Analyzing Investing
Activities
4
CHAPTER
Current Asset Introduction
Classification
Current (shortterm) Assets
Resources or claims to
resources that are
expected to be sold,
collected, or used
within one year or the
operating cycle,
whichever is longer.
Noncurrent
(Long-Term)
Assets
Resources or claims
to resources that are
expected to yield
benefits that extend
beyond one year or
the operating cycle,
whichever is longer.
Current Asset Introduction
Cash on hand
1
1
2
Cash paid for
products
4
Customers pay for
products
Cash on hand
Cash paid to
employees
Customers pay for
services
Operating Cycle
4
2
3
3
Services sold to
customers
Products sold
to customers
Current Asset Introduction
Cash, Cash Equivalents and Liquidity
Cash
Currency, coins and amounts on deposit
in bank accounts, checking accounts, and
some savings accounts.
Current Asset Introduction
Cash, Cash Equivalents and Liquidity
Cash Equivalents
Short-term, highly liquid investments that are:
 Readily convertible to a known cash
amount.
 Close to maturity date and not
sensitive to interest rate changes.
Current Asset Introduction
Analysis of Cash and Cash Equivalents
• Does not present serious valuation problems because of its
liquidity
• Requires special precautions against theft and defalcation
• Examine for restrictions on disposition
— remove restricted balances from current assets since they are not
available for paying current obligations
MERCK &
CO
DELTA AIR
LINES
TARGET
CORP
COCACOLA CO
20.00%
15.00%
10.00%
5.00%
0.00%
TEXAS
INSTRUMEN
— exposure often measured
by the ratio of restricted
balances to the total
Cash and Cash Equivalents as a Percent of Total
Assets
EASTMAN
KODAK C
— in assessing liquidity,
consider repercussions
of violating these
agreements
Current Asset Introduction
Receivables
Receivables are amounts due from others
that arise from the sale of goods or services,
or the loaning of money
Accounts receivable refer to oral promises of
indebtedness due from customers
Notes receivable refer to formal written
promises of indebtedness due from others
Current Asset Introduction
Valuation of Receivables
Receivables are reported at their net realizable
value —total amount of receivables less an
allowance for uncollectible accounts
Management estimates the allowance for
uncollectibles based on experience, customer
fortunes, economy and industry expectations,
and collection policies
Current Asset Introduction
Analyzing Receivables
Assessment of earnings quality is often affected by an analysis of receivables and their
collectibility
Analysis must be alert to changes in the allowance—computed relative to sales,
receivables, or industry and market conditions.
Two special analysis questions:
(1) Collection Risk
Review allowance for uncollectibles in light of industry conditions
Apply special tools for analyzing collectibility:
• Determining competitors’ receivables as a percent of sales—vis-à-vis the
company under analysis
• Examining customer concentration—risk increases when receivables are
concentrated in one or a few customers
• Investigating the age pattern of receivables—overdue and for how long
• Determining portion of receivables that is a renewal of prior receivables
• Analyzing adequacy of allowances for discounts, returns, and other credits
(2) Authenticity of Receivables
Review credit policy for changes
Review return policies for changes
Review any contingencies on receivables
Current Asset Introduction
Securitization of Receivables
Securitization (or factoring) is when a company
sells all or a portion of its receivables to a third party
Receivables can be sold with or without recourse to a
seller (recourse refers to guarantee of collectibility)
Sale of receivables with recourse
does not effectively transfer risk of
ownership
Current Asset Introduction
Analysis of Securitization
For securitizations with any type of recourse, the seller
must record both an asset and a compensating liability
for the amount factored
For securitizations without any recourse, the seller
removes the receivables from the balance sheet
Current Asset Introduction
Analysis of Securitization
Balance Sheet Effects of Securitization
Assets
Cash
Receivables
Other current assets
Total current assets
Noncurrent assets
Total assets
Liabilities
Current liabilities
Noncurrent liabilites
Equity
Total liabilities and equity
Key ratios
Current ratio
