for income from continuing operations and net income are required to be presented on
the face of the statement. The other per-share amounts may be presented in the notes to
the financial statements.^8
In the preceding paragraphs, we have assumed a simple capital structure with only
common stock or common stock and preferred stock outstanding. Often, however, cor-
porations have complex capital structures with various types of securities outstanding,
such as convertible preferred stock, options, warrants, and contingently issuable shares.
In such cases, the possible effects of converting such securities to common stock must
be calculated and reported as earnings per common share assuming dilution or diluted earn-
ings per share.^9 This topic is discussed further in advanced accounting texts.ACCOUNTING FOR INVESTMENTS IN STOCKS
Corporations not only issue stock, but they also purchase stock of other companies for
investment purposes. Like individuals, businesses have a variety of reasons for in-
vesting in stock, called equity securities. A business may purchase stock as a means
of earning a return (income) on excess cash that it does not need for its normal opera-
tions. Such investments are usually for a short period of time. In other cases, a busi-
ness may purchase the stock of another company as a means of developing or
maintaining business relationships with the other company. A business may also pur-
chase common stock as a means of gaining control of another company’s operations.
In these two latter cases, the business usually intends
to hold the investment for a long period of time.
The equity securities in which a business invests
may be classified as trading securities or available-
for-sale securities. Trading securitiesare securities
that management intends to actively trade for profit.
Businesses holding trading securities are those whose
normal operations involve buying and selling secu-
rities. Examples of such businesses include banks
and insurance companies. Available-for-sale securi-
tiesare securities that management expects to sell in
the future but which are not actively traded for profit.
For example, Warren Buffett, one of the wealthiest
men in the world, invests through a public company
calledBerkshire Hathaway Inc.In a recent annual
report, Berkshire Hathaway reported over $35 billion
of equity investment holdings listed on its balance sheet as available-for-sale securities.
Some of these investments include The Coca-Cola Company,McDonald’s Corporation,
andAmerican Express. In this section, we describe and illustrate the accounting for
available-for-sale equity securities. The accounting for trading securities is described
and illustrated in advanced accounting texts.Short-Term Investments in Stocks
Rather than allow excess cash to be idle until it is needed, a business may invest in
available-for-sale securities. These investments are classified as temporary investments
ormarketable securities.Although such investments may be retained for several years,544 Chapter 12 Special Income and Investment Reporting Issues
8 Ibid., pars. 36 and 37.
9 Ibid., pars. 11–39.Describe the accounting
for investments in stocks.3
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