In: Business and Management

Submitted By sagarbhatia
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Chapter 11: Highlights

1. For a variety of reasons, corporations often acquire the securities (bonds, preferred stock, common stock) of other entities. For example, a business may invest (in the short term) some of its excess cash in income-yielding securities such as bonds or stocks. A business may also invest in securities intending to hold them for a longer period.

2. The accounting for investments in securities depends on the expected holding period and the purpose of the investment.

3. The expected holding period determines where investments in securities appear in the balance sheet. Securities that firms expect to sell within the next year appear as “Marketable Securities” in the Current Asset section of the balance sheet. Securities that firms expect to hold for more than one year from the date of the balance sheet appear in “Investments in Securities,” which firms include in a separate section of the balance sheet between Current Assets and Property, Plant and Equipment. When a company owns sufficient number of shares to control another company, it prepares consolidated financial statements. Consolidated financial statements combine, with some adjustments, the assets, liabilities, revenues, expenses, and cash flows of both companies.

4. The accounting for the investment in securities depends on the purpose of the investment and the percentage of voting stock that one corporation owns of another. Three types of investments are: (1) minority, passive investments, (2) minority, active investments, and (3) majority, active investments.

5. Minority, passive investments are bonds or shares of capital stock of another corporation viewed as a worthwhile expenditure and acquired for the anticipated interest, dividends and capital gains (increases in the market price of the shares). The percentage of shares owned is not so large (less than 20…...

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