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ACCT6007 - Financial Accounting Theory and Practice

Added on - 03 May 2020

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Running head: FINANCIAL INSTRUMENTS- ACCOUNTINGFINANCIAL INSTRUMENTS- ACCOUNTINGName of the StudentName of the UniversityAuthor Note
1FINANCIAL INSTRUMENTS- ACCOUNTINGTable of ContentsAnswer to Question 1......................................................................................................................2Answer to Question 2......................................................................................................................5Answer to Question 3......................................................................................................................6Part 1............................................................................................................................................6Part 2............................................................................................................................................7References........................................................................................................................................9
2FINANCIAL INSTRUMENTS- ACCOUNTINGAnswer to Question 1A Financial instrument can be described as a monetary contract between two or threeparties. These contracts can be traded, created, modified and settled. These instruments rangefrom checks, drafts bonds, and shares bills of exchange to futures or an options contract. Theseinstruments have a legally binding agreement regarding payment of money("AustralianAccounting Standards Board (AASB) - Home", 2017). Financial instruments represent the legalagreement and can be real or virtual. A financial instrument gives rise to assets of an entity and afinancial liability of another entry. A financial asset would include cash, or a contractual right toreceive cash or equivalent, whereas on the other hand, a financial liability would include anobligation to pay money to the second party or to exchange assets or liabilities with anotherbeing under unfavourable potential conditions. It also includes contracts which may be settledusing the entity`s personal assets.Other than a liability or an asset financial instrument, financial instruments can also be anequity instruments. Equity instrument can described as a contract that supports an interest in theassets of another being after subtracting all the liabilities of the being.As mentioned earlier, financial instruments can be divided with respect to asset classesalso depending on the fact whether they are equity based or debt based. Short term instrumentsbased on debt`s duration is for one year or less. Examples of this kind include T-Bills,commercial paper, certificates of deposits, forward based agreements and interest rate futures.Long-term liability based financial instruments are loans, futures bond, interest rate swaps andinterest rate options("Television Education Network services the professional developmentneeds of lawyers, accountants, business and finance executives.", 2017).
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