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Corporations purchase investments in debt or stock securities generally for one of two reasons.
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A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.
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The accounting for short-term debt investments and for long-term debt investments is similar.
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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.
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Debt investments are investments in government and corporation bonds.
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In accordance with the cost principle, brokerage fees should be added to the cost of an investment.
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In accordance with the cost principle, the cost of debt investments includes brokerage fees and accrued interest.
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In accounting for stock investments of less than 20%, the equity method is used.
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Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.
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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.
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The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.
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Under the equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted manually.
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Under the equity method, the receipt of dividends from the investee company results in an increase in the Stock Investments account.
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Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investors common stock.
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Consolidated financial statements are prepared in place of the financial statements for that parent and subsidiary companies.
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Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.
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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.
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An unrealized gain or loss on trading securities is reported as a separate component of stockholders' equity.
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For non-trading securities, the unrealized gain or loss account is carried forward to future periods.
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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.
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The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet,and retained earnings statement.
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For external reporting, a company must prepare either an income statement ora statement of cash flows, but not both.
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A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions.
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A statement of cash flows indicates the sources and uses of cash during a period.
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A statement of cash flows should help investors and creditors assess the entity's ability to generate future income.
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The information in a statement of cash flows helps investors and creditors assess the company's ability to pay dividends and meet obligations.
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Financial statement readers can determine future investing and financing transactions by examining a company's statement of cash flows.
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In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt.
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Non-cash investing and financing activities must be reported in the body of a statement of cash flows.
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The statement of cash flows classifies cash receipts and payments as operating, non operating, financial and extraordinary activities.
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The sale of land for cash would be classified as a cash inflow from an investing activity.
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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.
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The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities.
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The payment of interest on bonds payable is classified as a cash outflow from operating activities.
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Any item that appears on the income statement would be considered as either a cash inflow or cash outflow from operating activities.
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The acquisition of a building by issuing bonds would deb considered an investing and financing activity that did not affect cash.
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All major financing and investing activities affect cash.
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Cash provided by operations is generally equal to operating income.
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Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations.
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Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations.
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Intracompany comparisons of the same financial statement items can often detect changes in financial relationships and significant trends.
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Calculating financial ratios is a financial reporting requirement under generally accepted accounting principles.
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Measures of a company's liquidity are concerned with the frequency and amounts of dividend payments.
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Analysis of financial statements is enhanced with the use of comparative data.
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Comparisons of company data with industry averages can provide some insight into the company's relative position in the industry.
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Vertical and horizontal analyses are concerned with the format used to prepare financial statements.
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Horizontal, vertical and circular analyses are the most common tools of financial statement analysis.
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Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.
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Another name for trend analysis is horizontal analysis.
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If a company has sales of $110 in 2012 and $154 in 2013, the percentage increase in sales from 2012 to 2013 is 140%.
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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.
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Common size analysis expresses each item within a financial statement in terms of a percent of a base amount.
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Vertical analysis is a more sophisticated analytical tool than horizontal analysis.
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Vertical analysis is useful in making comparisons of companies of different sizes.
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Meaningful analysis of financial statements will include either horizontal or vertical analysis, but not both.
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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%.
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In the vertical analysis of the income statement, each item is generally stated as a percentage of net income.
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A ratio can be expressed as a percentage, a rate, or a proportion.
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A solvency ratio measures the income or operating success of an enterprise for a given period of time.
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The current ratio is a measure of all the ratios calculated for the current year.