CH 12: Financial Investments

This set of flashcards covers key vocabulary terms related to financial investments and their accounting treatments as discussed in the lecture.

Financial Investments

Purchasing the debt and equity securities of other companies for various strategic purposes.

Fair Value

The amount that an independent buyer would be willing to pay for an asset, determined by either 'mark-to-market' or 'mark-to-model' methods.

Fair Value Hierarchy

A system that categorizes the inputs used to measure fair value into three levels: Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs).

Passive Investments

Investments where the investor owns less than 20% of the voting stock and cannot exert influence over the investee.

Significant Influence

Ownership of 20% to 50% of the voting stock where the investor can exert influence over the investee's decisions but not control.

Controlling Influence

Ownership of more than 50% of the voting stock, allowing the investor to control the investee's management and policies.

Trading Securities

Debt securities that are bought and held primarily for the purpose of selling them in the near term.

Available-for-Sale Securities

Securities that are not classified as trading or held-to-maturity and can be sold in the future.

Equity Method

An accounting method whereby an investor recognizes their share of the investee’s income and adjusts the carrying amount of the investment accordingly.

Consolidation Accounting

The process of combining the financial statements of a parent company with its subsidiaries, eliminating intercompany transactions.