f5 - Investments in Investments Stocks and Bonds Stocks ©...

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Unformatted text preview: Investments in Investments Stocks and Bonds Stocks © Copyright D Hillman 2000 1 Overview of FASB No. 115 s Requires Requires most investment securities to be valued at market securities s Securities classified into three Securities categories categories s Held-to-maturity – Only debt securities that will be held Only to maturity date to © Copyright D Hillman 2000 2 Overview of FASB No. 115 s Trading securities – Debt and equity securities that are Debt purchased and sold for short-term profits profits s Available-for-sale – All debt and equity securities not All classified as held-to-maturity or trading trading © Copyright D Hillman 2000 3 Short-term Investments s Readily saleable securities s Management intends to sell within Management one year one s All three of FASB 115 categories All apply apply © Copyright D Hillman 2000 4 Short-term Investments in Stocks Short-term (Trading) (Trading) s Purchase – Record cost in Short-term Investment Record account account s Cash dividends – Record revenue upon receipt of Record dividend dividend s Stock © Copyright D Hillman 2000 dividends and splits 5 – No entry and calculate new cost Short-term Investments in Stocks Short-term (Trading) (Trading) s Sale – Increase Cash for proceeds – Decrease Investment account by cost – Record Realized Gain(Loss) on Record Investment for difference Investment © Copyright D Hillman 2000 6 Unrealized Gain or Loss Unrealized (Trading) (Trading) s Valuation for financial statements – Adjust Investment account to market – Record Unrealized Gain(Loss) for Record change change s Unrealized Unrealized gain or loss shown on income statement income © Copyright D Hillman 2000 7 Subsequent Sale (Trading) s When When sold after adjustment to market market s Realized gain or loss is difference Realized between market at date of sale and amount security adjusted to at last financial statement date financial © Copyright D Hillman 2000 8 Short-term Investments in Bonds Short-term (Trading) (Trading) s Purchase – Record cost in Short-term Investment Record account account s Interest accruals and receipts – Interest revenue accrued at Interest appropriate dates appropriate – No amortization of premium or No discounts discounts © Copyright D Hillman 2000 9 Short-term Investments in Bonds Short-term (Trading) (Trading) s Sale – Increase Cash for proceeds – Accrue interest revenue to date of Accrue sale sale – Decrease Investment account by cost – Record Realized Gain(Loss) on Record Investment for difference Investment © Copyright D Hillman 2000 10 Unrealized Gain or Loss Unrealized (Trading) (Trading) s Valuation for financial statements – Adjust Investment account to market – Record Unrealized Gain(Loss) for Record change change s Unrealized Unrealized gain or loss shown on income statement income © Copyright D Hillman 2000 11 Subsequent Sale (Trading) s When When sold after adjustment to market market s Realized gain or loss is difference Realized between market at date of sale and amount security adjusted to at last financial statement date financial © Copyright D Hillman 2000 12 Investments in Investments Available-For-Sale Securities Available-For-Sale s Acquired Acquired as short-term or long-term investment investment s When available-for-sale bonds held When as long-term, premium or discount should be amortized as adjustment to interest revenue to © Copyright D Hillman 2000 13 Investments in Investments Available-For-Sale Securities Available-For-Sale s Accounting similar to trading except: s Unrealized gains or losses reported Unrealized as a separate component of stockholders’ equity stockholders’ s When sold, realized gain or loss is When difference between proceeds and original cost original – Unrealized gain or loss closed © Copyright D Hillman 2000 14 Long-term Investments in Stocks Own less than Own 20% of voting stock stock s Own 20-50% of Own voting stock voting s Own more than Own 50% of voting stock stock s © Copyright D Hillman 2000 s Market value Market method method Equity method Prepare Prepare consolidated statements statements 15 s s Equity Method of Accounting s Investment initially recorded at cost s Receipt of dividends – Reduces investment account – No revenue © Copyright D Hillman 2000 16 Equity Method of Accounting s Investee reported income – Increase Investment by investor’s Increase share share – Report share of investee income as Report income income s Investee reported loss – Decrease Investment by share – Report share as loss © Copyright D Hillman 2000 17 Investment in Bonds Investment Held-to-Maturity Held-to-Maturity s FASB 115 states must not be any foreseeable intent to sell bonds before maturity date before s Accounting is mirror image of Accounting accounting for long-term debt accounting s Reported in financial statements at Reported amortized cost amortized © Copyright D Hillman 2000 18 Analyzing Information s What What is overall percent of total assets invested in current and noncurrent securities? noncurrent s What is mix of trading, availablefor-sale, and held-to-maturity for-sale, investments? investments? © Copyright D Hillman 2000 19 Analyzing Information s Has Has company been successful in generating additional income from investments? investments? s How does current market value and How cost compare? cost s Is there good range of maturity Is dates? dates? © Copyright D Hillman 2000 20 Analyzing Information s If If equity securities accounted for using equity method using – does significant influence exist? – how much of share of income has how been received as dividends? been © Copyright D Hillman 2000 21 ...
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