Lecture 22 Marketable Securities

Lecture 22 Marketable Securities - Valuation Adjustment...

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Valuation Adjustment --Marketable Securities Understand different approaches to accounting for changes in asset values. Understand how GAAP (Generally Accepted Accounting Standards) applies these concepts to marketable securities valuation. Understand the impact of marketable securities valuation on the B/S (Balance Sheet), I/S(Income Statement) and S/C/F(Cash Flow Statement).
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Five Reasons for Investments in Securities Safety Cushion: Microsoft Cyclical Cash Needs: Toys R Us Investment for a Return: Berkshire Hathaway Investment for Influence: Coca-Cola and its bottling companies Purchase for Control: Cisco Systems
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Two Types of Investment Securities Equity Securities (stocks) Issuer vs. investor: issuers of stocks receive money upfront and are expected to pay dividends, investors of stocks give out money upfront and expect to receive dividends Compared to bonds, stocks carry higher risk and yield higher return. Debt Securities (bonds) Issuer vs. buyer: issuers of bonds borrow money and are expected to pay interests and principal, buyers of bonds lend money upfront and expect to receive interests and principal. Compared to stocks, bonds carry lower risk (a steady stream of interest payments) and yield a lower return.
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Ownership Not significant Trading Securities (Market Value Method) or Available-for-Sale Securities (adjusted Market Value Method) Significant (>=20% and <50% of outstanding shares) ( < 20% of outstanding shares) Investments in Affiliates (Equity Method) Control (>=50% of outstanding shares) Consolidated Financial Statements Accounting for Equity Securities according to Ownership
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Accounting Classification of Investment Securities Trading Securities Purchased with the intention to take advantage of short-term price changes. Listed as current assets. Available for Sale Purchased as a store of wealth for safety or a normal long-run return. Can be classified as current assets or long-term assets, depending on management’s intent for holding them. Held-to-Maturity Debt securities purchased with the intent of holding the security until it matures. Classified as either current or long-term assets, depending on the intent.
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Overview for Marketable Securities Marketable securities Debt securities Equity securities < 20% of the outstanding shares Held-to-maturity securities Trading securities Available for sale securities
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Accounting for Purchase, sale, and Return on Trading and Available-for-Sale Securities Purchase: cash goes down, trading security or available-for sale security goes up Sale: cash goes up, securities go down, the difference goes to
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Lecture 22 Marketable Securities - Valuation Adjustment...

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