InvestmentsGroup #4

Bajacan, Karla Mae

Carlos, Juan Paolo

Castro, Patrick

Lu, Enrico Rafael

Investments

• Are assets that may result to a profit or loss.

• Are not related to any Current Operations

• Are classified as short term investments or Long term investments.

Short term investments

• An investment that will expire with in one year

• May be in the form of Debts securities (Bonds) or Equity securities (Stocks)

Long term investments

• An investment that has more than a year before it expires

• May be in the form of Debt securities or Equity securities

• May have different purposes

1.) Reduction of cost – When a company merges or combines, it may no longer require to fill up some positions because the other company will provide that service. Ex. Chief executive officer

Purposes of Long term investments

2.)Replacement of management – the Company which purchased the other company may replace the manager for a brighter management.

3.)Expansion – The 2 companies that have combined may be able to serve customers better rather than them being separated. This is true with complementary products. For example: coffee company and sugar company merging to supply the right amount of each product so that there will be no shortage of each product thus meeting the demand of customers.

4.)Integration – A long term investment to a supplier so that your production will be stable throughout your operations.

Accounting debt investments

• Purchase of Bonds – this is recorded by debiting an investments account for the purchase price of the bond including acquisition cost and the accrued interest.

• Interest Revenue –this can be recorded by multiplying the cash received by the interest rate and the total time.

• Sale of Bonds – This normally results to a gain or loss of profit depending with the proceeds.

Accounting for equity investments

• Investor - an entity purchasing a stock.

• Investee - the company whose stock is being bought.

Less than 20% ownership

• The investor does not have any control on the investee.

• The investor is only subjected to dividends and realized gains.

Recording

• Purchase of stock – records the cost of the stock with the cost of the brokerage commission

• Receipt of Dividends – it is recorded under other income

• Sale of stock – This normally ends up with a gain or loss, this depends on the proceeds.

Between 20%-50% Ownership

• The investor has a significant influence on the investee

• The investor has significant influence over the investee.

• Stocks are accounted using equity method. Under the equity method, the investment account is adjusted for the investor's share of the net income and dividends of the investee.

More Than 50% Ownership• The investor has control over the

investee.• Stocks are accounted using

consolidation.• The purchased of more than 50%

ownership of the investee's stock is termed a business combination.

• A corporation owning all or a majority of the voting stock of another corporation is called a parent company. The corporation that is controlled is called the subsidiary company.

• Consolidated Financial Statements combined financial statements of parent and subsidiary company.

Valuing and Reporting InvestmentsFor purposes valuing and reporting, debt and equity instruments are

classified as follows:

1. Trading securities- are debt and equity securities that are purchased and sold to earn short-term profits from changes in their market prices.

- Fair value is the market price that the company would receive for a securities if it were sold. Changes in fair value of the portfolio of trading securities are recognized as an unrealized gain or loss.

2. Available-for-Sale Securities-are debt and equity securities that are neither held trading, held to maturity or strategic reasons.-similar to trading securities except for

the reporting changes in fair values.

3. Held-to-Maturity Securities- are debt investments, such as notes or bonds, that a company intends to hold until their maturity date. -Held-to-Maturity securities are primarily

purchased to earn interest revenue.

Fair Value of Accounting

- is the that would be received for selling an asset or paying off a liability.

•  Trend to Fair Value AccountingFactors contributing to this trend include the following:

1. Current GAAP are a hybrid of varying measurement methods that often conflict with one another.

2. A greater percentage of the total assets of many companies consists of financial assets such as receivables and securities.

3. The world economy has compelled accounting regulators to adopt a worldwide set of accounting principles and standards.

While there is an increasing trend to fair value accounting, using fair values has several potential disadvantages. Some of these disadvantages include the following:

1. Fair values may not be readily obtainable for some assets or liabilities.

2. Fair values make it more difficult to compare if companies use different methods of determining fair values.

3. Using fair values could result in more fluctuations in accounting reports because fair values normally change from year to year.

Effects of Fair Value Accounting on the Financial Statements

-The use of fair values for valuing assets and liabilities affects the financial statements. Specially, the balance sheet and income statement could be affected.

Financial Analysis and Interpretation: Dividend Yield

• Dividend yield measures the rate of return to stockholders based on cash dividends.-The dividend yield is computed as

follows: