121_05SG - Chapter 5Accounting for Short-Term Investments...

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Accounting for Short-Term Investments and Receivables 115 Chapter 5—Accounting for Short-Term Investments and Receivables CHAPTER OVERVIEW In Chapter 4, you learned about the importance of internal control and the application of internal control procedures to cash. Chapter 5 expands this discussion to include other current assets, specifically short- term investments and receivables. The learning objectives for this chapter are 1. Account for short-term investments. 2. Report short-term investments and the related revenue on the balance sheet and income statement. 3. Apply internal controls to receivables. 4. Use the allowance method to estimate uncollectible receivables. 5. Account for notes receivable and the related interest revenue. 6. Use the acid-test ratio and days’ sales in receivables to evaluate a company’s financial position. 7. Report investment and receivables transactions on the statement of cash flows. CHAPTER REVIEW Objective 1 - Account for short-term investments. The three most liquid assets company’s have are cash and cash equivalents, short-term investments and accounts receivables. Short-term investments (also called marketable securities) are investments that the company plans to hold for one year or less. Short-term investments fall into three groups: held-to- maturity securities, trading securities, and available-for-sale securities. Held-to-maturity securities , on which the company earns interest, are those the company intends to keep until they mature. Trading securities are those being held to earn profit on short-term price movements. Available-for-sale securities are defined by exception: if the short-term investment is neither a trading security nor a held- to-maturity security, it is classified as an available-for-sale security. Remember, however, that these three groups refer only to short-term investments. Study Tip : Much of the discussion in this chapter will be easier to understand if you become conversant with the following terms: creditor, debtor, debt instrument, equity security, maturity, securities, and term. Short-term held-to-maturity securities (examples are T-bills, short-term commercial paper) earn interest which accrues over time. When acquired, held-to-maturity securities are recorded at cost. At the end of the accounting period, an adjusting entry is required to accrue the interest on the security, as follows: Short-Term Investment XX Interest Revenue XX Note that the debit is to the Investment account, not interest receivable. By increasing the Investment account to reflect the accrued interest, the amortized cost of the held-to-maturity security can be listed on the balance sheet. Amortized cost is simply original cost plus accrued interest.
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Chapter 5 116 Objective 2 - Report short-term investments and the related revenue on the balance sheet and income statement. Short-term trading securities can be either equity securities or debt instruments. The
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This note was uploaded on 10/24/2010 for the course ACCOUNTING 31609 taught by Professor R.ambrose during the Fall '09 term at San Mateo Colleges.

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121_05SG - Chapter 5Accounting for Short-Term Investments...

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