Chap11Financial-Assets(財(cái)務(wù)報(bào)表分析-加州大學(xué)MBA)

FinancialAssetsWehavecoveredphysicalassetssuchasaccountreceivables,inventory,andlong-livedassets.Companiesalsopossessfinancialassets.Examplesoffinancialassetsincludegovernmentbonds,corporatebondsissuedbyothercompanies,stocksofothercompanies;theybasicallyfallintotwocategories:debtsandstocks.Ifthecompanyholdsanothercompany’sbond,thiscompanyisacreditor;ifholdsanothercompany’sstock,thiscompanyisashareholder.Goodnews…Intheselasttwolectures,weuserealUniversityofChicagoGSBlecturenotes…Andyoujudgewhichschooloffersbetterfinancialaccountingcourse,GuanghuaorChicagoGSB?Typesoffinancialassets1.Marketablesecurities(bothdebtsandstocks):Currentassets2.Minority,passive〔被動(dòng)〕investments3.Minority,activeinvestments4.Majority,activeinvestmentsTypesofInvestmentsInvestorCorporationMinority,ActiveInvestments(typicallybetween20%and50%ownership)Majority,ActiveInvestments(greaterthan50%ownership)Minority,PassiveInvestments(lessthan20%ownership)Theaccountingforinvestmentsdependsonthepurposeoftheinvestmentandthepercentageofvotingstockheld.TypesofInvestments(Cont.)Minority,passiveinvestmentsLessthan20%ofvotingstock.Assumedtobeheldforshorttermreturnsincludingdividendsandcapitalgains.Minority,activeinvestments

Between20%and50%ofvotingstock.Assumedtobeheldtoexertinfluenceovertheothercompany.Majority,activeinvestments

Greaterthan50%ofvotingstock.Assumedtobeheldsoforfullcontrolovertheothercompany.MarketableSecuritiesMarketablesecuritiesarebondsorstocksforwhichthereisanactivemarketandhenceareliablemarketvalue.Theyareliquidassetsinthattheycaneasilyandquicklybeconvertedintocash.Marketablesecuritiesheldasatemporaryinvestmentareclassifiedascurrentassets.ClassificationSecuritiesareproperlyclassifiedasmarketablesecuritieswhen1.Thefirmcanreadilyconvertthemintocash,and2.Intendstodosowhenitneedscash.Ifeitherofthetwotestsformarketablesecuritiesdonotapply,thenthesecuritiesareproperlyclassifiedasinvestmentinsecurities.

Investmentinsecuritiesaresecuritiesheldforlong-termgoalsandareclassifiedaslong-termassets.ValuationatAcquisitionMarketablesecuritiesareinitiallyrecordedatacquisitioncost.Whichincludespurchasepriceplusanycommissions,taxesorothercostsrelatedtotheacquisition.Thisisthesameruleasthegeneralruleforvaluingassetsatacquisition.Whenthecompanyreceivesdividendsorinterestsfrommarketablesecurities,it Dr.Cash### Cr.Dividend(interest)revenues###ValuationafterAcquisitionBecausethereexistsamarketvalue,marketablesecuritiescanbereliablywrittenupordowntothemarketvaluegivingamorecurrentestimateofeconomicworth.Thisalsoresultsinaholdinggainorlosswhichisnotduetothenormaloperationsofafirm.Forthepurposesofvaluationafteracquisition,therearethreeclassesofmarketablesecurities:1.Debtheldtomaturity2.Tradingsecurities(debtorstock)3.Securitiesavailableforsale(debtorstock)DebtHeldtoMaturityDebtsecuritiesforwhichafirmhasboththepositiveintentandabilitytoholdtomaturity.Shownonthebalancesheetattheamortizedacquisitioncost.Amortizedacquisitioncostmeansthatthesecuritiesareamortizedlikeamortgageorbond.Rememberaccountingforbond,nowweareontheothersideofbondaccounting.Theacquisitioncost(thebalanceinthebondpayableaccount)isassumedtobethepresentvalue.Thematurityvalue(bond’sparvalue)andmaturitydateareknownfromthebondcertificate.Aninternalrateofreturn(discountrate)canbecalculatedusingPVtechniques.DebtHeldtoMaturityGotochapter9lecturenotes,page28,nowyouarenottheseller,youarethebuyerofthebondwhichyouclassifyassecurityheld-to-maturity(notrealisticexamplebecauseafive-yearbondwillmakealong-terminvestment,notamarketablesecurity,justasanillustrationofaccounting).Theamortizedacquisitioncostatpurchaseofthebondisthebondprice. Dr.Held-to-Maturitysecurities92,976 Cr.Cash92,976