Total Debt to Equity
Before
$
50
400
150
600
900
$
1,500
After
$
450
0
150
600
900
$ 1,500
$
400
500
600
$
400
500
600
$
800
500
600
$
1,500
$
1,500
$
1,500
1.50
1.50
1.50
1.50
Adjusted
$
450
400
150
1,000
900
$ 1,900
1.25
2.17
Current Asset Introduction
Prepaid Expenses
Prepaid expenses are advance payments for services or
goods not yet received that extend beyond the current
accounting period—examples are advance payments for
rent, insurance, utilities, and property taxes
Analysis of Prepaids
Two analysis issues:
(1) For reasons of expediency, noncurrent prepaids
sometimes are included among prepaid expenses
classified as current--when their magnitude is large,
they warrant scrutiny
(2) Any substantial changes in prepaid expenses
warrant scrutiny
Inventories
Definitions
Inventories are goods held for sale, or
goods acquired (or in process of being
readied) for sale, as part of a company’s
normal operations
Expensing treats inventory costs like period
costs—costs are reported in the period
when incurred
Capitalizing treats inventory costs like
product costs—costs are capitalized
as an asset and subsequently
charged against future
period(s) revenues
benefiting from their sale
Inventories
Inventory Cost Flows
Beginning
Inventory
Net Cost
of Purchases
Merchandise
Available
for Sale
Ending
Inventory
Cost of
Goods Sold
Inventories
Inventory Costing Method
Use of Inventory Methods in Practice
LIFO
32%
Weighted
Average
20%
FIFO
44%
Other
4%
Inventories
First-In, First-Out (FIFO)
Oldest
Costs
Costs of
Goods Sold
Recent
Costs
Ending
Inventory
Inventories
Last-In, First-Out (LIFO)
Recent
Costs
Costs of
Goods Sold
Oldest
Costs
Ending
Inventory
Inventories
Average Cost
When a unit is sold, the
average cost of
each unit in
inventory is assigned
to cost of goods sold.
Cost of
÷ Goods
Available for
Sale
Units
available on
the date of
sale
Inventories
Illustration of Costing Methods
Inventory on January 1, Year 2
Inventories purchased
during the year
Cost of Goods available
for sale
40 @ $500
$ 20,000
60 @ $600
36,000
100 units
$ 56,000
Note: 30 units are sold in Year 2 for $800 each = Total
Revenue-$24,000
Inventories
Illustration of Costing Methods
FIFO
LIFO
Average
Beginning
Inventory
$20,000
$20,000
$20,000
+
+
+
+
Net
Purchases
$36,000
$36,000
$36,000
=
=
=
=
Cost of
Goods Sold
$15,000
$18,000
$16,800
+
+
+
+
Ending
Inventory
$41,000
$38,000
$39,200
Assume sales of $35,000 for the period—then gross profit under each method
is:
FIFO
LIFO
Average
Sales
– Cost of Goods Sold =
Gross Profit
$24,000
$24,000
$24,000
-- 15,000
-- 18,000
-- 16,800
$7000
$6,000
$7,200
=
=
=
Inventories
A company is
required to use the
same accounting
methods from period
to period.
A change is only
acceptable when it
improves financial
reporting.
Inventories
Inventory must be reported at market value
when market is lower than cost.
Defined as current
replacement cost
(not sales price).
Can be applied three ways:
(1)
(2)
Dictated by the
conservatism
principle.
(3)
separately to each
individual item.
to major categories of
assets.
to the whole inventory.
Inventories
Compute LCM for individual items, inventory
groups, and overall inventory.
LCM Applied to
Units on
Inventory Items Hand
Total Cost
Cycles:
Roadster
20 $ 160,000
Sprint
10
50,000
Category subtotal
$ 210,000
Off-Road
Trax-4
Blaz'm
Category subtotal
Total
Total
Market
Items
Categories
Whole
$ 140,000 $ 140,000
60,000
50,000
$ 200,000
$ 200,000
8 $ 40,000 $ 52,000
40,000
5
45,000
35,000
35,000
$ 85,000 $ 87,000
85,000
$ 295,000 $ 287,000 $ 265,000 $ 285,000 $ 287,000
Inventories
Inventory Purchase Commitments
•Purchase Commitments are contracts with other entities
to purchase inventory several months or years in
advance
•Accounting does not reflect these commitments since
title to the goods has not passed to the buyer
•Disclosure exists for certain noncancelable purchase
commitments
Inventories
Analyzing Inventories—Restatement of LIFO to FIFO
Three step process:
(1) Inventory + LIFO reserve
(2) Deferred tax payable + [LIFO reserve x Tax rate]
(3) Retained earnings + [LIFO reserve x (1-Tax rate)]
LIFO reserve is the amount by which current cost
exceeds reported cost of LIFO
inventories
Inventories
LIFO Liquidations
(1) Companies maintain LIFO inventories in separate
cost pools.
(2) When inventory quantities are reduced, each cost
layer is matched against current selling prices.
