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Unformatted text preview: CHAPTER 11 Investing Activities THINKING BEYOND THE QUESTION How do we account for investing activities? Investing is necessary for a company to grow. Good investments provide resources that a company can use to produce and sell additional products. These sales lead to higher revenues. Good investments pro- duce profits because the company produces and sells products that are demanded by customers and produces the products efficiently. Higher profits result in higher value for a company and its stockholders. Bad investments result when a company acquires assets that it does not need or is not capable of managing effectively. A company can expand into new product or customer markets that it does not understand, or it can grow more rapidly than demand for its products. Assets acquired from these investments may not result in additional revenues or may res- ult in additional expenses that are higher than additional revenues. QUESTIONS Q11-1 The primary types of assets Archer would include in its accounting system are: a. Current assets: those assets management expects to convert to cash or consume during the next fiscal year. i. Cash and short-term marketable securities: highly liquid re- sources that are ready sources of cash and that management ex- pects to convert to cash during the next year. ii. Accounts and notes receivable: amounts due from customers that the company expects to collect in the next year. iii. Inventories: materials used in production and goods the com- pany expects to sell in the next year. iv. Prepaid expenses: amounts paid for insurance, taxes, and other items that will be consumed during the coming year. b. Long-term assets: those assets that management does not expect to convert to cash or consume during the next fiscal year. i. Property, plant, and equipment: physical assets used by the company in the production, distribution, and sale of goods and in the general management of the company. (continued) 47 48 Chapter 11 ii. Long-term investments: bonds, stocks, and other securities of other companies that management does not plan to sell during the next year. iii. Intangible assets: legal rights and other nonphysical assets ac- quired by a company that are assumed to have long-term bene- fits. Q11-2 The gross amount of property, plant, and equipment is the original cost paid to acquire those assets. The net amount of property, plant, and equipment is the amount remaining after accumulated depreciation has been subtracted from original cost. Another term for net property, plant, and equipment is book value. Q11-3 Student responses will vary. Some students will note that interest is the cost of renting money. It is a period cost that is traceable to a given period and should be expensed on the income statement during that period. Others will observe that if interest isnt always part of the cost of obtaining an asset, it shouldnt ever be. To do so would be inconsistent....
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- Spring '11