DebtHeldtoMaturityOnJune30ofyear1,thebondsellerpayscash$100,000*0.06=$6,000.ThisisNOTyourentireinterestrevenues.Interestrevenuesforthefirsthalfofyear1=discountrate7%*bondpayable$92,976=$6,508. Dr.Cash6,000Dr.Held-to-Maturitysecurities508 Cr.InterestRevenues6,508Nownewamortizedacquisitioncost=$92,976+508=$93,484Therestcashreceiptsfollowssimilartreatment.Note:Amortizedacquisitioncost(thebalanceofthesecurityaccount)hasnothingtodowiththemarketvalueofthesecurity.)TradingSecuritiesTradingsecuritiesareassumedheldforshort-termprofit.Characterizedbyfrequentandactivebuyingandsellingwiththeobjectofgeneratingprofit.Typicallyonlyfinancialinstitutionsholdtradingsecurities.Sincetradingsecuritiesareacquiredforshort-termprofit,unrealizedgainsorlossesthatresultfromadjustmentstomarketvaluepassthroughtheincomestatementandincreaseorreducenetincomebeforethereisasaleofthesecurities.Note:unlikesecuritiesheld-to-maturity,tradingsecurity’sbalanceisadjustedtothemarketvalueatfinancialstatementdates,anydifferencebetweenpreviousbalanceandcurrentmarketvalueisrecordedasunrealizedgains(losses);afterthisadjustment,thenewbalancewouldequaltocurrentmarketvalue.TradingSecuritiesRecordacquisitionoftradingsecuritiesDec28 Marketablesecurities 400,000Year3 Cash 400,000Dec31 Marketablesecurities 35,000Year3 Unrealizedholdinggain 35,000Torevaluethesecuritiestomarketvalueandrecognizeanunrealizedholdinggain.Theunrealizedholdinggainisclosedtoincome,appearsontheincomestatementandincreasesretainedearnings.Thenewbookvalueofthetradingsecuritiesisnow$435,000.TradingSecuritiesRecordthesalefor$480,000inJan.3ofyear4,thenextyear.Recallatthistimethenewvalueofthesecuritiesis$435,000.Jan3 cash 480,000Year4 marketablesecurities 435,000

realizedgainonsale 45,000Thisrealizedgain(becauseitissupportedbyasale)isclosedtoincomealso.Overthelifeofholdingthissecurity,thecompanyearned$80,000,$35,000inyear3incomestatement,$45,000inyear4incomestatement.SecuritiesAvailableforSaleSecuritiesavailableforsaleareneithertradingsecuritiesorsecuritiesheldtomaturity.Theyareanintermediateclassandaretypicallytiedtoaspecificcashneed.Theyareheldbynon-financialcompanies.Forexample,amanufacturingfirmmaybuildalargefundofsecuritiestopayforarenovationtoitsplantortoretirebondsthatwillcomedue.SecuritiesAvailableforSale(AFS)Similartotradingsecurity,AFS’

balanceisadjustedtothemarketvalueatfinancialstatementdates;afterthisadjustment,thenewbalancewouldequaltocurrentmarketvalue.Similartotradingsecurity,anydifferencebetweenpreviousbalanceandcurrentmarketvalueisrecordedasunrealizedgains(losses).Unliketradingsecurities,unrealizedgains(losses)donotshowupontheincomestatement,butdirectlyshowuponthebalancesheetequitysectionasanequityaccount.

SecuritiesAvailableforSale

Considerthepreviousexample,butassumethatthesecuritiesareproperlyclassifiedassecuritiesavailableforsale.RecordacquisitionoftradingsecuritiesatacquisitioncostjustasbeforeDec31 Marketablesecurities 35,000Year3 Unrealizedholdinggain 35,000Torevaluethesecuritiestomarketvalueandrecognizeanunrealizedholdinggain(alsolikebefore).Thisunrealizedholdinggainisnotclosedtoincome,butappearsintheequitysectionofthebalancesheethavingbypassedtheincomestatement.SecuritiesAvailableforSale

Recordthesalefor$480,000inthenextyearRecallatthenewvalueofthesecuritiesis$435,000.Jan3 Unrealizedholdinggain35,000Year4Marketablesecurities35,000