(3) In periods of rising prices, dipping into lower cost
layers can inflate profits.
Inventories
Analyzing Inventories—Restatement of LIFO to FIFO
Campbell Soup Balance Sheet Adjustment—using an analytical
entry:
Inventories
Deferred Tax Payable
Retained Earnings
89.6
30.5
59.1
Campbell Soup Income Statement Adjustment:
Under LIFO
Beginning Inventory
+ Purchases (P)c
-- Ending inventory
= Cost of goods sold
Year 11
Difference
$
819.8
P
(706.7)
$P + 113.1
$
$
Under FIFO
84.6
$
904.4
---P
(89.6)
(796.3)
(5.0)
$P + 108.1
Investment Securities
Composition
Investment securities (also called marketable
securities) are of two types:
Debt Securities
• Government or corporate debt obligations
Equity Securities
• Corporate stock that is readily marketable.
Investment Securities
Classification
Investment Securities
Debt Securities
Trading
Held-to-Maturity
Available-for-Sale
Equity Securities
No Influence (below 20%
holding)
- Trading
- Available-for-Sale
Significant Influence
(between 20% and
50% holding)
Controlling Interest (above
50% holding)
Investment Securities
Accounting for Debt Securities
Accounting
Balance Sheet
Category
Description
Income Statement
Unrealized
Gains/Losses
Other
Trading
Securities
acquired mainly
for short-term or
trading gains
(usually less than
three months)
Fair Value
Recognize in net
income
Recognize realized
gains/losses and
interest income in
net income
Available-for-Sale
Securities neither
held for trading
nor held-tomaturity
Fair Value
Not recognized in
net income, but
recognized in
comprehensive
income
Recognize realized
gains/losses and
interest income in
net income
Held-to-Maturity
Securities
acquired with both
the intent and
ability to hold to
maturity
Amortized
Cost
Not recognized in
either net income
or comprehensive
income
Recognize realized
gains/losses and
interest income in
net income
Investment Securities
Accounting for Transfers between Security Classes
Transfer
From
Accounting
To
Effect on Asset Value in
Balance Sheet
Effect on Income
Statement
Trading
Available-for-Sale
No effect
Unrealized gain or loss on
date of transfer included
in net income
Available-for-Sale
Trading
No effect
Unrealized gain or loss on
date of transfer included
in net income
Available-for-Sale
Held-to-Maturity
No effect at transfer;
however, asset reported
at (amortized) cost
instead of fair value at
future dates
Unrealized gain or loss on
date of transfer included
in comprehensive income
Held-to-Maturity
Available-for-Sale
Asset reported at fair
value instead of
(amortized) cost
Unrealized gain or loss on
date of transfer included
in comprehensive income
Investment Securities
Classification and Accounting for Equity Securities
Category
No Influence
Available-for-Sale
Significant Influence
Trading
Controlling
Interest
Ownership
Less than 20%
Less than 20%
Between 20% and 50%
About 50%
Purpose
Long- or
intermediate-term
investment
Short-term
investment or
trading
Degree of business
control
Full business
control
Valuation Basis
Fair value
Fair value
Equity method
Consolidation
Balance Sheet
Asset Value
Fair value
Fair value
Acquisition cost adjusted
for proportionate share of
investee’s retained
earnings and appropriate
amortization
Consolidated
balance sheet
Income Statement:
Unrealized Gains
In comprehensive
income
In income
Not recognized
Not recognized
Income Statement:
Other Income
Effects
Recognize
dividends and
realized gains and
losses in income
Recognize
dividends and
realized gains
and losses in
income
Recognize proportionate
share of investee’s net
income less appropriate
amortization in income
Consolidated
income
statement
Investment Securities
Analyzing Investment Securities
At least three main objectives:
(1) to separate operating from investing (and
financing) performance
(2) to evaluate investment performance and
risk
(3) to analyze accounting distortions due to
accounting rules and
/or earnings management
involving investment
securities
Investment Securities
Separating Operating from Investing Assets and Performance
Determine whether investment securities (and related income
streams) are investing or operating in nature—based on an
assessment of whether each investment is strategic or made
purely for the purpose of investment
Remove all gains (losses) relating to investing activities—
including dividends, interest income, and realized and
unrealized gains and losses—when evaluating the operating
performance of a company
Separate operating and non-operating
assets when determining operating
return on investment
Investment Securities
Analyzing Accounting Distortions from
Investment Securities
Potential accounting distortions an analyst
must be alert to:
•
•
•
•
Classification based on intent
Opportunities for gains trading
Liabilities recognized at cost
Inconsistent definition of equity
securities
Auditors
Derivative Securities
Background
Market risks
commodity price risk
interest rate risk
foreign currency risk
Derivative Securities
Background
Hedges are contracts that seek to insulate companies from
market risks—securities such as futures, options, and swaps are
commonly used as hedges
Derivative securities, or simply derivatives, are contracts whose
value is derived from the value of another asset or economic item
such as a stock, bond, commodity price,
interest rate, or currency exchange rate
— they can expose companies to considerable
risk because it can be difficult to find a
derivative that entirely hedges the risks or
because the parties to the derivative contract
fail to understand the risk exposures
Derivative Securities
Definitions
Derivative is a contract possessing each of the following characteristics:
• One or more underlying indexes and one or more notional amounts
(and/or payments)—the underlying indexes and the notional amounts
determine the settlement amount, if any.
