Currently, the value of the equity security is less than the cost. Therefore, this equity security falls under the available for sale category but is to be reclassified as trading. In a situation when the equity security is trading at a lower price compared to its cost, there would be a reduction in its carrying value. In this scenario, the organization’s earnings per share shall not be affected. Besides, organization’s earnings depend on the level of revenue generated and profit control (Carmichael & Rosenfield, 2003). Since there is a linkage between profits and earnings of the organization, the valuation of security can fluctuate depending on the earnings. If a share is trading at a lower value compared to its cost, it means that the organizational assets are lower compared to its liabilities. Also, the profits the organization generates are lower at that time.
Carmichael, D. R., & Rosenfield, P. H. (2003). Accountants’ Handbook, Volume 1, Financial Accounting and General Topics: Volume 1, Financial Accounting and General Topics. Hoboken, NJ: John Wiley & Sons.
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