Corporations purchase investments in debt or stock securities generally for one of two reasons.
A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.
The accounting for short-term debt investments and for long-term debt investments is similar.
When debt investments, are sold, the gain or loss is the difference between the net proceeds from the sale and the fair value of the bonds.
Debt investments are investments in government and corporation bonds.
In accordance with the cost principle, brokerage fees should be added to the cost of an investment.
In accordance with the cost principle, the cost of debt investments includes brokerage fees and accrued interest.
In accounting for stock investments of less than 20%, the equity method is used.
Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.
If an investor owns between 20% and 50% of an investors common stock, it is presumed that the investor has significant influence on the investee.
The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.
Under the equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted manually.
Under the equity method, the receipt of dividends from the investee company results in an increase in the Stock Investments account.
Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investors common stock.
Consolidated financial statements are prepared in place of the financial statements for that parent and subsidiary companies.
Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.
The valuation of non-trading securities is similar to the procedures followed for trading securities, except that changes in fair value are not recognized in current income.
An unrealized gain or loss on trading securities is reported as a separate component of stockholders' equity.
For non-trading securities, the unrealized gain or loss account is carried forward to future periods.
A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Fair Value Adjustment account.
The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet,and retained earnings statement.
For external reporting, a company must prepare either an income statement ora statement of cash flows, but not both.
A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions.
A statement of cash flows indicates the sources and uses of cash during a period.
A statement of cash flows should help investors and creditors assess the entity's ability to generate future income.
The information in a statement of cash flows helps investors and creditors assess the company's ability to pay dividends and meet obligations.
Financial statement readers can determine future investing and financing transactions by examining a company's statement of cash flows.
In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt.
Non-cash investing and financing activities must be reported in the body of a statement of cash flows.
The statement of cash flows classifies cash receipts and payments as operating, non operating, financial and extraordinary activities.
The sale of land for cash would be classified as a cash inflow from an investing activity.
Cash flow from investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected income.
The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities.
The payment of interest on bonds payable is classified as a cash outflow from operating activities.
Any item that appears on the income statement would be considered as either a cash inflow or cash outflow from operating activities.
The acquisition of a building by issuing bonds would deb considered an investing and financing activity that did not affect cash.
All major financing and investing activities affect cash.
Cash provided by operations is generally equal to operating income.
Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations.
Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations.
Intracompany comparisons of the same financial statement items can often detect changes in financial relationships and significant trends.
Calculating financial ratios is a financial reporting requirement under generally accepted accounting principles.
Measures of a company's liquidity are concerned with the frequency and amounts of dividend payments.
Analysis of financial statements is enhanced with the use of comparative data.
Comparisons of company data with industry averages can provide some insight into the company's relative position in the industry.
Vertical and horizontal analyses are concerned with the format used to prepare financial statements.
Horizontal, vertical and circular analyses are the most common tools of financial statement analysis.
Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.
Another name for trend analysis is horizontal analysis.
If a company has sales of $110 in 2012 and $154 in 2013, the percentage increase in sales from 2012 to 2013 is 140%.
In horizontal analysis, if an item has a negative amount in the base year,and a positive amount in the following year, no percentage change for that item can be computed.
Common size analysis expresses each item within a financial statement in terms of a percent of a base amount.
Vertical analysis is a more sophisticated analytical tool than horizontal analysis.
Vertical analysis is useful in making comparisons of companies of different sizes.
Meaningful analysis of financial statements will include either horizontal or vertical analysis, but not both.
Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 10%; therefore, the cost of goods sold as a percentage of sales must be 90%.
In the vertical analysis of the income statement, each item is generally stated as a percentage of net income.
A ratio can be expressed as a percentage, a rate, or a proportion.
A solvency ratio measures the income or operating success of an enterprise for a given period of time.
The current ratio is a measure of all the ratios calculated for the current year.
