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what are the three reasons that companies make investments?
1) invest their extra cash for more income
2) entities such as mutal funds and pension funds are set up to earn more income from investments
3) for strategic reasons such as investments in competitors, supplier, and customers
define short term investments
debt and equity secuties that management expencts to convert to cash within the next 3 to 12 months. also called temporary investments or marketable securites. these are current assets.
define long term investments
long term assets not used in operating activites such as notes receivable and investments in stocks and bonds. these are non-current assets.
debt securites reflect:
a creditor relation such as investments in notes, bonds, and certificates of deporit, they are issued by governments, companies and individuals.
equity securites reflect:
owner relation such as investments in shares of stock issued by companies.
accounting for securites depend on three factors:
1) security type, either debt or equity
2) the company’s intent to hold the security either short or long term
3) the investor’s percentage of ownership in the other company’s equity securites.
what are the three types of debt securites?
held to maturity, trading, and available for sale
what are the three types of equity securites?
insignificnt, significant, and controlling
ENTRY: long co, paid $30,000 on july 1, 2021 to buy dell’s 7%, two year bond payable with a $30,000 par value.
purchase of bonds
DEBIT: debt investments 30,000
CREDIT: cash 30,000
what is the entry to record interest revenue for debt investments?
DEBIT: cash
CREDIT: interest revenue
define trading securites
investments in debt securites that the company intends to actively trade for profit. they are always current assets. they are reported at fair value. any unrealized gain/loss is reported on the income statement (temporary account).
what is the entry to record a trading investment at fair value?
DEBIT: fair value adjustment - trading
CREDIT: unrealized gain - income
define held to maturity securites
debt securites that a company has the intent to hold until they mature. reported a current asset if short term, otherwise they are classifed as long term investments. they are recored at a amortized cost. they have no fair value adjustment.
define available for sale securites
investments in debt securites that are not classified as trading securites or held to maturity securites. they can be long or short term. any unrealized gain/loss are reported in the equity section of the balance sheet. they use fair value adjustments to it’s portfolio cost.
what is the entry for fair value adjustments for available for sale securites?
DEBIT: fair value adjustments - available for sale.
CREDIT: unrealized gain - equity
define insignificant influence
when a invesotr owns less than 20% of voting stock. the stock is reported at fair value. they can be either short or long term, any cash dividends are recorded as dividend revenue.
any unrelaized gain/loss is reported on the income statement.
what is an example of a entry for a purchase of stock under insignificant influence and a cash dividend given?
purchase
DEBIT: stock investment
CREDIT: cash
dividend
DEBIT: cash
CREDIT: dividend revenue
define significant influence
the investor owns between 20% and 50% of a company’s voting stock. this is used for long-term investments. the equity method investments is not used to adjust for fair value. dividends are reported under equity method investments.
what is a example for a entry of a purchase of stock under the significant influence and net income and dividend given?
purchase
DEBIT: equity method investment
CREDIT: cash
net income
DEBIT: equity method investment
CREDIT: earnings from equity method investments
dividends
DEBIT: equity method investments
CREDIT: cash
define controlling influence
long term investments when the investor is able to exert controlling influence over the investee; investoers owning 50% or more of the voting stock.
define consolidated financial statements
finacial statements that show all (combined) activites under the parent’s control, including those of any subsidiaries. controlling investor is the parents and the investee is the subsidiary.
define comprehensive income
net change in equity for a period, excluding owner investments and distributions. other comprehensive income includes unrealized gains/losses on available for sale securites, forign currency translation adjustments, and other adjustments.
what does return on total assets do?
assess fiancial performance (net income / average total assets)
what is profit margin?
the percent of each dollar of revenue (net income / net sales)
what is total asset turnover?
measure of a company’s ability to use its assets to generate sales. (net sales / average total assets)
what is the formula for return on total assets?
profit margin X total asset turnover
