121_05 - CHAPTER 5 SHORT-TERM INVESTMENTS AND RECEIVABLES...

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CHAPTER 5 SHORT-TERM INVESTMENTS AND RECEIVABLES WHY INVEST IN MARKETABLE SECURITIES? ± Excess cash ± Short period of time ± Earn interest Interest = Principle x Rate x Time Interest = $10,000,000,000 x 3% x 30/360 Interest = $25,000,000 MARKETABLE SECURITIES ± Short-term investments ± Held for one year or less ± Debt securities or equity securities TYPES OF SECURITIES Marketable Securities Debt Equity EQUITY SECURITIES Investments in stock DEBT SECURITIES Small debt borrowed from single source Banks Insurance Companies or Pension Plans or
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DEBT SECURITIES Large debts financed by issuing many debt securities to many buyers Cash Debt securities DEBT SECURITIES ± Target needs cash to buy inventory ± Large debt broken into small pieces $2,000,000 Sell 2,000 $1,000 debt securities DEBT SECURITIES Promise by borrower (debtor) to pay ± To holder ± Face value (principle) ± Plus interest ± On maturity date DEBT SECURITIES Length of security (term) ± Commercial paper - Less than 1 year ± Note - One to five years ± Bond - Five to thirty years PROMISSORY NOTE FROM HARRIS CORPORATION $1,000.00 Aug. 31, 20X2 Amount Date For value received, I promise to pay the holder of this note One thousand and no/100------------------ Dollars on August 31, 20x3 plus interest at the annual rate of 9 percent Lewis Harris Chief Financial Officer Authorized representative of Harris Corporation Principle Principle Note created Payee (Creditor ) Maturity date Interest rate Maker (Debtor) DEBT SECURITIES We purchase debt securities ± To earn interest ± Over short period of time ± On excess cash ± Debt securities we purchase are assets ± Debt securities we issue are liabilities CH8
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MARKETABLE SECURITIES Three categories ± Held-to-maturity securities ± Trading securities ± Available-for-sale securities TYPES OF SECURITIES Marketable Securities Debt Equity Held-to- Maturity Available- for-Sale Trading TYPES OF SECURITIES Marketable Securities Debt Equity Available for Sale Trading HELD-TO-MATURITY ± Debt instruments that earn interest ± Held until maturity date ± Less than one year (current asset) ± Reported on balance sheet at amortized cost (cost + accrued interest) DEBT SECURITIES Purchased GE commercial paper ± Face value $100,000 ± Life 90 days ± Interest rate 3.6% Short-Term Investment in GE Commercial Paper 100,000 Cash 100,000 ACCRUE INTEREST Accrue 30 days interest at year end Interest = Principle x Rate x Time Interest = 100,000 x 0.036 x 30/360 Interest = 300 Interest Revenue 300 Short-Term Investment in GE Commercial Paper 100,000 300 Bal. 100,300
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PRACTICE QUESTIONS Question 1A TRADING SECURITIES ± Purchased as short-term investments ± Equity or debt securities ± Valued at fair market value ± Recorded at cost and adjusted to current market value AVAILABLE-FOR-SALE ± Securities not classified as trading or held-to-maturity ± On balance sheet date reported at market value FOR OUR PURPOSES ± Treat same way ± Trading securities ± Available for sale securities
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121_05 - CHAPTER 5 SHORT-TERM INVESTMENTS AND RECEIVABLES...

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