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12 Ch3. 12 - Investments PowerPoints

12 Ch3. 12 - Investments PowerPoints - Investments Click to...

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Investments Chapter 12 1
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1. Demonstrate how to identify and account for investments classified for reporting purposes as held-to-maturity, trading and available-for-sale. 2. Explain what constitutes significant influence by the investor over the operating and financial policies of the investee. 3. Demonstrate how to identify and account for investments accounted for under the equity method. 4. Explain the adjustments made in the equity method when the fair value of the net assets underlying the investment exceeds their book value. 5. Explain how electing the fair value option affects accounting for investments. 6. Analyze the impact of investments on the financial statements. Learning Objectives – Investments 2
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Investments Types of Securities Debt - Bonds & Notes Equity - Common & Preferred Stock Accounting for Investments Degree of Influence Ownership Level Accounting Method No significant influence < 20% Cost or Market* – HTM,TS, AFS Significant influence 20-50% Equity Method Control > 50% Consolidation Investment strategies Liquidity cushion Cyclical cash needs Earn income Exercise influence Control Determine Purpose Purchase Securities Classify Investments Recognize Earnings & Cash Flows Sell Securities Monitor Changes in Value Disclose in F/S *Cost – For non-marketable equity securities *Market – For publicly traded securities 3
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Class: Initially recorded: Balance Sheet: Income Statement: Statement of Cash Flows: Realized G/L: HTM Cost Amortized cost Interest earned +/- realized G/L Buy/sell = Investing Activities; Interest = OA Selling price minus amortized cost AFS Cost Fair value; unrealized G/L = AOCI Interest & dividends earned +/- realized G/L Buy/sell = Investing Activities; Interest & dividends = OA Selling price minus (amortized) cost TS Cost Fair value Interest & dividends earned +/- realized G/L +/- unrealized G/L Buy/sell = Operating Activities; Interest & dividends = OA Selling price minus fair value at most recent Balance Sheet date Marketable Securities Investments 4
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Equity Method Investments Applies when investor company exercises significant influence (20%-50% ownership). Investment is initially recorded at cost and then adjusted as follows: Beginning investment Share of investee’s net income (loss)* Dividend received from investee Ending investment +/- +/- = * Adjusted for additional depreciation or amortization due to excess of fair value of investment over the underlying book value at acquisition. Changes in market value of publicly-traded shares are NOT recognized, unless permanently impaired. Do not record unrealized gains/losses. 5
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Investments Fair Value Option – companies are allowed to use the “fair value option” for HTM, AFS and equity method investments. Marketable Securities When an HTM and AFS security is purchased, the company makes an irrevocable decision about whether to elect the fair value option.
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