• No initial net investment or an initial net investment less than that
required for a normal transaction yielding similar responses to
market risk changes.
• Permits a net settlement.
Underlying index, or simply underlying (also called a primitive), is the
main driver of derivative value--it can be any economic variable such as a
commodity price, security price, index, interest rate, or exchange rate
Notional amount is the number of units—expressed in figures, weight,
volume, dollars, or other unit measure—as specified in the contract
Net settlement is a cash resolution for the contracting parties in lieu of
settling up in full amounts (or quantities)
Derivative Securities
Classification of Derivatives
Derivatives
Hedge
Fair Value
Hedge
Speculative
Cash Flow
Hedge
Fair Value
Hedge
Foreign
Currency
Hedge
Cash Flow
Hedge
Hedge of Net
Investment in
Foreign
Operation
Derivative Securities
Accounting for Derivatives
Derivative
Balance Sheet
Income Statement
Speculative
Derivative recorded at fair
value
Both derivative and hedged
asset and/or liability
recorded at fair value
Derivative recorded at fair
value (offset by accumulated
comprehensive income)
Unrealized gains and losses included in
income
Unrealized gains and losses on both
derivative and hedged asset and/or liability
included in income
Unrealized gains and losses on effective
portion of derivative are recorded in other
comprehensive income until settlement date,
afterwhich transferred to income; unrealized
gains and losses on the ineffective portion of
derivative are included in income
Foreign currency
fair value hedge
Same as fair value hedge
Same as fair value hedge
Foreign currency
cash flow hedge
Same as cash flow hedge
Same as cash flow hedge
Foreign currency
hedge of net
investment in
foreign operation
Derivative (and cumulative
unrealized gain or loss)
recorded at fair value (part of
cumulative translation
adjustment in accumulated
comprehensive income)
Unrealized gains and losses reported in other
comprehensive income as part of translation
adjustment
Fair value hedge
Cash flow hedge
Derivative Securities
Analysis of Derivatives
Identify Objectives for Using Derivatives—risk associated with derivatives is
much higher for speculation than for hedging; many companies implicitly speculate
with derivatives
Risk Exposure and Effectiveness of Hedging Strategies—evaluate the
underlying risks, the risk management strategy, the activities to hedge its risks, and
the effectiveness of hedging operations; also consider counterparty risk
Transaction Specific versus Companywide Risk Exposure—evaluate
companywide effects of derivatives; hedging specific risk exposures to transactions,
commitments, assets, and/or liabilities does not necessarily ensure hedging of
companywide risk
Inclusion in Operating or Nonoperating Income—to the
extent derivatives are hedges, then unrealized and realized
gains and losses should be excluded from operating income
and their fair values should be excluded from operating assets
Long-Lived Asset Introduction
Definitions
Long-lived assets—resources or claims to resources are used to
generate revenues (or reduce costs) in the long run
Tangible fixed assets such as
property, plant, and equipment
Intangible assets such as
patents, trademarks,
copyrights, and goodwill
Deferred charges such as
research and development
(R&D) expenditures, and natural
resources
Long-Lived Asset Introduction
Capitalization
Capitalization—process of deferring a cost that is incurred in the
current period and whose benefits are expected to extend to one or
more future periods
For a cost to be capitalized, it must meet each of the following
criteria:
• It must arise from a
past transaction or event
• It must yield identifiable and
reasonably probable future benefits
• It must allow owner (restrictive)
control over future benefits
Long-Lived Asset Introduction
Allocation
Allocation—process of periodically expensing a
deferred cost (asset) to one or more future expected
benefit periods; determined by benefit period, salvage
value, and allocation method
Terminology
• Depreciation for tangible fixed
assets
• Amortization for intangible assets
• Depletion for natural resources
Long-Lived Asset Introduction
Impairment
Impairment—process of writing down asset value
when its value-in-use falls below its carrying (book)
value
Two distortions arise from impairment:
• Conservative biases distort
long-lived asset valuation
because assets are written
down but not written up
• Earnings management
opportunities increase in a
trade-off for more useful
balance sheets
Plant Assets & Natural Resources
Plant Assets
Tangible
Actively Used in Operations
Expected to Benefit Future Periods
Property, Plant and Equipment
Plant Assets & Natural Resources
Plant Assets
Historical cost principle is used for valuation—
justification includes:
• Conservatism—in not anticipating
subsequent replacement costs
• Accountability—in dollar amounts for
management
• Objectivity—in cost
determination
Plant Assets & Natural Resources
Plant Assets Costing Rule
Purchase
price
Acquisition
cost
Acquisition cost excludes
financing charges and
cash discounts.
