12 - Reporting and Analyzing Investments

Question 1

Non-strategic investments that are held for the purpose of earning capital gains are called ______ for ______ investments.

Answer 1

Non-strategic investments that are held for the purpose of earning capital gains are called held for trading investments.

Question 2

Non-strategic investments can be further classified as ______-term investments (current assets) or _____-term investments (non-current assets), depending on how _____ the investment is and how long management wants to _____ it.

Answer 2

Non-strategic investments can be further classified as short-term investments (current assets) or long-term investments (non-current assets), depending on how liquid the investment is and how long management wants to hold it.

Question 3

Reasons corporations make non-strategic investments:

Answer 3

Reasons corporations make non-strategic investments:

to generate investment income (interest, dividends, appreciation in share prices)

Question 4

Reasons corporations make strategic investments:

Answer 4

Reasons corporations make strategic investments:

to influence or control another company

Question 5

Types of non-strategic investments:

Answer 5

Types of non-strategic investments:

debt securities (guaranteed investment certificates, bonds, bankers’ acceptances, term deposits, treasury bills), and equity securities (preferred and common shares)

Question 6

Types of strategic investments:

Answer 6

Types of strategic investments:

equity securities (common shares)

Question 7

4 valuation models for non-strategic investments:

Answer 7

4 valuation models for non-strategic investments:

• Fair Value Through Profit or Loss
• Fair Value Through Other Profit or Loss Comprehensive Income
• Amortized Cost
• Cost Model/Method

Question 8

Fair Value Through Profit or Loss:

&

Fair Value Through Other Profit or Loss Comprehensive Income

Answer 8

Fair Value Through Profit or Loss:

Used for: Debt or equity investments
Investment valued at: Fair value

Question 9

Amortized Cost

Answer 9

Amortized Cost

Used for: Debt investments
Investment valued at: Amortized cost

Question 10

Cost Method/Model

Answer 10

Cost Method/Model

Used for: Equity investments
Investment valued at: Cost

Question 11

Unrealized/realized Gain (loss) = ______ - _____

Answer 11

Unrealized/realized Gain (loss) = Fair value - Carrying amount

Question 12

Unrealized gains and losses for held for trading investments under the fair value through profit or loss model are reported in exactly the same way as _____ gains and losses.

Answer 12

Unrealized gains and losses for held for trading investments under the fair value through profit or loss model are reported in exactly the same way as realized gains and losses.

Question 13

A company that purchases (owns) securities is known as the ______, whereas the company that issues (sells) the securities is known as the ______.

Answer 13

A company that purchases (owns) securities is known as the investor, whereas the company that issues (sells) the securities is known as the investee.

Question 14

If the investor owns less than ___% of the investee’s common shares, then they are unable to influence or control the investee.

Answer 14

If the investor owns less than 20% of the investee’s common shares, then they are unable to influence or control the investee.

Question 15

When an investee can be significantly influenced, it is known as an ______.

Answer 15

When an investee can be significantly influenced, it is known as an associate.

Question 16

If the investor has more than ____% of the investee’s voting shares, it is assumed that the investor controls the investee. In this case, the investee is considered to be a subsidiary company of the investor or parent company.

Answer 16

If the investor has more than 50% of the investee’s voting shares, it is assumed that the investor controls the investee. In this case, the investee is considered to be a subsidiary company of the investor or parent company.

Question 17

To show shareholders and other users of the parent’s financial statements the full extent of the group’s operations, the financial statements of ___ ______ within the group are ______, resulting in ________ financial statements.

Answer 17

To show shareholders and other users of the parent’s financial statements the full extent of the group’s operations, the financial statements of all entities within the group are combined, resulting in consolidated financial statements.

Question 18

Under the equity method, revenue is recognized on the _____ basis, so when it is earned by the investee, it is also earned by the _____.

Answer 18

Under the equity method, revenue is recognized on the accrual basis, so when it is earned by the investee, it is also earned by the investor.

Question 19

Under the equity method, the investment is initially recorded at cost in an account called ______ in ______.

Answer 19

Under the equity method, the investment is initially recorded at cost in an account called Investment in Associates.

Question 20

When the associate declares a dividend, resulting in the reduction of its ______ earnings, the investor’s investment account will be _______.

Answer 20

When the associate declares a dividend, resulting in the reduction of its retained earnings, the investor’s investment account will be decreased.

Question 21

To keep its records up to date, each year the investor adjusts the investment account to:

(1) Record its _____ of the associate’s ____ ______ (loss)
(2) Record the _______ declared by the ________

Answer 21

To keep its records up to date, each year the investor adjusts the investment account to:

(1) Record its share of the associate’s net income (loss)
(2) Record the dividends declared by the associate

Question 22

Treatment of investment income items under valuation models:

Answer 22

Look at Illustration 12.5

Question 23

The fair value through profit or loss model reports ____ or ____ investments at their ___ values on the statement of _____ position while all related investment income, such as ____, _____, and both unrealized and realized gains and losses, are reported in the _____ statement under other _____ and _______.

Answer 23

The fair value through profit or loss model reports debt or equity investments at their fair values on the statement of financial position while all related investment income, such as interest, dividends, and both unrealized and realized gains and losses, are reported in the income statement under other revenues and expenses.

Question 24

The fair value through other comprehensive income model is very similar to the above except that both unrealized ____ and _____ are reported in other _____ income rather than on the income statement.

Answer 24

The fair value through other comprehensive income model is very similar to the above except that both unrealized gains and losses are reported in other comprehensive income rather than on the income statement.

Question 25

The amortized cost model is used for _____ investments that have _____ or _____ that need to be _____ over time. Under this model, if interest is received, it is recorded in the ______ statement, as is the effect of any amortization.

The investment is not ______ to reflect _____ value so no unrealized gains or losses are recorded.

Answer 25

The amortized cost model is used for debt investments that have premiums or discounts that need to be amortized over time. Under this model, if interest is received, it is recorded in the income statement, as is the effect of any amortization.

The investment is not adjusted to reflect fair value so no unrealized gains or losses are recorded.

Question 26

The cost model is identical to the amortized cost model but would be used on an _____ investment rather than a ____ investment.

Answer 26

The cost model is identical to the amortized cost model but would be used on an equity investment rather than a debt investment.

Question 27

If the investor is not able to exert significant influence over the investee company, the investment is accounted for as if it were a _____ _____ investment.

Answer 27

If the investor is not able to exert significant influence over the investee company, the investment is accounted for as if it were a non-strategic equity investment.

Question 28

When significant influence exists, the _____ method can be used. The ____ method records ____ _____ from an associate (a significantly influenced investee) based on the investor’s proportion of the associate’s income.

Answer 28

When significant influence exists, the equity method can be used. The equity method records investment income from an associate (a significantly influenced investee) based on the investor’s proportion of the associate’s income.