Chapter14Slides

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Unformatted text preview: Click to edit Master subtitle style 4/7/11 ACCT 4050 Professor Dennis Chambers ACCT 4050 Investments in Debt and Equity Securities 4/7/11 ACCT 4050 Objectives 4/7/11 ACCT 4050 2 2 Understand the varying classifications associated with investment securities Account for the purchase of debt and equity securities Account for the change in value of investment securities Account for the sale of investment securities Record the transfer of investment securities between categories 4/7/11 ACCT 4050 Why do companies invest in 4/7/11 ACCT 4050 3 3 Parking cash not needed right now Safety cushion--increase financial flexibility Seasonal cash needs Investment for a return Purpose is to earn profits from an investment Investment for influence Key suppliers or customers Want to have a say in business decisions 4/7/11 ACCT 4050 Types of Investments 4/7/11 ACCT 4050 4 4 Debt Securities Instruments representing a creditor relationship Often tradable in organized markets Examples: US government bonds Corporate bonds Convertible debt Commercial paper 4/7/11 ACCT 4050 Classification of Securities 4/7/11 ACCT 4050 5 5 For accounting purposes, we separate securities into different classifications Based on a number of factors: Maturity Intended holding period Degree of control over the other company What kind of accounting will we see? Some at historical cost Some at fair value 4/7/11 ACCT 4050 Held-to-Maturity Securities 4/7/11 ACCT 4050 6 6 Only includes debt securities Management has a positive intent to hold until maturity Management states the intention Management acts consistently with the stated intention Reported at amortized cost Historical cost adjusted for amortized discounts and premia 4/7/11 ACCT 4050 Equity Method Securities 4/7/11 ACCT 4050 7 7 Purchased with the intent to significantly influence the actions of another firm Rule of thumb: At least 20% ownership stake No more than 50% ownership stake These are not bright line rules Degree of control is the issue Significant influence without outright control Accounting Method 4/7/11 ACCT 4050 DigressionThink About Fair 4/7/11 ACCT 4050 8 8 Lets think about whats involved with fair value accounting This is true anytime we want to report an asset at market or fair value We know every debit needs its credit and vice versa If market value is higher than historical cost we need a debit to increase the asset value What is the matching credit?? UNREALIZED 4/7/11 ACCT 4050 Trading Securities 4/7/11 ACCT 4050 9 9 Held with the intention to liquidate in a short period of time Holding period generally less than 3 months Trading involves frequent buying and selling Purpose is to earn short-term holding profits Reporting method: Current asset section of balance sheet Reported at fair market value (cost 4/7/11...
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