Upload
moana-christian
View
48
Download
1
Embed Size (px)
DESCRIPTION
Investments and International Operations. Chapter. 15. Basics of Investments. Motivation for Investments. Companies transfer excess cash into investments to produce higher income. Some companies are setup to produce income from investments. Companies make investments for strategic reasons. - PowerPoint PPT Presentation
Citation preview
McGraw-Hill/Irwin1
15-1
© The McGraw-Hill Companies, Inc., 2006
Investments and International Operations
Chapter
1515
McGraw-Hill/Irwin2
15-2
© The McGraw-Hill Companies, Inc., 2006
Basics of InvestmentsBasics of Investments
1.Companies transfer excess cash into investments to produce higher income.
2.Some companies are setup to produce income from investments.
3.Companies make investments for strategic reasons.
Motivation for Investments
McGraw-Hill/Irwin3
15-3
© The McGraw-Hill Companies, Inc., 2006
Basics of InvestmentsBasics of Investments
Short-Term versus Long-Term Investments
Short-term investments:
are securities that management intends to convert to cash with one year or the operating cycle, whichever is longer.
are readily convertible to cash.
Short-term investments:
are securities that management intends to convert to cash with one year or the operating cycle, whichever is longer.
are readily convertible to cash.
Long-term investments:
are not readily convertible to cash.
are not intended to be converted to cash.
are reported in the noncurrent section of the balance sheet, often in its own category.
Long-term investments:
are not readily convertible to cash.
are not intended to be converted to cash.
are reported in the noncurrent section of the balance sheet, often in its own category.
McGraw-Hill/Irwin4
15-4
© The McGraw-Hill Companies, Inc., 2006
Classes of and Reporting for InvestmentsClasses of and Reporting for Investments
Held-To-MaturityHeld-To-Maturity
Available-For-Sale
Available-For-Sale
Significant Influence
Significant Influence
Controlling Influence
Controlling Influence
ConsolidateConsolidateEquityMethodEquity
MethodMarket Value
MethodMarket Value
Method
TradingTrading
AmortizedCost
AmortizedCost
Class of Investment
Reporting
McGraw-Hill/Irwin5
15-5
© The McGraw-Hill Companies, Inc., 2006
Basics of Accounting for InvestmentsBasics of Accounting for Investments
Accounting Basics for Debt Securities
Debt securities are recorded at cost when purchased. Interest revenue for investments in debt securities is
recorded when earned.
Debt securities are recorded at cost when purchased. Interest revenue for investments in debt securities is
recorded when earned.
On January 1, 2005, Matrix, Inc. purchased $1,000,000 in bonds of Debt, Inc. Matrix paid $975,000 for the
bonds and $25,000 in brokerage fees. The two-year bonds have a stated rate of 6% annually. Interest is paid semi-annually on June 30 and December 31.
On January 1, 2005, Matrix, Inc. purchased $1,000,000 in bonds of Debt, Inc. Matrix paid $975,000 for the
bonds and $25,000 in brokerage fees. The two-year bonds have a stated rate of 6% annually. Interest is paid semi-annually on June 30 and December 31.
McGraw-Hill/Irwin6
15-6
© The McGraw-Hill Companies, Inc., 2006
Basics of Accounting for InvestmentsBasics of Accounting for Investments
Accounting Basics for Debt Securities
Held-to-maturity (HTM) debt securities are recorded at cost when purchased. Interest revenue for investments in debt
securities is recorded when earned.
Held-to-maturity (HTM) debt securities are recorded at cost when purchased. Interest revenue for investments in debt
securities is recorded when earned.
Jan. 1 Long-Term Investment - HTM 1,000,000 Cash 1,000,000
Purchased bonds to hold to maturity
McGraw-Hill/Irwin7
15-7
© The McGraw-Hill Companies, Inc., 2006
Basics of Accounting for InvestmentsBasics of Accounting for Investments
Accounting Basics for Debt Securities
Debt securities are recorded at cost when purchased. Interest revenue for investments in debt securities is
recorded when earned.
Debt securities are recorded at cost when purchased. Interest revenue for investments in debt securities is
recorded when earned.
Jun. 30 Cash 30,000 Interest Revenue 30,000
To record receipt on interest on bonds
The same entry would be made on December 31, 2005.The same entry would be made on December 31, 2005.
McGraw-Hill/Irwin8
15-8
© The McGraw-Hill Companies, Inc., 2006
Basics of Accounting for InvestmentsBasics of Accounting for Investments
Accounting Basics for Debt Securities
Jan. 1 Cash 1,000,000 Long-Term Investment - HTM 1,000,000
Cash received at bond maturity.
