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zAccounting > Appendix E > Flashcards

Appendix E Flashcards

1
Q

Three reasons why Corporations invest in debt or equity securities:

A
  1. To house excess cash until needed
  2. Earnings from investment income
  3. To meet strategic goals
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2
Q

Typical investment: to house excess cash until needed

A

Low-risk, high-liquidity, short-term securities such as government-issued securities

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3
Q

Typical investment: to generate earnings

A

Banks and financial institutions often purchase debt securities, while mutual funds and index funds purchase stock securities

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4
Q

Typical investment: to meet strategic goals

A

Stocks of companies in a related industry or in an unrelated industry that the company wishes to enter

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5
Q

Debt investments

A

Investments in government and corporation bonds

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6
Q

What is included in cost of investments?

A

All costs (price paid plus brokerage fees) - commissions

*Cost principle applies*

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7
Q

Journal entry to acquire investment

A

Dr. Debt investments XXX

Cr. Cash XXX

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8
Q

Journal entry: gain on sale of bond investments

A

Dr. Cash 58,000

Cr. Debt Investments 54,000

Cr. Gain on Sale of Debt Investments 4,000

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9
Q

Stock investments

A

Investments in the capital stock of corporations

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10
Q

Investment portfolio

A

When a company holds stock (and/or debt) of several different corporations, the group of securities is an investment portfolio

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11
Q

Investor’s Ownership Interest in Investee’s Common Stock: Less than 20%

A

Presumed influence on investee: insignificant

Accounting guidelines: Cost method

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12
Q

Investor’s Ownership Interest in Investee’s Common Stock: Between 20% and 50%

A

Presumed influence on investee: significant

Accounting guidelines: equity method

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13
Q

Investor’s Ownership Interest in Investee’s Common Stock: More than 50%

A

Presumed influence on Investee: controlling

Accounting guidelines: Consolidated financial statements

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14
Q

Cost method with stock investments

A

Companies record the investment at cost and recognize revenue only when cash dividends are received

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15
Q

Journal entry for purchase of stock

A

Dr. Stock Investments XXX

Cr. Cash XXX

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16
Q

Journal entry if dividends are received (less than 20% ownership)

A

Dr. Cash XXX

Cr. Dividend Revenue XXX

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17
Q

Journal entry for sale of stock with loss (less than 20% ownership)

A

Dr. Cash 39,500

Dr. Loss on Sale of Stock Investments 1,000

Cr. Stock Investments 40,500

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18
Q

Equity method

A

An accounting method in which the investment in common stock is initially recorded at cost, and the investment account is then adjusted annually to show the investor’s equity in the investee

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19
Q

Journal entry when a company (who owns 30%) has its invested company report net income of 100,000

A

Dr. Stock Investments 30,000

Cr. Revenue from Investment in Beck Company 30,000

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20
Q

Parent company

A

A company that owns more than 50% of the common stock of another entity

21
Q

Subsidiary (affiliated) comapny

A

The entity whose stock is owned by the parent company

22
Q

Controlling interest

A

Ownership of more than 50% of the common stock of another entity

23
Q

Consolidated financial statements

A

Financial statements that present the assets and liabilities controlled by the parent company and the total revenues and expenses of the subsidiary companies

24
Q

Who are consolidated statements useful to?

A

Stockholders

Board of directors

Management of the parent company

25
Q

Fair value

A

Amount for which a security could be sold in a normal market

pro: it represents the expected cash realizable value of securities
con: unless a security is to be sold soon, not relevant because the price will likely change again

26
Q

3 categories of securities:

(for purposes of valuation and reporting at a financial statement date)

A
  1. Trading securities
  2. Available-for-sale securities
  3. Held-to-maturity securities
27
Q

Trading securities

A

Securities bought and held primarily for sale in the near term to generate income on short-term price differences

28
Q

Available-for-sale securities

A

Securities that are held with the intent of selling them sometime in the future

29
Q

Held-to-maturity securities

A

Debt securities that the investor has the intent and ability to hold to their maturity date

30
Q

Valuation of Trading securities

A

At fair value with changes reported in net income

31
Q

Valuation of available-for-sale securities

A

At fair value with changes reported in the stockholders’ equity section

32
Q

Valuation of held-to-maturity securities

A

at amortized cost

33
Q

Intention of trading securites

A

Selling them in a short period of time (less than a month)

34
Q

Trading

A

means frequent buying and selling

35
Q

Mark-to-market

A

A method of accounting for certain investments that requires that they be adjusted to their fair value at the end of each period

36
Q

Unrealized gain or loss =

A

Total cost - Total fair value

37
Q

Journal entry for an unrealized gain on trading securities

A

Dr. Market Adjustment-Trading XXX

Cr. Unrealized Gain-Income XXX

38
Q

Journal entry to record unrealized loss (available-for-sale)

A

Dr. Unrealized Gain or Loss-Equity

Cr. Market Adjustment-Available-for-Sale

39
Q

Short-term investments (marketable securities)

A

Investments that are readily marketable and intended to be converted into cash within the next year of operating cycle, whichever is longer

40
Q

Two criteria of short-term investments (marketable securities)

A
  1. Readily marketable
  2. Intended to be converted into cash within next year or operating cycle, whichever is longer
41
Q

Long-term investments

A

Investments that are not readily marketable or that management does not intend to convert into cash within the next year or operating cycle, whichever is longer

42
Q

Readily marketable

A

When it can be sold easily whenever the need for cash arises

ex. short-term paper, stocks and bonds traded on organized securities markets

43
Q

Intent to convert

A

Management intends to sell the investment within the next year or operating cycle, whichever is longer

ex. Ski company that invests in securities but intends to sell them before next ski season

44
Q

Trading securities are always _________

A

short-term

45
Q

Available-for-sale securities can be either _________________

A

short-term or long-term

46
Q

Reporting the unrealized gain or loss in the stockholders’ equity section for two purposes:

A
  1. Reduces the volatility of net income due to fluctuations in fair value
  2. Informs the financial statement user of the gain or loss that would occur if the company sold the securities at fair value
47
Q

Other Revenue and Gains

A

Interest Revenue

Dividend Revenue

Gain on Sale of Investments

Unrealized Gain-Income

48
Q

Other Expenses and Losses

A

Loss on Sale of Investments

Unrealized Loss-Income

49
Q
A

zAccounting (31 decks)

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