Chapter 8 - Investments and Internal Operations Flashcards
Explain the following sentence: “The entity that owns the shares of a corporation is the investor. The corporation that issues the shares is the investee.”.
When you invest in a company, it makes you an investor. When you issue shares, it makes you an investee.
True or false: for an investor, an investment is a liability.
False
Account for the three types of investments.
- financial assets
- investments in associates/affiliates
- investments in subsidiaries
Investments below 20% (ownership) are considered what?
Passive investments.
Investments above 20% (ownership) are considered what?
Associates/equity affiliates.
What type of investment are loans and receivables?
Financial assets.
What’s the most liquid asset?
Cash
What’s the second-most liquid asset?
Short-term investments.
True or false: financial assets are usually short-term.
True
True or false: investments in associates/affiliates are usually long-term.
True
True or false: investments in subsidiaries are usually short-term.
False
A gain has what effect on a company’s balance sheet?
It increases equity.
A loss has what effect on a company’s balance sheet?
It decreases equity.
Account for the equity method.
“[an] investment is initially recognized at cost and adjusted thereafter for the post-acquisition change in the investor’s share of net assets of the investee.”.
What does the term “hedging” mean?
Protecting yourself from losing money in one transaction by engaging in a counter-balancing transaction.
What does “net profit margin” refer to?
How much net profit a company generates from its total revenue.
How do you calculate “net profit margin”?
Net profit margin = Net profit / Revenue