All
expenditures
needed to
prepare the
asset for its
intended use
Plant Assets & Natural Resources
Natural Resources
Natural resources (wasting assets)—rights to extract or consume natural resources
Total cost,
including
exploration and
development,
is charged to
depletion expense
over periods
benefited.
Extracted from
the natural
environment
and reported
at cost less
accumulated
depletion.
Examples: oil, coal, gold
Plant Assets & Natural Resources
Valuation Analysis
Valuation emphasizes objectivity of historical cost, the
conservatism principle, and accounting for the monies
invested; represent a company’s capacity to produce
goods and services
Limitations of historical costs:
• Balance sheets do not purport to reflect market values
• Not especially relevant in assessing replacement values
• Not comparable across companies
• Not particularly useful in measuring opportunity costs
• Collection of expenditures reflecting different
purchasing power
Plant Assets & Natural Resources
Depreciation
Depreciation is the process of allocating
the cost of a plant asset to expense in the
accounting periods benefiting from its
use.
Balance Sheet
Acquisition
Cost
(Unused)
Cost
Allocation
Income Statement
Expense
(Used)
Plant Assets & Natural Resources
Factors in Computing Depreciation
The calculation of depreciation requires
three amounts for each asset:
 Cost.
 Salvage Value.
 Useful Life.
 Depreciation Method
Plant Assets & Natural Resources
Comparing Depreciation Methods
Percent of Companies Employing Verious
Depreciation Methods
12%
5%
Straight Line
Accelerated
Units of Produstion
83%
The majority of companies use the straight-line
method.
Plant Assets & Natural Resources
Comparing Depreciation Methods
Straight-Line Method
Depreciation
Cost - Salvage Value
=
Expense per Year
Useful life in periods
SL
Plant Assets & Natural Resources
Straight-Line Depreciation Illustration
Facts: Asset cost=$110,000; Useful life=10 years;
Salvage value=$10,000
End of
Year
Depreciation
1
2
:
:
9
10
Accumulated
Depreciation
$ 10,000
10,000
$ 10,000
20,000
Book
Value
$110,000
100,000
90,000
10,000
10,000
90,000
100,000
20,000
10,000
Plant Assets & Natural Resources
Double-Declining-Balance Method
Step 1:
Straight-line
=
depreciation rate
100 %
Useful life
Step 2:
Double-decliningbalance rate
Straight-line
= 2 ×
depreciation rate
Step 3:
Depreciation
Double-decliningBeginning period
×
=
expense
balance rate
book value
Ignores salvage value
Plant Assets & Natural Resources
Double-Declining-Balance (and SYD) Depreciation
Illustration
Year
Depreciation
DoubleSum-of-the
Declining
Years’-Digits
Cumulative Amount
DoubleSum-of-the
Declining Years’-Digits
1
2
3
4
5
6
7
8
9*
10*
$22,000
17,600
14,080
11,264
9,011
7,209
5,767
4,614
4,228
4,228
$22,000
39,600
53,680
64,944
73,955
81,164
86,931
91,545
95,773
100,000
*reverts to straight-line
$18,182
16,364
14,545
12,727
10,909
9,091
7,273
5,455
3,636
1,818
$18,182
34,546
49,091
61,818
72,727
81,818
89,091
94,546
98,182
100,000
Plant Assets & Natural Resources
Activity (Units-of-Production) Method
Step 1:
Depreciation
Per Unit
=
Cost - Salvage Value
Total Units of Production
=
Units Produced
Depreciation
×
in Period
Per Unit
Step 2:
Depreciation
Expense
Plant Assets & Natural Resources
Total cost,
including
exploration and
development,
is charged to
depletion expense
over periods
benefited.
