Chapter 10 Investments Flashcards
Why do companies invest?
A debt security represents a credit relationship with another company and typically pays interest for a fixed period. An Equity security represents stock ownership in another company and sometimes pays dividends
Companies invest in debt or equity securities to generate investment income or to pursue a certain business strategy. Investments are classified as either short-term or long-term investments and can be further classified into five categories
What are trading investments?
Debt securities or equity securities in which the investor holds less than 20% of the voting stock and that the investor plans to sell in the very near future
What are Held-to-maturity investments? (HTM)
debt securities the investments or HTM investments tor intends to hold until they mature
what are available for sale investments (AFS)
debt securities or equity securities in which the investor holds less than 20% of the voting stock and that aren’t trading investments or held-to-maturity investments
What are significant interest investments?
equity securities in which the investor owns 20% or more, but less than 50% of the investee’s voting stock
what are controlling investments?
Equity securities in which the investor owns 50% or more of the investee’s voting stock
How are investments in debt securities accounted for?
investments in debt securities are recorded at cost, including any brokerage fees paid. The receipt of interest revenue is recorded with a DR Cash and CR Interest revenue. Debt securities disposed of at a maturity are recorded with a DR Cash and CR Short-term or Long-term Investments account
How are investments in equity securities accounted for?
Equity securities with less than 20% ownership are recorded using the cost method. The purchase of equity securities is recorded at cost, including any brokerage fees paid. The receipt of dividend revenue is recorded with a DR Cash and CR Dividend Revenue. Equity securities with 20% or more, but less than 50%, ownership are recorded using the equity method. The purchase of the equity securities is recorded at cost. Dividends declared and received are recorded with a DR Cash and CR Long-term investments. A dividend reduces the investor’s investment. The investor’s share of net income is recorded as revenue from investments. Disposition of equity securities could involve either a gain or loss. Equity securities with a 50% or more ownership are recorded using the consolidation method, which involves the parent company preparing consolidated statements.
How are debt and equity securities reported?
Trading investments and available-for-sale investments are reported at fair value on the balance sheet. The unrealized holding gain or loss incurred on trading investments is reported on the income statement as Other Revenues and (Expenses). The unrealized holding gain or loss incurred on available-for-sale investments is not included in net income. It is, instead, reported as part of accumulated other comprehensive income included in stockholders’ equity on the balance sheet. Held-to-maturity investments are reported at amortized cost on the balance sheet.
How do we use the rate of return on total assets to evaluate business performance?
The rate of return on total assets measures a company’s success in using its assets earn a profit. (Net income + Interest expense) / Average total assets
define available-for-sale (AFS) investment
a debt security or an equity security in which the investor holds less than 20% of the voting stock and that isn’t a trading investment or a held-to-maturity investment
define comprehensive income
a company’s change in total stockholders’ equity from all sources other than owners’ investments and dividends
Define consolidation accounting
they way to combine the financial statements of 2 or more companies that have the same owners
define consolidated statements
financial statements that combine the balance sheets, income statements, and cash flow statements of the parent company with those of its controlling affiliates
Define controlling interest investment
an equity security in which the investor owns 50% or more of the investee’s voting stock
define debt security
represents a credit relationship with another company or governmental entity that typically pays interest for a fixed period
define equity security
represents stock ownership in another company that sometimes pays dividends
define fair value
the price that would be used if investments were sold on the market
define HTM investment
a debt security the investor intends to hold until it matures
define investee
the corporation that issued the bond or stock to the investor
define investor
the owner of a bond or stock of a corporation
define long-term investments
investments in debt or equity securities the investor intends to hold for longer than 1 year
define parent company
a company that owns a controlling interest in another company
define rate of return on total assets
a ratio that measures the success a company has in using its assets to earn income (Net income + interest expense ) / Average total assets
define security
a share or interest representing financial value
Short-term investments
investments in debt and equity securities that are highly liquid and that the investor intends to sell in one year or less
define significant interest investment
an equity security in which the investor owns 20% or more, but less than 50% of the investee’s voting stock
define subsidiary company
a company that is controlled by another corporation
define trading investment
a debt security or an equity security in which the investor holds less than 20% of the voting stock and that the investor plans to sell in the very near future
