Chapter 25: Summary Cheat Sheet (Page C-17)

Basics of Investments Types of Investments: • • Short-term Investments: These are assets management plans to convert to cash within one year and are classified as current assets. Long-term Investments: These are assets intended to be held beyond one year and classified as noncurrent assets. Types of Securities: • • Debt Securities: Represent a creditor relationship, including investments in notes and bonds. Equity Securities: Represent an ownership relationship, including investments in stocks. Types of Debt Investments 1. Trading Securities o Actively bought and sold for profit and are classified as current assets. o Fair Value Adjustments: Unrealized gains and losses are recorded on the income statement. o Sale of Trading Securities: Any gain or loss from the sale is also reported in the income statement under “Other Revenues and Gains” or “Expenses and Losses.” 2. Held-to-Maturity (HTM) Securities o Intended to be held until maturity. Classified as current assets if maturing within one year, otherwise as long-term investments. o Reporting: Not adjusted to fair value, reported at amortized cost. 3. Available-for-Sale (AFS) Securities o Debt investments not classified as trading or HTM. Current if intended for sale within one year; otherwise, classified as long-term. o Fair Value Adjustments: Unrealized gains or losses are reported in the equity section of the balance sheet as part of comprehensive income. Types of Equity Investments 1. Stock Investments with Insignificant Influence (< 20% ownership) o Classified as either short or long-term. o Dividends: Recognized as dividend revenue. Fair Value Adjustments: Unrealized gains or losses are reported on the income statement. 2. Equity Method Investments (Significant Influence, 20%-50% ownership) o Reporting: The investment’s book value is adjusted for the investor's share of the investee's net income and reduced by dividends. o Sale of Investment: Gains or losses from the sale are determined by comparing the sale price with the book value. 3. Equity Securities with Controlling Influence (> 50% ownership) o Consolidation Method: The parent company (investor) consolidates the financial statements of the subsidiary, combining all assets, liabilities, revenues, and expenses. o Reporting and Analysis Key Terms • • • Comprehensive Income: Total change in equity, excluding owner investments and dividends. o Other Comprehensive Income (OCI): Includes unrealized gains/losses on AFS securities, foreign currency adjustments, etc. Fair Value Adjustment: Account used to adjust trading and AFS securities portfolios to their fair values. Return on Total Assets (ROA): Measures profitability relative to assets and is broken down into: o Profit Margin: Net income as a percentage of sales. o Total Asset Turnover: Net sales relative to total assets. Example Multiple-Choice Solutions (based on provided answers) 1. Interest Revenue Calculation: Answer: $625 o Formula: Principal×Interest Rate×Months Held12=30,000×5%×512=625 2. Unrealized Gain for AFS Investment: Answer: Credit to Unrealized Gain—Equity for $1,500 o Calculation: Fair Value ($84,500) - Cost ($83,000) = $1,500 Unrealized Gain. 3. Dividend Entry for Equity Method Investment (35% ownership): Answer: Credit to Equity Method Investments for $17,500 o Calculation: Dividend Amount × Ownership % = $50,000 × 35% = $17,500. 4. Return on Total Assets Calculation: Answer: 15% o Formula: Net IncomeTotal Assets=300,0002,000,000=15% 5. Profit Margin and Total Asset Turnover Calculation: Answer: Profit Margin = 13.3%; Total Asset Turnover = 1.5 o Formulas:  Profit Margin: Net IncomeNet Sales=80,000600,000=13.3%  Total Asset Turnover: Net SalesTotal Assets=600,000400,000=1.5 This summary provides an overview of investment types, methods for different equity securities, and key calculations to analyze financial performance.