Chapter 5 - Chapter 5 ShortTerm Investments Receivables Dr...

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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 square6 Date: Thursday, October 8 th , 2009 square6 Content: Chapters 4&5 (specific instructions will be provided during the class) square6 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 square6 Short-Term Investments box2 Trading vs. Available for sale box2 Dividend Revenue box2 Unrealized/Realized Gains and Losses square6 Account Receivables box2 Collection problems? box2 Uncollectible Accounts box2 Allowance Method square6 Credit Cards square6 Notes Receivable box2 Interest Revenue box2 Interest Receivable square6 Acid Test Ratio & Days’ Sales in Receivables Ron Lazer, Ph.D.
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Chapter 5 Page 3 Dr. Ron Lazer Marketable Securities square6 Equity investments represent ownership of another company’s outstanding common stock. square6 Marketable equity investments are actively traded on a public stock exchange. square6 Accounting for investments in securities depends upon: 1. Expected holding period 2. Purpose/intent of the investment Expected Holding Period square6 The intended holding period determines where on the B/S investments in securities will appear Marketable Securities square6 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 square6 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 square6 Securities are generally recorded at Fair Value box2 i.e. purchase price (plus commissions, taxes, and other costs incurred depending on the classification) square6 Next: Post Acquisition Less than 20 % ownership square6 If marketable securities, use the mark-to market method (carry securities on balance sheet at market value). square6 Revalue at the end of each period based on new market price. square6 Unrealized gains (or losses) are recognized as the investment is valued up (or down). square6 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 square6 Trading securities held for the short term, with purpose of selling securities for profit. square6 At purchase: box2 Record investment at cost square6 During the period: box2 Record declaration of cash dividends as “ Dividend Revenue ” on the Income Statement square6 At the end of the accounting period: box2 Revalue to market value and record “ Unrealized Gain/Loss ” on the Income Statement square6 When sold: box2 Recognize “Gain/Loss on Sale” on the Income Statement for any balance since the last revaluation Trading Investments – Journal Entries square6 At purchase:
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