1、Investments and International OperationsChapter 15Basics of InvestmentsCompanies transfer excess cash into investments to produce higher income.Some companies are set up to produce income from investments.Companies make investments for strategic reasons.Motivation for InvestmentsC1Investments of Sel

2、ected CompaniesShort-Term (S-T) and Long-Term (L-T) Investments as a Percent of Total AssetsC1Short-Term InvestmentsC1Short-term investments are securities that:Management intends to convert to cash within one year or the operating cycle, whichever is longer.Are readily convertible to cash.Short-ter

3、m investments do not include cash equivalents. Cash equivalents are investments that are both readily converted to known amounts of cash and mature within three months. Long-Term InvestmentsLong-term investments:are not readily convertible to cash. are not intended to be converted to cash in the sho

4、rt term.are reported in the noncurrent section of the balance sheet, often in its own category.C1Debt Securities versus Equity SecuritiesDebt SecuritiesReflect a creditor relationship Examples: Investments in notes, bonds, and CDsMay be issued by governments, companies, or individualsC1Equity Securi

5、tiesReflect an owner relationship Examples: Investments in shares of stockIssued by companiesClassification and ReportingC1Accounting for Investments depends on three factors:Security type: debt or equity Intent to hold the security short or long termPercentage ownership in another companys equity s

6、ecuritiesDebt Securities: Accounting BasicsDebt securities are recorded at cost when purchased. Interest revenue for investments in debt securities is recorded when earned. On September 1, 2012, Music City paid $29,500 plus a $500 brokerage fee to buy Dells 7%, 2-year bonds payable with a $30,000 pa

7、r value. The bonds pay interest semiannually on August 31st and February 28th. Music City plans to hold the bonds until they mature (HTM securities).P2Debt Securities: Accounting BasicsInterest earned but not received must be accrued on December 31, 2012. $30,000 par value 7% 4/12 = $700 interest ea

8、rned.P2Debt Securities: Accounting BasicsOn February 28, 2013, Music City will record the receipt of the semiannual interest. The companys accountants will make the following entry. $30,000 par value 7% 6/12 = $1,050 (Interest received).P2$30,000 par value 7% 4/12 = $700 (Interest earned in 2012).$3

9、0,000 par value 7% 2/12 = $350 (Interest earned in 2013).Debt Securities: Accounting BasicsWhen the bonds mature, Music City will receive the amount of the par value in cash. The bonds have now been retired.P2Equity Securities: Accounting Basics Equity securities are recorded at cost when acquired,

10、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.P1Equity Securities: Accounting Basics On October 10,

11、 2012, Music City purchases 1,000 shares of Intex common stock for $86,000 in the open market. The securities are classified by management of Music City as “available-for-sale” (AFS) securities.P3Equity Securities: Accounting Basics On November 2, Music City receives a $1,720 quarterly dividend on i

12、ts investment in Intex.P3Equity Securities: Accounting Basics On December 20, Music City sells 500 shares of Intex in the open market for $45,000.Calculate original cost per share:$86,000 1,000 shares = $86.00 per share cost.Calculate cost of shares sold:500 shares $86 = $43,000.P3Trading Securities

13、Debt and equity securitiesActively managed and traded for profitFrequent purchases and sales expectedReported at fair valueUnrealized gain or loss reported in the income statementP1TechComs portfolio of trading securities had a total cost of $11,500, and a fair value of $13,000, on December 31, 2012

14、, the first year the securities were held. The $1,500 difference between the cost of $11,500 and the fair value of $13,000 is an unrealized gain.Trading SecuritiesP1Assume TechCom sells trading securities that had cost $1,000 for $1,200 cash, on January 9, 2013.Trading SecuritiesThe gain is reported

15、 in the Other Revenues and Gains section of the Income Statement. Likewise, a loss would be reported in Other Expenses and Losses section.P1Held-to-Maturity SecuritiesDebt securitiesIntent and ability to hold until maturityReported as:Current assets if their maturity dates are within one year or the

16、 operating cycle, whichever is longer.Noncurrent investments if their maturity dates are longer than one year or the normal operating cycle, whichever is longer.The portfolio of HTM securities is reported at amortized cost. There is no fair value adjustment to the portfolio.P2Available-for-Sale Secu

17、ritiesDebt and equity securities not classified as trading or held-to-maturity Not actively managed Report as: Short-term investments if the intent is to sell the securities within one year or the normal operating cycle, whichever is longer. Long-term investments if securities do not meet short-term

18、 investment criteria.Valued at fair valueUnrealized gains or loss reported in the equity section of the balance sheet as part of comprehensive incomeP3Available-for-Sale SecuritiesMusic City had no prior investments. In the current period, it acquired two available-for-sale securities. At December 3

19、1, 2012, the following information is provided:P3Available-for-Sale SecuritiesMusic CityPartial Balance SheetDecember 31, 2012Assets Long-term investmentsAFS (at cost) $ 73,000 Fair value adjustmentAFS 1,550 Long-term investmentsAFS (at fair value) $ 74,550 Equity Add unrealized gain on AFS securiti

