1、15-1PowerPoint Authors:Susan Coomer Galbreath,Ph.D.,CPACharles W.Caldwell,D.B.A.,CMAJon A.Booker,Ph.D.,CPA,CIACynthia J.Rooney,Ph.D.,CPACopyright 2013 by The McGraw-Hill Companies,Inc.All rights reserved.Investments and International OperationsChapter 1515-2Basics of Investments1.Companies transfer
2、excess cash into investments to produce higher income.2.Some companies are set up to produce income from investments.3.Companies make investments for strategic reasons.Motivation for InvestmentsC115-3Investments of Selected CompaniesShort-Term(S-T)and Long-Term(L-T)Investments as a Percent of Total
3、AssetsC115-4Short-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-term investments do not include cash equivalents.Cash equivalents are investments that
4、 are both readily converted to known amounts of cash and mature within three months.15-5Long-Term InvestmentsLong-term investments:are not readily convertible to cash.are not intended to be converted to cash in the short term.are reported in the noncurrent section of the balance sheet,often in its o
5、wn category.C115-6Debt Securities versus Equity SecuritiesDebt Securities Reflect a creditor relationship Examples:Investments in notes,bonds,and CDs May be issued by governments,companies,or individualsC1Equity Securities Reflect an owner relationship Examples:Investments in shares of stock Issued
6、by companies15-7Classification and ReportingC1Accounting for Investments depends on three factors:1.Security type:debt or equity 2.Intent to hold the security short or long term3.Percentage ownership in another companys equity securities15-8Debt Securities:Accounting BasicsDebt securities are record
7、ed 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 par value.The bonds pay interest semiannually on August 31st and February 28th.
8、Music City plans to hold the bonds until they mature(HTM securities).P215-9Debt Securities:Accounting BasicsInterest earned but not received must be accrued on December 31,2012.$30,000 par value 7%4/12=$700 interest earned.P215-10Debt Securities:Accounting BasicsOn February 28,2013,Music City will r
9、ecord 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).$30,000 par value 7%2/12=$350(Interest earned in 2013).15-11Debt Securities:Accounting Basic
10、sWhen the bonds mature,Music City will receive the amount of the par value in cash.The bonds have now been retired.P215-12Equity Securities:Accounting Basics Equity securities are recorded at cost when acquired,including commissions or brokerage fees paid.Any cash dividends received are credited to
11、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.P115-13Equity Securities:Accounting Basics On October 10,2012,Music City purchases 1,000 shares of Intex common stock for$86,000 in the open marke
12、t.The securities are classified by management of Music City as“available-for-sale”(AFS)securities.P315-14Equity Securities:Accounting Basics On November 2,Music City receives a$1,720 quarterly dividend on its investment in Intex.P315-15Equity Securities:Accounting Basics On December 20,Music City se
13、lls 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.P315-16Trading Securities1.Debt and equity securities2.Actively managed and traded for profit3.Frequent purchases and
14、 sales expected4.Reported at fair value5.Unrealized gain or loss reported in the income statementP115-17TechComs portfolio of trading securities had a total cost of$11,500,and a fair value of$13,000,on December 31,2012,the first year the securities were held.The$1,500 difference between the cost of$
15、11,500 and the fair value of$13,000 is an unrealized gain.Trading SecuritiesP115-18Assume TechCom sells trading securities that had cost$1,000 for$1,200 cash,on January 9,2013.Trading SecuritiesThe gain is reported in the Other Revenues and Gains section of the Income Statement.Likewise,a loss would
16、 be reported in Other Expenses and Losses section.P115-19Held-to-Maturity Securities1.Debt securities2.Intent and ability to hold until maturity3.Reported as:a)Current assets if their maturity dates are within one year or the operating cycle,whichever is longer.b)Noncurrent investments if their matu
17、rity 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.P215-20Available-for-Sale Securities1.Debt and equity securities not classified as trading or held-to
18、-maturity 2.Not actively managed 3.Report as:a)Short-term investments if the intent is to sell the securities within one year or the normal operating cycle,whichever is longer.b)Long-term investments if securities do not meet short-term investment criteria.4.Valued at fair value5.Unrealized gains or
19、 loss reported in the equity section of the balance sheet as part of comprehensive incomeP315-21Available-for-Sale SecuritiesMusic City had no prior investments.In the current period,it acquired two available-for-sale securities.At December 31,2012,the following information is provided:P315-22Availa
20、ble-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 securities$1,550 P315-23Available-for-Sale SecuritiesLets extend our e
21、xample 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.P315-24Global ViewFair Value Option for Reporting Financial Assets Both U.S.GAAP and IFRS permit companies to use fair value in reporting financial assets.This option allo
22、ws 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.15-25In some cases,influence or control may exist with less than
23、20%ownership.Investor Ownership of Investee Shares OutstandingCost or Market Value MethodEquity MethodConsolidated Financial StatementsAccounting For Influential InvestmentsP415-26Significant influence is generally assumed with 20%to 50%ownership.Accounting For Influential InvestmentsInvestor Owners
24、hip of Investee Shares OutstandingCost or Market Value MethodEquity MethodConsolidated Financial StatementsP415-27Original investment is recorded at cost.The investment account is increased by a proportionate share of investees earnings.The investment account is decreased by dividends received.P4Inv
25、estments in Equity Securities with Significant Influence15-28 On January 1,2012,Micron Co.records the purchase of 3,000 shares(30%)of Star Cmon stock at a total cost of$70,650 cash.P4Investments in Equity Securities with Significant Influence15-29 For 2012,Star reports net income of$20,000,and pays
26、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 Influence15-30P4Investments in Equity Securities with Significant Influence15-31Required when investors ownership exceeds 50%of investee.Equity Method is used.Cons
27、olidated financial statements show the financial position,results of operations,and cash flows of all entities under the parents control.C2Investments in Securities with Controlling Influence15-32Accounting Summary for Investments in SecuritiesC115-33Comprehensive IncomeC1Comprehensive Income:all ch
28、anges 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-sale securitiesForeign currency adjustmentsCertain pension adjustments Compr
29、ehensive 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 comprehensive income).15-34Global ViewAccounting for Influential Securities T
30、he 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 is broadly similar between U.S.GAAP and IFRS.There are a couple of differ
31、ences 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.15-35Components of Return on Total AssetsReturn ontotal assets=ProfitmarginTotal assetturn
32、overNet incomeAverage total assets=Net incomeNet salesNet salesAverage total assetsA115-36*Differences due to rounding.Return on Total AssetsHere are the returns on total assets for Gap,Inc.for the years 2008 through 2012:All companies desire a high return on total assets.To improve the return,the c
33、ompany must meet any decline in profit margin or total asset turnover with an increase in the other.Companies consider these components in planning strategies.A115-37Appendix 15A:Investments in International OperationsTwo major accounting challenges arise when companies have international operations
34、:C3Accounting for sales and purchases listed in a foreign currency.Preparing consolidated financial statements with international subsidiaries.15-38Each country uses its own currency for internal economic transactions.To make transactions in another country,units of that countrys currency must be ac
35、quired.The cost of those currencies is called the exchange rate.Exchange Rates Between CurrenciesC315-39Sales in a Foreign CurrencyBoston Company,a U.S.-based manufacturer makes a credit sale to London Outfitters,a British retail company.On December 12,2012,Boston sells 10,000 of goods with payment
36、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.C315-40Sales in a Foreign CurrencyBoston Company is a December 31,year-end company.On December 31,2012,the British pound has an exchange rate of$1.84.The dollar value of the account
37、 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 C315-41Sales in a Forei
38、gn CurrencyOn February 10,2012,Boston receives London Outfitters payment of 10,000.Boston immediately exchanges the pounds for U.S.dollars.The exchange rate on this date is$1.78 per pound,so Boston receives$17,800 for the 10,000 received in settlement.Accounts Receivable London OutfittersDateExplana
39、tionDebitCreditBalance12/12/12 Sale 18,000 18,000 12/31/12 Adjustment for foreign currency400 18,400 2/10/13 Payment received 18,400 -0-C315-42Purchases in a Foreign CurrencyNC Imports,a U.S.company,purchases products costing 20,000 from Hamburg Brewing on January 15,when the exchange rate is$1.20 p
40、er euro.C315-43Purchases in a Foreign CurrencyNC Imports makes payment in full on February 14 when the exchange rate is$1.25 per euro.C315-44Consolidated Statements with International SubsidiariesConsider a U.S.-based company that owns a controlling interest in a French company.The reporting currenc
41、y of the U.S.company is the dollar.The French company maintains its books in Euros.Before preparing consolidated statements,the U.S.company must translate the French companys statements into dollars.The process requires the parent company to select appropriate foreign exchange rates and to apply those rates to the foreign subsidiarys account balances.TranslateAccount BalancesC315-45End of Chapter 15
