Chapter 14 Revision4

Chapter 14 Revision4 - Accounting Principles: A Business...

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Accounting Principles: Accounting Principles: A Business Perspective, 8e A Business Perspective, 8e Chapter 14: Stock Investments Revised3 – KRJ Feb 2008 1
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Chapter 14 Asian Blue Quail – Asian Blue Quail – very friendly! very friendly! Investments Lecture I 2
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Chapter 14 Stock Investments Stock Investments Part I – Investments where control of the Investee is not obtained 3
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Chapter 14 Stock Investments Stock Investments Three Questions: 1. For how long will we hold the security? 3 days, 6 months, 4 years, indefinitely 1. How large is our investment in terms of % of investee’s stock? 1%, 14%, 36%, 80%, 100% 1. What is the purpose of our investment? Invest idle cash, earn income, attain strategic goal 4
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Chapter 14 Stock Investments Stock Investments - - Q1 (How long held?) Q1 (How long held?) may be held as Short–Term or Long–Term investments the investment is a short-term investment if: it is a temporary investment of otherwise idle cash the investment is a long–term investment if: Expected to be held for over a year May represents substantial percentage of another company’s stock It may be held for strategic purposes 5
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Chapter 14 Stock Investments Stock Investments - - Q1 (How long held?) Q1 (How long held?) Why is classification as Short–Term or Long– Term important? Short-Term investments are a part of CURRENT ASSETS Long-Term investments are NOT part of CURRENT ASSETS Current assets classification significantly affects many important financial analysis calculations. 6
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Chapter 14 Stock Investments – Stock Investments – Q2 (% size of investment?) Q2 (% size of investment?) Two methods are used by investors to account for investments in common stock – Cost Method & Equity Method The answer to the % size questions guides our selection of the appropriate method for long-term stock investments. If we have little or no influence over the investee because of our stock ownership, we use COST method. We assume that we have little or no influence if we own less than 20% of the investee’s stock. 7
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Chapter 14 Cost Method – Cost Method – Q2 less than 20% ownership Q2 less than 20% ownership The cost method The investor records its investment at cost (price paid at acquisition, including any brokerage costs) The investor does not subsequently adjust the investment account balance for its share of the investee’s reported earnings, losses, and dividends. The investor does record dividends received as revenue on its income statement. 8
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Chapter 14 Cost Method Cost Method the cost method is also used to account for short-term stock investments, regardless of the % ownership investments accounted for under the Cost Method are recorded at their purchase price plus any commissions that were paid to acquire them – this becomes the investor’s basis in the investment. cash
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This note was uploaded on 04/08/2008 for the course ACT 240 taught by Professor Janson during the Winter '08 term at N. Michigan.

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Chapter 14 Revision4 - Accounting Principles: A Business...

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