20、es $ 1,550 P3Available-for-Sale SecuritiesLets extend our example and assume that at December 31, 2013, the portfolio of long-term AFS securities has an $81,000 cost and an $82,000 fair value.P3Global ViewFair Value Option for Reporting Financial Assets Both U.S. GAAP and IFRS permit companies to us

21、e fair value in reporting financial assets. This option allows companies to report any financial asset at fair value and recognize value changes in income. This method was previously reserved only for trading securities, but now is an option for available-for-sale and held-to-maturity securities. In

22、 some cases, influence or control may exist with less than 20% ownership.Investor Ownership of Investee Shares Outstanding0%20%50%100%Cost or Market Value MethodEquity MethodConsolidated Financial StatementsAccounting For Influential InvestmentsP4Significant influence is generally assumed with 20% t

23、o 50% ownership.Accounting For Influential InvestmentsInvestor Ownership of Investee Shares Outstanding0%20%50%100%Cost or Market Value MethodEquity MethodConsolidated Financial StatementsP4Original investment is recorded at cost.The investment account is increased by a proportionate share of invest

24、ees earnings.The investment account is decreased by dividends received.P4Investments in Equity Securities with Significant Influence On January 1, 2012, Micron Co. records the purchase of 3,000 shares (30%) of Star Co. common stock at a total cost of $70,650 cash. P4Investments in Equity Securities

25、with Significant Influence For 2012, Star reports net income of $20,000, and pays total cash dividends of $10,000 on January 9, 2013.P4$10,000 30% = $3,000$20,000 30% = $6,000Investments in Equity Securities with Significant InfluenceP4Investments in Equity Securities with Significant InfluenceRequi

26、red when investors ownership exceeds 50% of investee.Equity Method is used.Consolidated financial statements show the financial position, results of operations, and cash flows of all entities under the parents control.C2Investments in Securities with Controlling InfluenceAccounting Summary for Inves

27、tments in SecuritiesC1Comprehensive IncomeC1Comprehensive Income: all changes in equity during a period except those from owners investments and dividends. Examples of items not included in Net Income but which are part of Comprehensive Income include:Unrealized gains and losses on available-for-sal

28、e securitiesForeign currency adjustmentsCertain pension adjustments Comprehensive Income Reporting Options1. On a separate statement of comprehensive income that immediately follows the income statement.2. On the lower section of the income statement (as a single continuous statement of income and c

29、omprehensive income).Global ViewAccounting for Influential Securities The accounting for influential securities is broadly similar between U.S. GAAP and IFRS. There are a couple of minor differences in terminology.Accounting for Noninfluential Securities The accounting for noninfluential securities

30、is broadly similar between U.S. GAAP and IFRS. There are a couple of differences in terminology. Trading securities are referred to in IFRS as financial assets at fair value though profit and loss, and available-for-sale securities are referred to as available-for-sale financial assets.Components of

31、 Return on Total AssetsReturn ontotal assets=ProfitmarginTotal assetturnoverNet incomeAverage total assets=Net incomeNet salesNet salesAverage total assetsA1* Differences due to rounding.Return on Total AssetsHere are the returns on total assets for Gap, Inc. for the years 2008 through 2012:All comp

32、anies desire a high return on total assets. To improve the return, the company must meet any decline in profit margin or total asset turnover with an increase in the other. Companies consider these components in planning strategies.A1Appendix 15A: Investments in International OperationsTwo major acc

33、ounting challenges arise when companies have international operations:C3Accounting for sales and purchases listed in a foreign currency.Preparing consolidated financial statements with international subsidiaries.Each country uses its own currency for internal economic transactions.To make transactio

34、ns in another country, units of that countrys currency must be acquired.The cost of those currencies is called the exchange rate.Exchange Rates Between CurrenciesC3Sales in a Foreign CurrencyBoston Company, a U.S.-based manufacturer makes a credit sale to London Outfitters, a British retail company.

35、 On December 12, 2012, Boston sells 10,000 of goods with payment due on February 10, 2013. Boston keeps its record in U.S. dollars. At the date of sale, the British pound is valued at $1.80.10,000 $1.80 = $18,000C3Sales in a Foreign CurrencyBoston Company is a December 31, year-end company. On Decem

36、ber 31, 2012, the British pound has an exchange rate of $1.84. The dollar value of the account receivable from London is $18,400 on this date. The receivable is to be valued in the balance sheet at its current dollar amount.Accounts Receivable London OutfittersDateExplanationDebitCreditBalance12/12/12 Sale 18,000 18,000 12/31/12 Adjustment for foreign currency400 18,400 C3Sales in a Foreign CurrencyOn February 10, 2012, Boston receives London Outfitters payment of 10,000. Boston immediately exchanges the pound