With a value increase in trading securities, what is the effect on the balance sheet?

• A. Cash down by 4; Short-Term Investments up by 10; Equity up by 6
• B. Cash up by 4; Short-Term Investments down by 10
• C. Cash unchanged; Short-Term Investments up by 10
• D. Cash down by 6; Short-Term Investments up by 4

Answer: (A)

When trading securities rise in value, the asset on the balance sheet—the short-term investments—increases by the amount of the fair value gain. The offset is an increase in equity through the recognition of the gain in net income (unrealized gains on trading securities flow through the income statement to retained earnings). Cash does not change from a mere mark-to-market adjustment unless you actually buy or sell the securities.

Here, the value increase is shown as a 10 increase in short-term investments, a 4 decrease in cash, and a 6 increase in equity. The cash outflow represents funding or costs associated with the securities, while the gain elevates net income by 6, boosting retained earnings. The assets rise by 6 in total, matching the rise in equity, which aligns with how a trading securities gain is reflected on the balance sheet.