INVESTMENT AND FAIR VALUE ACCOUNTING

1. INVESTMENT AND FAIR VALUE ACCOUNTING By Austin, Harelle, Jemma

2. COMPANIES INVESTMENTS - The companies use their cash from their operations for investing in current, temporary, and long term investments.

3. INVESTING CASH IN CURRENT OPERATIONS • Cash is often used to support the current operating activities of a company. For example, cash may be used to purchase new equipments. Another example, a retailer based in the Philippines would like to expand his business by opening stores in the other country. • COMPANIES ALSO USES CASH TO PAY: • Expenses • Suppliers of merchandise and other assets • Interest to creditors • Dividends to stockholders

4. INVESTING CASH IN TEMPORARY INVESTMENTS • A company may temporarily have excess cash that is not needed for use in its current operations when they have seasonal operating cycle. Instead of letting excess cash remain idle in a checking account, they will invest it in a temporary investments. • COMPANIES INVEST SECURITIES SUCH AS: • Debt Securities – Notes and bonds that pay interest and have a fixed maturity date. • Equity Securities – Preferred and common stock that represent ownership in a company and do not have a fixed maturity date.

5. INVESTING CASH IN LONG-TERM INVESTMENTS • A company invest in the debt or equity of another company as a long-term investment. Long-term investments may be held for the same investment objectives as temporary investments, but long-term investments often involve the purchase of a significant portion of the another company. • STRATEGIC PURPOSE OF THESE INVESTMENTS: • Reduction of Costs – A combined company may be able to reduce administrative expenses. For example, company ABC and DEF combined, they don’t need two CEOs. • Replacement of Management - When a company had a mismanage purchases, the company may replace the company’s management and improve operations and profits • Expansion – The company may purchase a company because it has a complementary product line, territory, or customer base. The combined company may be able to serve customers better than the two companies could separately. • Integration – A company may integrate operations by acquiring a supplier or customer. Acquiring a supplier may provide a more stable or uninterrupted supply of resources. Acquiring a customer may also provide a market for the company’s products or services.

6. Accounting for Debt Investments • Purchase of Bonds • Investment account for the purchase price of the bond are debited in recording purchase of bonds. It includes accrued interest if the bonds are purchased between interest dates. • Interest Revenue • Non-operating income of a company receives from any investments. • The interest earned by the company during the time period is reported under the accrual basis of accounting.

7. Sales of Bonds • Sales of bonds could result in a gain or loss • It is gain if the proceeds from the sales exceed the book value of the bonds. • It is loss if the book value is greater than the proceeds

8. Accounting for Equity Investment • Less than 20% ownership • The investor have no control over the investee. • It is assumed that the investor purchased stock to earn dividends. • Under the cost method, entries are recorded for the following transactions: • Purchase of stock- it is recorded at its cost • Receipt of dividends – company that purchase stock would receive a dividend from the company • Sale of stock- if the proceeds exceed or less than from the book value it is gain or loss

9. Between 20%-50% ownership • The investor have a significant influence over the investee. • It is assumed that the investor purchased stock for strategic reasons • Under the equity method: • Net income- The investor records its share of the net income of the investee as an increase in the investment account. Its share of any loss is recorded as a decrease in the investment account • Dividends of the investee- The investor’s share of cash dividends received from the investee decreases the investment account.

10. More than 50% ownership • The investor has a control over the investee • It is termed a business combination • Parent company- A corporation owning all or a majority of the voting stock of another corporation • Subsidiary company- corporation that is controlled • Consolidated financial statements- are the combined parent and subsidiary financial statement

11. Valuing and reporting investments • Trading Securities • Purchased and sold to earn short-term profits • Often held by banks, mutual funds, insurance companies and other financial intermediaries • Reported as a current asset in the balance sheet • Changes in fair value are reported as an unrealized gain or loss in the income statement.

12. Available-for-sale securities • Neither held for trading, held to maturity or held for strategic reasons • Changes in the fair value are reported as a stockholder’s equity • Held- to- maturity securities • debt investments that a company intends to hold until the maturity • Within a year maturity date is reported as a current asset • Beyond a year maturity is reported as a noncurrent asset

13. Fair Value of Accounting • Price that would be received if the asset is sold or the liability is paid off • Used for valuing and reporting debt and equity securities • Accounts receivable and accounts payable are recorded at an amount approximates its fair value • Many assets and liabilities are recorded at amounts differ from their fair values.

14. FInancIalanalysIs and InterpretatIon • Dividend yield measures the rate of return to stockholders based on cash dividends. • Dividend is most often computed for common stock • Dividend yield= Dividend per share of common stock Market price per share of common stock

15. THE END!