On January 1, 2007, the bonds mature and Matrix would make the following entry:
On January 1, 2007, the bonds mature and Matrix would make the following entry:
McGraw-Hill/Irwin9
15-9
© The McGraw-Hill Companies, Inc., 2006
Accounting Basics for Equity SecuritiesAccounting Basics for Equity Securities
Equity securities are recorded at cost when acquired, including commissions or brokerage fees paid. Any cash dividends received are credited to Dividend
Revenue and reported in the income statement. When the securities are sold, sales proceeds are compared
with cost, and any gain or loss is recorded.
Equity securities are recorded at cost when acquired, including commissions or brokerage fees paid. Any cash dividends received are credited to Dividend
Revenue and reported in the income statement. When the securities are sold, sales proceeds are compared
with cost, and any gain or loss is recorded.
McGraw-Hill/Irwin10
15-10
© The McGraw-Hill Companies, Inc., 2006
Accounting Basics for Equity SecuritiesAccounting Basics for Equity Securities
On May 6, 2005, Matrix, Inc. purchased 10,000 shares of Apex, Inc. common stock for $250,000 in the open market.
The securities are classified by manager of Matrix as “available-for-sale” (AFS).
On May 6, 2005, Matrix, Inc. purchased 10,000 shares of Apex, Inc. common stock for $250,000 in the open market.
The securities are classified by manager of Matrix as “available-for-sale” (AFS).
May 6 Long-Term Investment - AFS 250,000 Cash 250,000
Purchase of 10,000 shares of common stock
McGraw-Hill/Irwin11
15-11
© The McGraw-Hill Companies, Inc., 2006
Accounting Basics for Equity SecuritiesAccounting Basics for Equity Securities
On June 30, Apex pays a quarterly dividend to Matrix, Inc. of $0.50 per share. Matrix receives a dividend check for $5,000.On June 30, Apex pays a quarterly dividend to Matrix, Inc. of $0.50 per share. Matrix receives a dividend check for $5,000.
Jun 30 Cash 5,000 Dividend Revenue 5,000
Received dividend of $0.50 per share
McGraw-Hill/Irwin12
15-12
© The McGraw-Hill Companies, Inc., 2006
Accounting Basics for Equity SecuritiesAccounting Basics for Equity Securities
On December 18, Matrix, Inc. sells 1,000 shares of Apex, Inc. in the open market for $30 per share.
On December 18, Matrix, Inc. sells 1,000 shares of Apex, Inc. in the open market for $30 per share.
Dec. 18 Cash 30,000 Long-Term Investment - AFS 25,000 Gain on Sale of Investment 5,000
Sold 1,000 Apex shares
$250,000 ÷ 10,000 shares = $25 per share cost
McGraw-Hill/Irwin13
15-13
© The McGraw-Hill Companies, Inc., 2006
Recorded at cost at acquisition Interest revenue recorded as accrued (debt
securities) Dividends recorded as revenue (equity
securities) Carrying amount is adjusted to Market Value
each period.
Recorded at cost at acquisition Interest revenue recorded as accrued (debt
securities) Dividends recorded as revenue (equity
securities) Carrying amount is adjusted to Market Value
each period.
Available-for-Sale SecuritiesAvailable-for-Sale Securities
Debt and equity securities that a company intends to sell in the future, before maturity.
Debt and equity securities that a company intends to sell in the future, before maturity.
McGraw-Hill/Irwin14
15-14
© The McGraw-Hill Companies, Inc., 2006
Matrix, Inc. purchased 1,000 shares of Apex, Inc. at $5 per share during 2005. At December 31, 2005, the shares had increased in value to $9.50 per share.
Matrix, Inc. purchased 1,000 shares of Apex, Inc. at $5 per share during 2005. At December 31, 2005, the shares had increased in value to $9.50 per share.
Valuing and Reporting Available-for-Sale SecuritiesValuing and Reporting Available-for-Sale Securities
Dec. 31 Market Adjustment - AFS 4,500 Unrealized Gain - Equity 4,500
To adjustment AFS securities to market
McGraw-Hill/Irwin15
15-15
© The McGraw-Hill Companies, Inc., 2006
{
In some cases, influence or control may exist with less than 20% ownership.
In some cases, influence or control may exist with less than 20% ownership.
Investor Ownership of Investee Shares
Outstanding
0% 20% 50% 100%
Cost or Market Value
MethodEquity Method
Consolidated Financial Statements
Accounting for Influential InvestmentsAccounting for Influential Investments
McGraw-Hill/Irwin16
15-16
© The McGraw-Hill Companies, Inc., 2006
{Significant influence is generally assumed
with 20% to 50% ownership.Significant influence is generally assumed
with 20% to 50% ownership.
