Investments Why corporations invest Reason o Too much cash want to house the money low risk high liquidity o To generate earnings debt securities and stock securities o To meet strategic goals stocks of companies in a related industry or in an unrelated industry that the company wishes to enter The accounting depends on 1 What type of investment has been acquired o Debt securities vs equity securities 2 What is the percentage of ownership obtained when acquiring equity security investments o Do you own more or less than 20 of other company s outstanding stock Investments in debt securities and investments in equity securities where you own less than 20 of other company s outstanding stock 4 Accountable Events related to these investments 1 When investment is acquired record it at cost represents an asset 2 If any dividends are received record them as dividend revenue 3 At year end make an adjusting entry to reflect any changes in the market value of the investment i e change the valuation of the asset on the balance sheet from its cost to its current market value o This year end adjusting entry is called the mark to market adjustment This is an exception to the historical cost concept 4 When the investments are sold record the cash received from the sale and any gain or loss realized from the sale o To calculate the gain or loss on the sale referred to as realized gain or less compare the selling price of the investment to amount at which the investments are being reported on the balance sheet Realized gain or loss o Only from sale of investment Unrealized gain or loss o Result from changes in the value of investments used in the mark to market adjustment o Both are recorded on the income statement Example 1 When would a company not classify cash received from dividends as operating activities If company uses IFRS Investments in equity securities where you own 20 or more of the other company s outstanding stock 4 Accountable event related to these investments 1 When investment is acquired required at its cost represents an asset 2 If any dividends are received record them as a decrease to the investment account 3 Record your share of the other company s net income as an increase to the investment account and as investment revenue other company s Net income percentage ownership 4 When the investments are sold record the cash received from the sale and any gain or loss realized from the sale o To calculate the gain or loss realized gain or loss compare the selling price of the investment to the balance in the investment account at the time of sale Key points 1 The accounting for these types of investments is called the equity method 2 There is no mark to market adjustment related to these types of investments Example 2
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