Chapter 5 - Chapter 5: ShortTerm Investments &...

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Chapter 5 Page 1 Dr. Ron Lazer 1 Chapter 5: Short- Term Investments & Receivables Dr. Ron Lazer Fall 2009 Fourth Quiz s Date: Thursday, October 8 th , 2009 s Content: Chapters 4&5 (specific instructions will be provided during the class) s Allowed material: 4 function calculator Ron Lazer, Ph.D.
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Chapter 5 Page 2 Dr. Ron Lazer Financial Accounting GAAP (Generally Accepted Accounting Principles) The Accounting Information System Financial Statements Balance Sheet Income Statement Ron Lazer, Ph.D. Chapter 5’s Objectives s Short-Term Investments b Trading vs. Available for sale b Dividend Revenue b Unrealized/Realized Gains and Losses s Account Receivables b Collection problems? b Uncollectible Accounts b Allowance Method s Credit Cards s Notes Receivable b Interest Revenue b Interest Receivable s Ron Lazer, Ph.D.
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Chapter 5 Page 3 Dr. Ron Lazer Marketable Securities s Equity investments represent ownership of another company’s outstanding common stock. s Marketable equity investments are actively traded on a public stock exchange. s Accounting for investments in securities depends upon: 1. Expected holding period 2. Purpose/intent of the investment Expected Holding Period s The intended holding period determines where on the B/S investments in securities will appear Marketable Securities s Shown as current assets (Short-term Investments) as long as: 1. the firm can readily convert them into cash; and 2. the firm intends to do so s Otherwise, the securities are classified as Investments in Securities and are a non-current asset
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Chapter 5 Page 4 Dr. Ron Lazer Valuation of Short-term Investments : Acquisition s Securities are generally recorded at Fair Value b i.e. purchase price (plus commissions, taxes, and other costs incurred depending on the classification) s Next: Post Acquisition Less than 20 % ownership s If marketable securities, use the mark-to market method (carry securities on balance sheet at market value). s Revalue at the end of each period based on new market price. s Unrealized gains (or losses) are recognized as the investment is valued up (or down). s Treatment of the Unrealized G/L depends on classification of security: (a) Trading investment. (b) Available-for-sale investment.
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Chapter 5 Page 5 Dr. Ron Lazer Trading Investments s Trading securities held for the short term, with purpose of selling securities for profit. s At purchase: b Record investment at cost s During the period: b Record declaration of cash dividends as “ Dividend Revenue ” on the Income Statement s At the end of the accounting period: b Revalue to market value and record “ Unrealized Gain/Loss ” on the Income Statement s When sold: b Recognize “Gain/Loss on Sale” on the Income Statement for any balance since the last revaluation Trading Investments – Journal Entries s At purchase: Short-term Investment XXX Cash XXX s During the period - Dividend: Cash YYY Dividend Revenue YYY s At the end of the accounting period:
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Chapter 5 - Chapter 5: ShortTerm Investments &...

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