CH. 4
ANALYZING INVESTING ACTIVITIES
Current Assets
 Cash and cash equivalents
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If cash equivalents are invested in equity
securities, companies risk a reduction in liability
should the market value of this investments
decline.
Cash and cash equivalents are sometimes
required to be maintained as compensating
balances => not available to meet normal
operating needs
Current Assets
 Receivables
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Collection risk: rely on knowledge of industry
conditions to assess the provision for
uncollectibles
Authenticity of receivables: credit policy and the
right of merchandise return
Securitization of receivables
Current Assets
 Prepaid Expenses
 Inventories
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Inventory cost flows
Inventory costing for manufacturing companies:
overhead
Lower of costs or market
Investment Securities
 Separating investment from investing assets
and performance
 Analyzing accounting distortions from
securities
Opportunities for gains trading
 Liabilities recognized at cost
 Inconsistent definition of equity securities
 Classification based on intent
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Derivative Securities
 Derivative: a financial instrument whose value is
derived from the value of another assets, class of
assets, or economic variable.
 Futures contract, swap contract, option contract,
forward contract.
 Analyzing derivatives:
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Objectives for using derivatives
Risk exposure and effectiveness of hedging strategies
Transaction specific versus companywide risk exposure
Inclusion in operating or nonoperating income
Long-Lived Assets
 Plant Assets and Natural Resources
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Historical costs & Impairment
Depreciation and depletion: useful lives,
allocation method
Intangible Assets
 Goodwill is recorded only when acquired,
most goodwill likely exists off the balance
sheet.
 Amortization
 Valuation