CPFO Accounting Practice Exam

Fair value reporting for investments is essential for providing transparent and accurate financial information. The requirement that liquid investments must show current market value aligns with accounting principles that emphasize the need to report assets at their most relevant values. Liquid investments, which can be easily converted to cash or have active markets, are primarily valued based on current market prices. This reporting gives stakeholders a clear view of an entity's financial situation by reflecting the most available market data.

Transparency and comparability are crucial in financial reporting, and valuing liquid investments at current market value helps achieve this. By continuously updating the value of these investments to reflect their current market conditions, organizations provide a more reliable picture of their financial health, enabling better decision-making by users of financial statements.

The other options do not fully capture the broader requirement of fair value reporting. For instance, fair value reporting is not limited to long-term investments, does not only apply to derivatives, and extends beyond just equities. Therefore, focusing specifically on the need for liquid investments to reflect current market value accurately captures an essential principle of fair value reporting.