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BSAD 221 Introductory Financial Accounting Donna Gunn, CA

BSAD 221 Introductory Financial Accounting Donna Gunn, CA. Why do we make investments?. Balance Sheet. Income Statement. Stakeholders. Why do we have financial statements?.

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BSAD 221 Introductory Financial Accounting Donna Gunn, CA

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  1. BSAD 221Introductory Financial AccountingDonna Gunn, CA

  2. Why do we make investments?

  3. Balance Sheet Income Statement Stakeholders Why do we have financial statements? Financial statements are the primary means of communicating financial information to parties outside the business organization.

  4. Investments Strategic Investments Passive Investments Investment made with a long-term strategy in mind for the betterment of the Company Primarily made for financial gain directly from the investment.

  5. Google CEO Larry Page: “Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies.”

  6. Percentage Ownership 0% 20% 50% 100% Equity Investments:Common Shares Level of Influence Little or None Significant Control Type ofNo Significant Significant Subsidiary Investment Influence Influence Accounting Fair Value Equity Consolidation; Method(AFS) Method

  7. Use the fair value method for investments.

  8. Accounting for Available-for-Sale Investments (Passive Investment) The investor usually holds less than 20% of the voting shares and would normally play no important role in the investee’s operations. Available-for-sale investments are accounted for using the cost method.

  9. Accounting for Available-for-Sale Investments Suppose ATCO Ltd. purchases 1,000Agrium Inc. common shares at the market price of $50.00. ATCO intends to hold these shares for longer than one year.

  10. Accounting for Available-for-Sale Investments Long-term Investment 50,000 Cash 50,000 Purchased investment (1,000 × $50.00)

  11. Accounting for Available-for-Sale Investments Assume that ATCO receives a $0.14 per share cash dividend on this investment. Remember they purchased 1,000 shares

  12. Accounting for Available-for-Sale Investments Assume that ATCO receives a $0.14 per share cash dividend on this investment. Cash 140 Dividend Revenue 140 Received cash dividend (1,000 × $0.14)

  13. Value of an Investment Assume that the market value of the Agrium common Shares is $53,000 on December 31, 2010. Remember, currently recorded at a cost of $50,000

  14. Value of an Investment Assume that the market value of the Agrium common Shares is $53,000 on December 31, 2010. Long-Term Investment 3,000 Unrealized Gain on Investment 3,000 Adjusted investment to market value ($53K - $50K)

  15. Selling an Available-for-Sale Investment Suppose ATCO sells its investment in Agrium Inc. shares for $57,000 during 2011. Remember: Purchased for $50K and FMV at last balance sheet date was $53K. 10 -

  16. Selling an Available-for-Sale Investment Suppose ATCO sells its investment in Agrium Inc. shares for $57,000 during 2011. Remember: Purchased for $50K and FMV at last balance sheet date was $53K. Cash 57,000 Long-Term Investment 53,000 Gain on Sale of Investment 4,000 10 -

  17. Use the equity method for investments.

  18. Accounting for Equity Method Investments The equity methodis used to account for investments in which the investor owns 20 to 50% of the investee’s voting shares and can significantly influence the decisions of the investee.

  19. Equity Method • Includes investment as an asset account • Recognizes proportionate share of the investee’s operating income as their own income • Recognizes proportionate share of dividends paid Increases investment account Decreases investment account

  20. Accounting for Equity Method Investments NPC Corporation paid $611 million for 32% of the common shares of Bruce Power in Ontario

  21. Accounting for Equity Method Investments NPC Corporation paid $611 million for 32% of the common shares of Bruce Power in Ontario Long-Term Investment 611 Cash 611

  22. Investor’s Percentageof Investee Income Bruce Power reports net income of $100 million for the year. Remember, NPC owns 32% and has significant influence in Bruce power.

  23. Investor’s Percentageof Investee Income Bruce Power reports net income of $100 million for the year. Remember, NPC owns 32% and has significant influence in Bruce power. Long-term Investment 32,000,000 Equity Investment Revenue 32,000,000 To record investment revenue($100 × 0.32=$32)

  24. Receiving DividendsUnder the Equity Method Bruce Power declares and pays a cash dividend of $10 million. NPC receives 32% of this amount.

  25. Receiving DividendsUnder the Equity Method Bruce Power declares and pays a cash dividend of $10 million. NPC receives 32% of this amount. Cash 3,200,000 Long-Term Investment 3,200,000 To receive cash dividend on equity-method investment ($10 × 0.32)

  26. Long-Term Investment Jan. 2 Purchase 611 Dec. 31 Net income 32 Dec. 31 Balance 640 Dec. 31 Dividends 3 Investment Account After the preceding entries are posted, NPC’s Investment account reflects its equity in the net assets of Bruce Power (in millions):

  27. Understand consolidated financial statements.

  28. Subsidiary B Subsidiary A Parent Company 100% ownership 85% ownership Consolidated Subsidiaries

  29. Consolidated Financial Statements _____ _____ _____ _____ _____ _____ Subsidiary Financial Statements _____ _____ _____ _____ _____ _____ Parent Financial Statements _____ _____ _____ _____ _____ _____ _____ _____ Consolidated Subsidiaries

  30. Income of a Consolidated Entity

  31. Income of a Consolidated Entity

  32. Account for long-term investments in bonds.

  33. Account for international operations.

  34. € £ $ ¥ Foreign Currenciesand Exchange Rates The measure of one currency against another is called the foreign-currency exchange rate. Using an exchange rate to convert the cost of an item given in one currency to its cost in a second currency is called a translation.

  35. Hong Kong France Germany Italy Japan Mexico United Kingdom United States Dollar Euro (€) Euro (€) Euro (€) Yen (¥) Peso (P) Pound (£) Dollar ($) $0.129 1.35 1.35 1.35 0.010 0.823 1.544 1.00 Foreign Currenciesand Exchange Rates Canadian Dollar Value Monetary Unit Country

  36. Managing Cash inInternational Transactions Hedgingmeans to protect oneself from losing money in one transaction by engaging in counterbalancing transactions. Losses on the receipt of one currency may be offset by gains of the payment on another currency.

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