BSAD 221
Introductory Financial
Accounting
Donna Gunn, CA
Why do we make investments?
Why do we have financial
statements?
Financial statements are the primary means of
communicating financial information to parties
outside the business organization.
Balance Sheet
Income Statement
Stakeholders
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.
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 anticompetitive threats from Microsoft, Apple and other
companies.”
Equity Investments:
Common Shares
Percentage
Ownership
0%
20%
50%
100%
Level of
Influence
Little or None
Significant
Control
Type of
Investment
No Significant
Influence
Significant
Influence
Subsidiary
Accounting
Method
Fair Value
(AFS)
Equity
Method
Consolidation;
Use the fair value method
for investments.
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.
Accounting for Available-forSale Investments
Suppose ATCO Ltd. purchases 1,000
Agrium Inc. common shares at the market
price of $50.00.
ATCO intends to hold these shares
for longer than one year.
Accounting for Available-forSale Investments
Long-term Investment
Cash
50,000
50,000
Purchased investment (1,000 × $50.00)
Accounting for Available-forSale Investments
Assume that ATCO receives a $0.14 per
share cash dividend on this investment.
Remember they purchased 1,000 shares
Accounting for Available-forSale 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)
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
Value of an Investment
Assume that the market value of the Agrium common
Shares is $53,000 on December 31, 2010.
Long-Term Investment
Unrealized Gain on Investment
3,000
3,000
Adjusted investment to market value ($53K - $50K)
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 -
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
Gain on Sale of Investment
53,000
4,000
10 -
Use the equity method
for investments.
Accounting for Equity
Method Investments
The equity method is 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.
Equity Method
1. Includes investment as an asset account
1. Recognizes proportionate share of the investee’s
operating income as their own income
Increases investment account
1. Recognizes proportionate share of dividends paid
Decreases investment account
Accounting for Equity
Method Investments
NPC Corporation paid $611 million
for 32% of the common shares of Bruce
Power in Ontario
Accounting for Equity
Method Investments
NPC Corporation paid $611 million
for 32% of the common shares of Bruce
Power in Ontario
Long-Term Investment
Cash
611
611
Investor’s Percentage
of Investee Income
Bruce Power reports
net income of $100 million for the year.
Remember, NPC owns 32% and has
significant influence in Bruce power.
Investor’s Percentage
of 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)
Receiving Dividends
Under the Equity Method
Bruce Power declares and pays
a cash dividend of $10 million.
NPC receives 32% of this amount.
Receiving Dividends
Under the Equity Method
Bruce Power declares and pays
a cash dividend of $10 million.
NPC receives 32% of this amount.
Cash
Long-Term Investment
3,200,000
To receive cash dividend on equity-method
investment ($10 × 0.32)
3,200,000
Investment Account
After the preceding entries are posted, NPC’s
Investment account reflects its equity in the
net assets of Bruce Power (in millions):
Long-Term Investment
Jan. 2 Purchase
Dec. 31 Net income
Dec. 31 Balance
611 Dec. 31 Dividends
32
640
3
Understand consolidated
financial statements.
Consolidated Subsidiaries
Parent Company
100%
ownership
85%
ownership
Subsidiary A
Subsidiary B
Consolidated Subsidiaries
Parent
Financial
Statements
_____ _____
_____ _____
_____ _____
_____ _____
Subsidiary
Financial
Statements
_____ _____
_____ _____
_____ _____
Consolidated
Financial
Statements
_____ _____
_____ _____
_____ _____
Income of a Consolidated
Entity
Parent Company
Subsidiary S-1
Subsidiary S-2
Net Income
Parent’s
(Net loss) Ownership
of Each
of Each
Company
Company
$330,000
100%
$150,000
100%
$(100,000)
60%
Income of a Consolidated
Entity
Parent Company
Subsidiary S-1
Subsidiary S-2
Consolidated net
income
Parent’s
Net Income
Parent’s
Consolidate
(Net loss) Ownership
d
of Each
of Each
Net Income
Company
Company
(Net Loss)
$330,000 x
100%=
$330,000
$150,000 x
100%=
$150,000
$(100,000) x
60%=
$(60,000)
$420,000
Account for long-term
investments in bonds.
Account for
international operations.
Foreign Currencies
and 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.
£
$
€
¥
Foreign Currencies
and Exchange Rates
Country
Hong Kong
France
Germany
Italy
Japan
Mexico
United Kingdom
United States
Monetary
Unit
Dollar
Euro (€)
Euro (€)
Euro (€)
Yen (¥)
Peso (P)
Pound (£)
Dollar ($)
Canadian
Dollar
Value
$0.129
1.35
1.35
1.35
0.010
0.823
1.544
1.00
Managing Cash in
International Transactions
Hedging means 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.