Investor Ownership of Investee Shares
Outstanding
0% 20% 50% 100%
Equity Method
Consolidated Financial Statements
Accounting for Influential InvestmentsAccounting for Influential Investments
Cost or Market Value
Method
McGraw-Hill/Irwin17
15-17
© The McGraw-Hill Companies, Inc., 2006
Original investment is recorded at cost. The investment account is increased by a
proportionate share of investee’s earnings.
The investment account is decreased by dividends received.
Original investment is recorded at cost. The investment account is increased by a
proportionate share of investee’s earnings.
The investment account is decreased by dividends received.
Investments in Equity Securities with Significant InfluenceInvestments in Equity Securities with Significant Influence
McGraw-Hill/Irwin18
15-18
© The McGraw-Hill Companies, Inc., 2006
Investment in Equity Securities with Significant InfluenceInvestment in Equity Securities with Significant Influence
On January 1, 2005, Matrix, Inc. buys 20% of the voting common stock of Apex, Inc. for $2,000,000 cash.
Jan. 1 Long-Term Investment - Apex 2,000,000 Cash 2,000,000
To record purchase of Apex common stock
2,000,000
Long-Term Investment - Apex
2,000,000
Cash
McGraw-Hill/Irwin19
15-19
© The McGraw-Hill Companies, Inc., 2006
Investment in Equity Securities with Significant InfluenceInvestment in Equity Securities with Significant Influence
On December 31, 2005, Apex reports net income for the year of $300,000, and pays total cash
dividends of $50,000.
Dec. 31 Long-Term Investment - Apex 60,000 Earnings from Long-Term Investment 60,000
To record 20% equity in Apex earnings
Dec. 31 Cash 10,000 Long-Term Investment - Apex 10,000
To record share of Apex dividend received
$300,000 × 20% = $60,000$300,000 × 20% = $60,000
$50,000 × 20% = $10,000$50,000 × 20% = $10,000
McGraw-Hill/Irwin20
15-20
© The McGraw-Hill Companies, Inc., 2006
Investment in Equity Securities with Significant InfluenceInvestment in Equity Securities with Significant Influence
2,000,000 60,000
10,000 2,050,000
Long-Term Investment - ApexInvestment
Earnings
Dividends
Balance
McGraw-Hill/Irwin21
15-21
© The McGraw-Hill Companies, Inc., 2006
Investment in Equity Securities with Controlling InfluenceInvestment in Equity Securities with Controlling Influence
o Required when investor’s ownership exceeds 50% of investee.
o Equity Method is used.
o Consolidated financial statements show the financial position, results of operations, and cash flows of all entities under the parent’s control.
McGraw-Hill/Irwin22
15-22
© The McGraw-Hill Companies, Inc., 2006
Accounting Summary for Investments in SecuritiesAccounting Summary for Investments in Securities
Class of Investment Securities Accounting Method
Short-Term I nvestment in Securities
Held-to-maturity (debt securities) Cost (without discount/premium amortization)
Trading (debt and equity) securities Market value (with market adjustment to income)
Available-for-sale (debt and equity) securities Market value (with market adjustment to equity)
Long-Term I nvestment in Securities
Held-to-maturity (debt securities) Cost (with discount/premium amortization)
Available-for-sale (debt and equity) securities Market value (with market adjustment to equity)
Equity securities with significant influence Equity method
Equity securities with controlling influence Equity method (with consolidation)
McGraw-Hill/Irwin23
15-23
© The McGraw-Hill Companies, Inc., 2006
Components of Return on Total AssetsComponents of Return on Total Assets
Return ontotal assets
=ProfitMargin
×Total assetturnover
Net incomeAverage total assets = ×
Net incomeNet sales
Net salesAverage total assets
McGraw-Hill/Irwin24
15-24
© The McGraw-Hill Companies, Inc., 2006
Investments in International OperationsInvestments in International Operations
(1) Accounting for sales and purchases
listed in a foreign currency.
(1) Accounting for sales and purchases
listed in a foreign currency.
(2) Preparing consolidated financial
statements with international subsidiaries.
(2) Preparing consolidated financial
statements with international subsidiaries.
Two major accounting challenges arise when companies have international operations:
Two major accounting challenges arise when companies have international operations:
McGraw-Hill/Irwin25
15-25
© The McGraw-Hill Companies, Inc., 2006
Each country uses its own currency for internal economic transactions.
To make transactions in another country, units of that country’s currency must be acquired.
The cost of those currencies is called the exchange rate.
Each country uses its own currency for internal economic transactions.
To make transactions in another country, units of that country’s currency must be acquired.
The cost of those currencies is called the exchange rate.
Exchange Rates Between CurrenciesExchange Rates Between Currencies
McGraw-Hill/Irwin26
15-26
© The McGraw-Hill Companies, Inc., 2006
Homework for Chapter 15Homework for Chapter 15
Ex 15-4