Cash 480,000 Marketablesecurities 400,000Realizedgainonsale 80,000Thefirstjournalentryreversesthejournalentryinthepreviousslideandsetthebookvalueofmarketablesecuritytoacquisitioncostof$400,000.Then,Thisrealizedgain(becauseitissupportedbyasale)isclosedtoincomealso.Thecompanyearned$80,000forholdingthissecurity,andrecognizetheentireamountof$80,000inyear4,theyearofsellingthesecurity,unlikeundertradingsecurity.ComparingTradingSecuritieswithSecuritiesAvailableforSaleBotharerecordedatacquisitioncost.Botharewrittenupordowntomarketwithadjustingentries.Bothgiverisetoanunrealizedholdinggainorlossaccountuponadjustment.However,theunrealizedholdinggainorlossfortradingsecuritiesisconsideredincome;itisclosedtoincomestatementandincreasesordecreasesnetincome.Whiletheunrealizedholdinggainorlossforavailableforsalesecuritiesisnotclosedtoincomestatementbutremainsonthebalancesheet.Whenthesesecuritiesaresold,thetotalamountofholdinggains(losses)recognizedoverholdingthesecurityisthesameforbothtypesofsecurities.DisclosureaboutSecuritiesFASB115requiresthefollowingdisclosuresforeachperiodformarketablesecurities:1.Theaggregatemarketvalue,grossunrealizedholdinggains,grossunrealizedholdinglosses,andamortizedcostsfordebtsecuritiesheldtomaturityandequitysecuritiesavailableforsale.2.Theproceedsfromsalesofsecuritiesavailableforsaleandthegrossrealizedgainsandlossesonthosesales.3.Thechangeduringtheperiodinthenetunrealizedholdinggainsorlossontradingavailableforsalesecuritiesincludedinaseparateshareholders’equityaccount.4.Thechangeduringtheperiodinthenetunrealizedholdinggainorlossontradingsecuritiesincludedinearnings.ControversyTheaccountingformarketablesecuritieshasbeencontroversial.Theaccountingissuesare:Whethertoreporttheseinstrumentsathistoricalcost(orsomemethodbasedonhistoricalcost)oratmarketvalue,andIfatmarketvalue,whethertoreportthechangesfromperiodtoperiodaspartofthatperiod’sincomeortoawaittheperiodwhenthefirmsellsorotherwisedisposesoftheinstrumenttorecordthegainorlossinincome.Minority,PassiveMinorityreferstolessthan50%ownership.Greaterthan50%ofthevotingstockmeansabsolutecontroloverthecorporation.Whentheinvestingfirmcannotordoesnotinfluencethedecisionsoftheownedfirm,theinvestmentispassive(normallylessthan20%isconsideredpassive)TheaccounttitlesshouldbeinvestmentinSecurity(long-termassets)todifferencefromtradingsecurity(currentassets)TheownerofapassiveminorityinvestmentmustaccountfortheinvestmentusingtheInitialinvestmentisrecordedatacquisitioncostDividendsarerecordedasrevenueAttheendofaccountingperiods,theassetisadjustedtothemarketvalueThetreatmentofunrealizedgains(losses)isthesameassecuritiesavailableforsale.Asaleoftheassetresultsinarealizedgainorloss,treatmentofunrealizedgains(losses)isthesameassecuritiesavailableforsale.Minority,ActiveBetween20%and50%givesrisetothepresumptionofactivebecauseaninvestorcanoftenexertinfluenceoverthedecisionsofthefirmwithlessthan50%ofthevotingstockprovidedtheremainderofthevotesaresplit.RequiretheequitymethodofaccountingInitialpurchaseisrecordedasanassetattheacquisitioncost.Eachperiod,theinvestingfirmrecognizedrevenueequaltoitsproportionateshareofthefirm.Dividendsreducetheassetandarenotrevenuebutratherareturnofcapital.RationaleforEquityMethodIfnotusingequitymethod,everytimethesubsidiaryfirmdeclaresdividend,thepurchaser Dr.Dividendreceivable(cash)### Cr.Dividendrevenues###Sincethepurchaserisassumedtobeabletoinfluencethedecisionofthepurchasedfirmincludingitsdividendpolicy,Thereisariskthatthepurchasermightusethisinfluencetomanipulateitsownincome…byhavingthepurchasedfirmdeclareorfailtodeclareadividend.Recognizingaproportionateshareofthepurchasedfirm’sincomeandnotrecognizingreceiveddividendsasrevenuesremovesthisrisk.AccountingfortheequitymethodPfirmpurchases30%ofoutstandingsharesofSfirm. Dr.InvestmentinStockS(equitymethod) Cr.Cash2.OnDec.31,Sreportsnetincomes,P Dr.InvestmentinStockS(30%ofS’sNetIncome) Cr.Equityinearningsofaffiliates(revenues)3.OnJan.5,Sdeclaresdividends,P Dr.Dividendreceivable(30%ofS’sdividends) Cr.InvestmentinstockSMajority,ActiveAparentfirmholdsmorethan50%ofthevotingstockofanotherfirm,whichiscalledthesubsidiaryfirm.Thisgivestheparentcompletecontroloverthesubsidiary.Theportionofthesubsidiarynotownedbytheparentiscalledtheminorityinterest.Acorporationisalegalentityandnotnecessarilyaneconomicentit