 500 series
c. Revenue: 600 series
d. Expenses: 700 series
When you use the Codification to find GAAP guidance for any question, you must be able to cite where you obtained the
information. When citing a reference from the Codification, the number is given as Topic-Subtopic-Section, so for example
the reference FASB ASC 305-10-20 would direct you to the Topic Cash and Cash Equivalents, the Subtopic Overall and
the Section Glossary. Use the links in the Codification to find FASB ASC 305-10-20 (first click on Cash and Cash
Equivalents under Assets, then Overall, then Glossary).
2. According to the glossary, what is the definition of
a. Cash:
b. Cash Equivalents: Cash Equivalents are short-term, highly liquid investments that have both of the
following characteristics: (a) Readily convertible to known amounts of cash and (2) So near their
maturity that they present insignificant risk of changes in value because of changes in interest rates.
When a question arises in practice that requires research, the Search function of the Codification is usually the most efficient
way to narrow down the breadth of information that you must read through to find the answer. A basic Search function is
found in the far upper right-hand corner of the website. However, the Advanced Search (link located directly below the
Search box) is more useful in reducing the number of results that are received. To complete this assignment, you will use the
Advanced Search function to find the appropriate guidance to determine how an investment should be classified.
Tiny Manufacturing Company has just purchased its first investment a bond that was issued by Microsoft. Tiny Cos
controller, Jim Small, does not know how to account for this security on Tiny Cos books. However, he knows that Investments
are Assets, and looking in the 300 section he sees that Investments are covered in section 32X. Specifically, bonds (which are
debt instruments) fall under Topic 320, Debt and Equity Securities.
If you click on Topic 320, you will see that there are 8 Subtopics listed. Subtopic 10 is Overall and Subtopics 940-965 are
specific to industries that have additional regulation requirements (such as banks or insurance companies). Since Tiny Co is a
manufacturer, none of these special Subtopics apply to it. Therefore, Mr. Small knows he must search for answers in Topic 320,
Subtopic 10 (Investments Debt and Equity Securities, Overall).
Mr. Small therefore uses the Advanced Search feature to begin by figuring out how to classify the new investment. Mr. Small
types Classification of Investment Securities into the Text/Keyword box, and types 320 as the Topic and 10 as the Subtopic.
3. Using the results of this search
a. What are the three categories listed from which Mr. Small must choose how to classify the investment?
Trading Securities, Available for Sale Securities and Held-to-Maturity Securities
b. What is the reference for this guidance (FASB ASC XXX-XX-XX-XX)?
FASB ASC 320-10-25-1
c.

Mr. Small expects that interest rates will fall over the next 2 years and therefore the bond will increase in
value. If this happens, in a year or two he will sell the bond for a gain when its price has increased. However,
if the bond price does not increase Mr. Small will hold the bond in Tiny Cos portfolio and continue to receive
and record the interest payments. Given this information, how do you think this bond should be classified in
Tiny Cos financial statements?

This bond should be classified as a trading security in Tiny Cos financial statements. The Codification
dictates that an entity shall classify a security as trading even if the entity does not intend to sell it in the
near term. In Mr. Smalls case, this bond was acquired with both intentions of selling and holding in the
future depending on its value. The bond fits under the definition of a trading security.