Extracted from
the natural
environment
and reported
at cost less
accumulated
depletion.
Examples: oil, coal, gold
Plant Assets & Natural Resources
Depletion of Natural Resources
Depletion is calculated using the
units-of-production method.
Unit depletion rate is calculated as follows:
Cost –
Salvage Value
Total Units of Capacity
Plant Assets & Natural Resources
Depletion of Natural Resources
Total depletion cost for a period is:
Unit Depletion
Rate
Total
depletion
cost
×
Number of Units
Extracted in Period
Cost of
goods sold
Unsold
Inventory
Plant Assets & Natural Resources
Analyzing Depreciation and Depletion
• Assess reasonableness of depreciable base, useful life, and
allocation method
• Review any revisions of useful lives
• Evaluate adequacy of depreciation—ratio of depreciation to total
assets or to another size-related factors
• Analyze plant asset age—measures include
Average total life span = Gross plant and equipment assets /
Current year depreciation expense.
Average age
= Accumulated depreciation / Current
year depreciation expense.
Average remaining life = Net plant and equipment assets /
Current year depreciation expense.
Average total life span = Average age + Average remaining life
(these measures also reflect on profit margins and financing requirements)
Intangible Assets
Often provide
exclusive rights
or privileges.
Noncurrent assets
without physical
substance.
Intangible
Assets
Useful life is
often difficult
to determine.
Usually acquired
for operational
use.
Intangible Assets
Accounting for Intangible Assets
Record at
cost, including
purchase
price, legal
fees, and
filing fees.
 Patents
 Copyrights
 Leaseholds
 Leasehold
Improvements
 Goodwill
 Trademarks and
Trade Names
Intangible Assets
Accounting for Intangible Assets
 Amortize identifiable intangibles over
shorter of economic life or legal life,
subject to a maximum of 40 years.
 Use straight-line method.
 Research and development costs are
normally expensed as incurred.
 Goodwill is not amortized, but is
tested annually for impairment
Intangible Assets
Accounting for Intangible Assets
Manner of Acquisition
Purchased
Developed Internally
Identifiable
intangible
Capitalize
Expense (with some
and amortize exceptions)
Goodwill
Capitalize
Expense
and test
for impairment
Intangible Assets
Goodwill
Goodwill is the value assigned
to a rate of earnings above the
norm-it translates into excess
earnings called superearnings
Goodwill (1) can be a sizable asset, (2) is
recorded only upon purchase of another entity
or segment, and (3) varies considerably in
composition
Intangible Assets
Goodwill
Occurs when one
company buys
another company.
Only purchased
goodwill is an
intangible asset.
The amount by which the
purchase price exceeds the fair
market value of net assets acquired.
Intangible Assets
Analyzing Intangibles and Goodwill
 Search for unrecorded intangibles and
goodwill—often misvalued and
most likely exist off-balance-sheet
 Examine for superearnings as
evidence of goodwill
 Review amortization periods—any bias likely is in the
direction of less amortization and can call for
adjustments
 Recognize goodwill has a limited useful life--whatever
the advantages of location, market dominance,
competitive stance, sales skill, or product
acceptance, they are affected by changes in business
(Appendix 4A)
Investment Securities
Evaluating Investment
Performance and Risk
ROI
=
Investment income
(Beginning fair value of investment + Ending fair value of investment)/2
Investment income consists of three parts: Interest
(and dividend) income + Realized gains and losses +
Unrealized gains and losses
(Appendix 4A)
Investment Securities
Evaluating Investment Performance and Risk—Coca-Cola Case
Held-to-Maturity
Investment income (1998):
Interest and dividend
Realized gains and losses
Unrealized gains and losses
Total before tax
Tax adjustment (33%)
Total after tax
Available-for-Sale
219
219
219
(72)
147
(70)
(70)
23
(47)
Average investment base (1998):
1997 Fair value
1,591
1998 Fair value
1,431
Average
1,511
526
422
474
Return on investment (ROI)
Before tax
After tax
-14.8%
-9.9%
14.5%
9.7%
Total
(70)
149
(49)
100
2,117
1,853
1,985
7.5%
5.0%