The Wall Street Journal once reported quarterly earnings for the technology comp

Question

The Wall Street Journal once reported quarterly earnings for the technology company Acer Inc. and the oil company Royal Dutch Shell. In the operating paragraph of the Acer article, it stated that there was a "41 percent jump in first-quarter profits, thanks in part to the sale of shares held in other companies." Shells's strong profits were "boosted by gains from proceeds of sales in the company's portfolio of equity investments." A. From the preceding quotes can you tell whether the securites were classified as available-for-sale or trading? Why? B. Why would a financial statement reader want to seperate profits from investment sales from other profits? C. What earnings concept would an analyst be examining by seperating different kinds of earnings?

Explanation / Answer

Answer A: In the above case, we can say securities were classified as available- for-sale. Because An available for sale security is a debt or equity instrument that is a default classification for any investments, If it is not classified for Trading securities or Held-to-maturity securities.

In the above quotes, Gain from thesale of shares It means that share does not classified under Held-to maturity. Main business of company is in oil industries. Share trading is not the activity of the company business. company investment in the securities to earn profit. Therefore company should classify its securities as available- for-sale.

Answer B : A financial reader always focus on profits from the main business of the company. Prfoits from the main business of the company always more significant than the profits from other activity of the company for example investment profits. Because, An investor invest their money on the basis of performance main business activity or future prespective of main business activity. Performance of main business activity is always the base of decision of investment in the company.

Answer C : An analyst give more weighatge to earn profits from main business activity of the company. Profits from other activity like sale of securities, sale of fixed assets etc. may be siginificant for a particular period but it will not always significant because these profits are not regular in the nature and it doesnot the part of main business activity of the company.

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