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MS2 Accounting Intro Review > Chapter 16: Investments > Flashcards

Chapter 16: Investments Flashcards

1
Q

Comprehensive Income

A

A company’s change in total stockholders’ equity from all sources other than owners’ investments and dividends

  • unrealized gains or losses from available-for-sale debt investments
  • foreign currency transaction adjustments
  • gains or losses on post retirement benefit plans
  • deferred gains or losses from derivatives
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2
Q

Consolidation Accounting

A

Wat to combine the financial statements of two or more companies that have the same owners

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3
Q

Controlling interest

A

Holdings over 50%
When one corporation requires a voting interest of more than 50% in another corp.
- investor = parent
- investee = subsidiary
- investment in subsidiary is reported on the parent’s books as a LONG-TERM investment
- Parent generally prepares a Consolidated Financial Statement

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4
Q

Classifications of Debit and Stock Investments

A

Debit Investments:

  • Trading
  • Available-for-sale
  • Held-To-Maturity
Equity Investments:
- Trading
- Held to Maturity
or
- No Significant Influence
- Significant Influence
-Controlling Interest
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5
Q

Available-For-Sale securities

A

(as of 2016- Available-for-sale classification only for debt securities, not equity)

  • Securities held with the intent of selling sometime in the future
  • classified as current assets or long-term assets depending on intent
  • reported at Fair Market Value and report changes from cost as part of the stockholders equity section
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6
Q

Held-To-Maturity Securities

A

(Debt Investments)
- Investments the company intends to hold + has the ability to hold until they mature

current or long term assets depending on the maturity date

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7
Q

Trading Securities

A

Trading debt investments
- Securities held with the intention of selling them in a short period
(Trading = frequent buying and selling)

Trading securities reported at Fair Market Value and report changes in value from cost as part of net income

Always short term assets

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8
Q

Marketable Securities

A

AKA short-term investments
Securities held by a company that are:
- readily marketable
- intended to be converted into cash within the next year (or operating cycle, whichever is longer)

if investments do not meet both of these requirements they are long-term investments

reported at Fair Value as current asset or balance sheet (just after cash)

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9
Q

Risks to investments in bonds

A

Guaranteed return of principal + interest BUT

  • when interest rates rise value of bonds fall (their lower rates are less attractive)
  • credit risk that the company cannot pay back what it borrowed
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10
Q

Reasons corporations invest

A

1) they have excess cash
2) to generate earnings from investment income
3) for “strategic reasons”
(investing in a key vendor to strengthen relationships)

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11
Q

Security

A

A share or interest representing financial value

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12
Q

Stock Investment

A

Accounting depends on investor’s influence over operating and financial affairs of issuing corporation

Equity security
Ownership share in another company that sometimes pays cash or issues stock dividends

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13
Q

Debt Investments

A

Include government and corporate bonds or notes

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14
Q

Accounting for Value of Financial Instruments

A

As of 2010 FASB still considering how best to handle

Fair Value (amount the instrument could currently be sold for) possibly difficult to accurate estimate

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15
Q

Adjusting value of trading securities

A

Debit Security Fair Value Adjustment - Trading
Credit Unrealized Gain - Income
or
Debit Unrealized Loss - Income
Credit Security Fair Value Adjustment - Trading

(Unrealized gain or loss shows in income statement other other income and expense)

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16
Q

Equity method journaling

A

Purchase:
Debit Stock Investments
Credit Cash

Recognizing Revenue:
Debit Stock Investments (net income reported x ownership percentage)
Credit Revenue from Investments

Receiving Dividends:
Debit Cash
Credit Stock Investments
(dividends are equity no longer held in the company)

17
Q

Disposing of Equity Investment with Gain or Loss on Disposal

A

Credit loss on disposal
or
Debit gain on disposal

Both temporary accounts (closed out)

Report in other income/ expenses section of the income statement

18
Q

Adjusting Value of Available-For-Sale Securities

A

Gain:
Debit Security Fair Value Adjustment - Available for sale (or “Market Adjustment)
Credit Unrealized Gain - Equity

