Chapter05 - 5-1Financial Statement AnalysisK R...

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Unformatted text preview: 5-1Financial Statement AnalysisK R SubramanyamJohn J Wild5-205CHAPTERAnalyzing Investing Activities: Intercorporate Investments5-3Investment SecuritiesInvestment (marketable)securities:Debt Securities• Government or corporate debt obligationsEquity Securities• Corporate stock that is readily marketableInvestment (marketable)securities:Debt Securities• Government or corporate debt obligationsEquity Securities• Corporate stock that is readily marketableComposition5-4Investment Securities• SFAS 115. – Departure from the traditional lower-of-cost-or-market principle.– Prescribes that investment securities be reported on the balance sheet at cost or fair (market) value, depending on the type of security and the degree of influence or control that the investor company has over the investee company.– Accounting is determined by its classification.Accounting for Investment Securities5-5Investment SecuritiesAccounting for Debt Securities5-6Investment SecuritiesAccounting for Transfers between Security Classes5-7Investment SecuritiesClassification and Accounting for Equity Securities5-8Investment Securities• Two main objectives: – To separate operating performance from investing (and financing) performance• Remove all gains (losses) relating to investing activities• Separate operating and nonoperating assets when determining RNOA– To analyze accounting distortions from securities• Opportunities for gains trading• Liabilities recognized at cost• Inconsistent definition of equity securities• Classification based on intentAnalyzing Investment Securities5-9Equity Method Accounting• Required for intercorporate investments in which the investor company can exert significant influence over, but does not control, the investee.– Reports the parent’s investment in the subsidiary, and the parent’s share of the subsidiary’s results, as line items in the parent’s financial statements (one-line consolidation)Note:Generally used for investments representing 20 to 50 percent of the voting stock of a company’s equity securities--main difference between consolidation and equity method accounting rests in the level of detail reported in financial statements 5-10Equity Method Accounting• Investment account:– Initially recorded at acquisition cost– Increased by % share of investee earnings– Decreased by dividends received• Income:– Investor reports % share of investee company earnings as “equity earnings” in its income statement– Dividends are reported as a reduction of the investment account, not as incomeEquity Method Accounting5-11Equity Method Mechanics•Assume that Global Corp. acquires for cash a 25% interest in Synergy, Inc. for $500,000, representing one-fourth of Synergy’s stockholders’ equity as of the acquisition date....
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This note was uploaded on 06/15/2011 for the course FIN 355 taught by Professor Tang during the Spring '10 term at Aachen University of Applied Sciences.

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Chapter05 - 5-1Financial Statement AnalysisK R...

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