Download Chapter 15 PowerPoint Presentation

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Investments and International
Operations
Chapter 15
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
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C1
Basics of Investments
Motivation for Investments
1.Companies transfer 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.
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C1
Investments of Selected
Companies
Short-Term (S-T) and Long-Term (L-T)
Investments as a Percent of Total Assets
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C1
Short-Term Investments
Short-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 are both readily converted to known
amounts of cash and mature within three
months.
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C1
Long-Term Investments
Long-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 own
category.
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C1
Debt Securities versus
Equity Securities
Debt Securities
• Reflect a creditor relationship
• Examples: Investments in notes, bonds, and CDs
• May be issued by governments, companies, or
individuals
Equity Securities
• Reflect an owner relationship
• Examples: Investments in shares of stock
• Issued by companies
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C1
Classification and Reporting
Accounting for Investments depends on three factors:
1. Security type: debt or equity
2. Intent to hold the security short or long term
3. Percentage ownership in another company’s equity securities
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P2
Debt Securities: Accounting Basics
Debt 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 Dell’s 7%, 2-year bonds payable
with a $30,000 par value. The bonds pay interest
semiannually on August 31st and February 28th. Music City
plans to hold the bonds until they mature (HTM securities).
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P2
Debt Securities: Accounting Basics
Interest earned but not received must be
accrued on December 31, 2012.
$30,000 par value × 7% × 4/12 = $700 interest earned.
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P2
Debt Securities: Accounting Basics
On February 28, 2013, Music City will record the
receipt of the semiannual interest. The company’s
accountants will make the following entry.
$30,000 par value × 7% × 6/12 = $1,050 (Interest received).
$30,000 par value × 7% × 4/12 = $700 (Interest earned in 2012).
$30,000 par value × 7% × 2/12 = $350 (Interest earned in 2013).
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P2
Debt Securities: Accounting Basics
When the bonds mature, Music City will
receive the amount of the par value in cash.
The bonds have now been retired.
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P1
Equity Securities:
Accounting Basics
Equity securities are recorded at cost when
acquired, 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.
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P3
Equity Securities:
Accounting Basics
On October 10, 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.
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P3
Equity Securities:
Accounting Basics
On November 2, Music City receives a $1,720
quarterly dividend on its investment in Intex.
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P3
Equity 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.
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P1
Trading Securities
1. Debt and equity securities
2. Actively managed and traded for profit
3. Frequent purchases and sales expected
4. Reported at fair value
5. Unrealized gain or loss reported in the income
statement
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P1
Trading Securities
TechCom’s 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 $11,500 and the
fair value of $13,000 is an unrealized gain.
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P1
Trading Securities
Assume TechCom sells trading securities that had
cost $1,000 for $1,200 cash, on January 9, 2013.
The gain is reported in the Other
Revenues and Gains section of
the Income Statement. Likewise,
a loss would be reported in Other
Expenses and Losses section.
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P2
Held-to-Maturity Securities
1. Debt securities
2. Intent and ability to hold until maturity
3. 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 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.
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P3
Available-for-Sale Securities
1. Debt and equity securities not classified as trading or
held-to-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 value
5. Unrealized gains or loss reported in the equity
section of the balance sheet as part of
comprehensive income
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P3
Available-for-Sale Securities
Music 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:
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P3
Available-for-Sale Securities
Music City
Partial Balance Sheet
December 31, 2012
Assets
Long-term investments‒AFS (at cost)
Fair value adjustment–AFS
Long-term investments‒AFS (at fair value)
Equity
Add unrealized gain on AFS securities
$ 73,000
1,550
$ 74,550
$ 1,550
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P3
Available-for-Sale Securities
Let’s 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.
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Global View
Fair Value Option for Reporting Financial Assets
Both U.S. GAAP and IFRS permit companies to use 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.
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Accounting For Influential
Investments
P4
Investor Ownership of
Investee Shares Outstanding
Cost or
Market
Value
Method
0%
Equity
Method
20%
Consolidated Financial
Statements
50%
In some cases, influence or control may
exist with less than 20% ownership.
100%
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Accounting For Influential
Investments
P4
Investor Ownership of
Investee Shares Outstanding
Cost or
Market
Value
Method
0%
Equity
Method
20%
Consolidated Financial
Statements
50%
100%
Significant influence is generally
assumed with 20% to 50% ownership.
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P4
Investments in Equity Securities
with Significant Influence
Original investment is recorded at cost.
The investment account is increased by a
proportionate share of investee’s earnings.
The investment account is decreased by
dividends received.
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P4
Investments 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.
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P4
Investments in Equity Securities
with Significant Influence
For 2012, Star reports net income of $20,000,
and pays total cash dividends of $10,000 on
January 9, 2013.
$20,000 × 30% = $6,000
$10,000 × 30% = $3,000
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P4
Investments in Equity Securities
with Significant Influence
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C2
Investments in Securities
with Controlling Influence
Required when investor’s 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 parent’s
control.
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C1
Accounting Summary for
Investments in Securities
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C1
Comprehensive Income
Comprehensive 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-sale securities
Foreign currency adjustments
Certain pension adjustments
Comprehensive Income Reporting Options
1. 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).
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Global View
Accounting for Noninfluential Securities
The accounting for noninfluential securities 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 availablefor-sale securities are referred to as available-for-sale financial
assets.
Accounting 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.
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A1
Components of
Return on Total Assets
Return on
total assets
Net income
Average total assets
=
=
Profit
margin
Net income
Net sales
Total asset
turnover
×
×
Net sales
Average total assets
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A1
Return on Total Assets
Here are the returns on total assets for Gap, Inc. for
the years 2008 through 2012:
* Differences due to rounding.
All companies 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.
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C3
Appendix 15A: Investments in
International Operations
Two major accounting challenges arise when
companies have international operations:
Accounting for sales
and purchases listed in
a foreign currency.
Preparing consolidated
financial statements
with international
subsidiaries.
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C3
Exchange Rates Between
Currencies
Each country uses its own
currency for internal economic
transactions.
To make transactions in
another country, units of that
country’s currency must be
acquired.
The cost of those currencies is
called the exchange rate.
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C3
Sales in a Foreign Currency
Boston 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 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 = $18,000
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C3
Sales in a Foreign Currency
Boston 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 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 Outfitters
Date
Explanation
12/12/12 Sale
12/31/12 Adjustment for foreign currency
Debit
18,000
400
Credit
Balance
18,000
18,400
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C3
Sales in a Foreign Currency
On 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 Outfitters
Date
Explanation
12/12/12 Sale
12/31/12 Adjustment for foreign currency
2/10/13 Payment received
Debit
Credit Balance
18,000
18,000
400
18,400
18,400
-0-
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C3
Purchases in a Foreign Currency
NC Imports, a U.S. company, purchases
products costing €20,000 from Hamburg
Brewing on January 15, when the exchange
rate is $1.20 per euro.
€20,000 × $1.20 = $24,000
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C3
Purchases in a Foreign Currency
NC Imports makes payment in full on February
14 when the exchange rate is $1.25 per euro.
€20,000 × $1.25 = $25,000
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C3
Consolidated Statements with
International Subsidiaries
Consider a U.S.-based company that owns a controlling
interest in a French company. The reporting currency 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 company’s statements into dollars. The
process requires the parent company to select appropriate
foreign exchange rates and to apply those rates to the
foreign subsidiary’s account balances.
Translate
Account Balances
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End of Chapter 15