Financial Accounting: Tools for Business Decision Making, 7th Edition

APPENDIX E

REPORTING AND ANALYZING INVESTMENTS

LEARNING OBJECTIVES

After studying this appendix, you should be able to:

1. Identify the reasons corporations invest in stocks and debt securities.
2. Explain the accounting for debt investments.
3. Explain the accounting for stock investments.
4. Describe the purpose and usefulness of consolidated financial statements.
5. Indicate how debt and stock investments are valued and reported in the financial statements.
6. Distinguish between short-term and long-term investments.

Why Corporations Invest

LEARNING OBJECTIVE 1

Identify the reasons corporations invest in stocks and debt securities.

Corporations purchase investments in debt or equity securities generally for one of three reasons. First, a corporation may have excess cash that it does not need for the immediate purchase of operating assets. For example, many companies experience seasonal fluctuations in sales. A Cape Cod marina has more sales in the spring and summer than in the fall and winter. The reverse is true for an Aspen ski shop. Thus, at the end of an operating cycle, many companies may have cash on hand that is temporarily idle until the start of another operating cycle. These companies may invest the excess funds to earn—through interest and dividends—a greater return than they would get by just holding the funds in the bank. Illustration E-1 shows the role that such temporary investments play in the operating cycle.

Illustration E-1 Temporary investments and the operating cycle ...