Loss:
Debit Unrealized Loss- Equity
Credit Security Fair Value Adjustment - Available For Sale

Gain or loss is then reported on the stockholders equity section of the balance sheet (not on income statement)

19
Q

Recording Acquisition of bonds (Debt Securities)

A

Include all expenditures (costs) necessary to acquire these investments

  • price paid
  • brokerage fees
Debit Investment (asset) account
     Credit Cash
20
Q

Recording Bond Investment Interest

A

Calculate Interest Revenue based on:

Carrying Value (BV) of Bond x Interest Rate x portion of the year the bond is outstanding

Debit Cash received
Credit Interest Revenue (or Interest receivable if already accrued)

21
Q

Recording Sale of Bonds

A 
Credit Investment (asset) account for the cost of bonds
Record gain or loss (any difference between net proceeds of sale (sale price less brokerage fees) and cost of bonds)

Debit Cash
(Debit Loss if applicable)
Credit Investment (asset)
(Credit Gain on sale of bonds if applicable)

22
Q

Valuing Stock Investments

A

Percent of ownership of issuing corporation | Investor Influence | Valuation Method

0-20% owned | No significant influence | Cost Method

20-50% owned | Significant Influence | Equity Method

50-100% owned | Control Exists | Cost or Equity. investment eliminated in consolidation

23
Q

Cost method of recording stock investments

A

Used for holdings of less than 20%

  • investments recording at cost (when bought and sold)
  • revenue only recognized when cash dividends are received (no dividends receivable)
  • Cost includes all expenditures necessary to acquire investments (price + brokerage fees/ comissions)

Debit Equity Investment (cost)
Credit Cash

24
Q

Equity Method of Recording stock investments

A

Used for Holdings between 20%-50%

  • Record investment at cost and adjust the amount each period for:
  • investors proportionate share of earnings (net income or net loss)
  • Dividends received

If investors share of investees losses exceeds Book (carrying) value of investment investor should stop using the equity method

25
Q

Consolidated Financial Statements

A

Indicate the magnitude and scope of operations of the companies under common control

26
Q

Realized/ Unrealized Gain or Loss on Balance Sheet

A

Other Revenues and Gains:

  • Interest Revenue
  • Dividend revenue
  • Gain on Sale of Investments
  • Unrealized Gain - Income

Other Expenses and Losses:

  • Loss on Sale of Investments
  • Unrealized Loss - Income
27
Q

Unrealized Gain or Loss on Available-For-Sale securities

A

Goes on balance sheet
- separate component of stockholders equity
“other comprehensive income or loss”

Stockholders’ equity
Common Stock
Retained Earnings
= Total Paid-In-Capital and retained earnings
Less: unrealized loss on Available-for-sale securities
(or Plus unrealized gain)
= Total stockholders’ equity

28
Q

Rate of Return on total assets

A

AKA Return on Assets

= (net income + interest expense)/ average total assets

measures the success a company has in using its assets to earn income

29
Q

Parent and subsidiary companies under IFRS

A

Investor and associate (subsidiary) company should following the same accounting practices

  • adjustments are made to associate’s policies to conform to investor’s books

NOT a requirement in GAAP

30
Q

Measurement of Financial Assets under IFRS

A

IFRS criteria to determine how to measure financial assets:

  • company’s business model for managing financial assets
  • contractual cash flow characteristics of the asset

eg: if the business model is to hold assets in order to collect contractual cash flows and contractual terms give specified dates to cash flows that are solely payments of principal + interest on principal outstanding = use cost method.

31
Q

Inventories under IFRS

A

NOT considered a financial cost

32
Q

When to use equity method under IFRS

A

Investor has significant influence (20-50% of investee’s common stock)

Same as GAAP

33
Q

Reporting unrealized loss on trading investments IFRS

A

Unrealized gains and losses related to available-for-sale / non-trading equity investments are reported under other comprehensive income in both GAAP and IFRS .
Reported on income statement - reducing net income

34
Q

Legal vs Economic entities

A

Parent and subsidiary companies are separate legal entities but are considered a single economic entity

MS2 Accounting Intro Review (16 decks)

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