Review12 - CHAPTER 12 Investments 0REVIEWING THE CHAPTER Objective 1 Identify and explain the management issues related to investments 10 In making

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CHAPTER 12 Investments 0REVIEWING THE CHAPTER Objective 1: Identify and explain the management issues related to investments. 10. In making investments, management must address the issues of recognition, valuation, classification, disclosure, and ethics. 20. The purchases and sales of investments, as well as the realization of investment income and gains and losses, are recognized in the accounting records as they occur. The cash amounts of purchases and sales of investments appear in the investing activities section of the statement of cash flows. 30. Investments are recorded at cost, which would include any commissions or fees paid. However, their valuation on the balance sheet should reflect (depending upon the type of investment) changes in their fair value, amortization, or changes in the operations of the investee companies. In addition, long-term investments must be evaluated annually for any impairment that appears to be permanent (whereby a loss would be recognized). 40. Investments in debt and equity securities are classified as either short-term or long-term. Short-term investments (also called marketable securities ) have a maturity of more than 90 days but are intended to be held only until cash is needed for current operations. Long- term investments are intended to be held for more than one year, and are reported in the investments section of the balance sheet. Short- and long-term investments are further classified as trading, available-for-sale, and held-to-maturity securities. a0. Trading securities are debt or equity securities expected to be held for only a short period of time, in hopes of generating short-term gains. They are classified on the balance sheet as current assets. b0. Available-for-sale securities are debt or equity securities that do not qualify as either trading securities or held-to-maturity securities. They are classified as current assets or long-term investments, depending on management’s intent. c0. Held-to-maturity securities are debt securities that management intends to hold until their maturity date. They are classified as current assets or long-term investments, depending upon the proximity of the maturity date. 50. The percentage ownership in another company can be described as noninfluential and controlling, influential but noncontrolling, and controlling. a0. A noninfluential and noncontrolling investment exists when a company owns less than 20 percent of another company’s voting stock. b0. An influential but noncontrolling investment exists when a company owns 20 to 50 percent of another company’s voting stock. With that degree of ownership, the investor company can normally exercise significant influence over (i.e., affect) the investee’s operating and financial policies.
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c0. A controlling investment exists when a company owns more than 50 percent of another company’s voting stock. With that level of ownership, the investor company can normally exercise control over (i.e., decide) the investee’s operating and financial
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This note was uploaded on 06/10/2009 for the course ACG 2021 taught by Professor Magoulis,b during the Spring '08 term at Pasco-Hernando Community College.

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Review12 - CHAPTER 12 Investments 0REVIEWING THE CHAPTER Objective 1 Identify and explain the management issues related to investments 10 In making

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