北大光华课件《财务报表分析》 Chap11.ppt

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1、北大光华课件财务北大光华课件财务报表分析报表分析 Chap1111-2Good newsIn these last two lectures,we use real University of Chicago GSB lecture notesAnd you judge which school offers better financial accounting course,Guanghua or Chicago GSB?11-3Types of financial assets1.Marketable securities(both debts and stocks):Current a

2、ssets2.Minority,passive（被动）被动）investments3.Minority,active investments4.Majority,active investments11-4Types of InvestmentsInvestor CorporationMinority,ActiveInvestments(typicallybetween 20%and50%ownership)Majority,ActiveInvestments(greater than50%ownership)Minority,PassiveInvestments(less than20%ow

3、nership)The accounting for investments depends on the purpose of the investment and the percentage of voting stock held.11-5Types of Investments(Cont.)mMinority,passive investmentsmLess than 20%of voting stock.mAssumed to be held for short term returns including dividends and capital gains.mMinority

4、,active investments mBetween 20%and 50%of voting stock.mAssumed to be held to exert influence over the other company.mMajority,active investments mGreater than 50%of voting stock.mAssumed to be held so for full control over the other company.11-6Marketable SecuritiesmMarketable securities are bonds

5、or stocks for which there is an active market and hence a reliable market value.mThey are liquid assets in that they can easily and quickly be converted into cash.mMarketable securities held as a temporary investment are classified as current assets.11-7ClassificationmSecurities are properly classif

6、ied as marketable securities when 1.The firm can readily convert them into cash,and2.Intends to do so when it needs cash.mIf either of the two tests for marketable securities do not apply,then the securities are properly classified as investment in securities.mInvestment in securities are securities

7、 held for long-term goals and are classified as long-term assets.11-8Valuation at AcquisitionmMarketable securities are initially recorded at acquisition cost.mWhich includes purchase price plus any commissions,taxes or other costs related to the acquisition.mThis is the same rule as the general rul

8、e for valuing assets at acquisition.mWhen the company receives dividends or interests from marketable securities,it Dr.Cash#Cr.Dividend(interest)revenues#11-9Valuation after AcquisitionmBecause there exists a market value,marketable securities can be reliably written up or down to the market value g

9、iving a more current estimate of economic worth.mThis also results in a holding gain or loss which is not due to the normal operations of a firm.mFor the purposes of valuation after acquisition,there are three classes of marketable securities:1.Debt held to maturity2.Trading securities(debt or stock

10、)3.Securities available for sale(debt or stock)11-10Debt Held to MaturitymDebt securities for which a firm has both the positive intent and ability to hold to maturity.mShown on the balance sheet at the amortized acquisition cost.mAmortized acquisition cost means that the securities are amortized li

11、ke a mortgage or bond.mRemember accounting for bond,now we are on the other side of bond accounting.mThe acquisition cost(the balance in the bond payable account)is assumed to be the present value.mThe maturity value(bonds par value)and maturity date are known from the bond certificate.mAn internal

12、rate of return(discount rate)can be calculated using PV techniques.11-11Debt Held to MaturityGo to chapter 9 lecture notes,page 28,now you are not the seller,you are the buyer of the bond which you classify as security held-to-maturity(not realistic example because a five-year bond will make a long-

13、term investment,not a marketable security,just as an illustration of accounting).The amortized acquisition cost at purchase of the bond is the bond price.Dr.Held-to-Maturity securities 92,976Cr.Cash 92,97611-12Debt Held to MaturityOn June 30 of year 1,the bond seller pays cash$100,000*0.06=$6,000.Th

14、is is NOT your entire interest revenues.Interest revenues for the first half of year 1=discount rate 7%*bond payable$92,976=$6,508.Dr.Cash 6,000 Dr.Held-to-Maturity securities 508Cr.Interest Revenues 6,508Now new amortized acquisition cost=$92,976+508=$93,484The rest cash receipts follows similar tr

15、eatment.Note:Amortized acquisition cost(the balance of the security account)has nothing to do with the market value of the security.)11-13Trading SecuritiesmTrading securities are assumed held for short-term profit.mCharacterized by frequent and active buying and selling with the object of generatin

16、g profit.mTypically only financial institutions hold trading securities.mSince trading securities are acquired for short-term profit,unrealized gains or losses that result from adjustments to market value pass through the income statement and increase or reduce net income before there is a sale of t

17、he securities.mNote:unlike securities held-to-maturity,trading securitys balance is adjusted to the market value at financial statement dates,any difference between previous balance and current market value is recorded as unrealized gains(losses);after this adjustment,the new balance would equal to

18、current market value.11-14Trading SecuritiesmRecord acquisition of trading securitiesDec 28Marketable securities 400,000Year 3 Cash 400,000Dec 31Marketable securities 35,000Year 3 Unrealized holding gain 35,000mTo revalue the securities to market value and recognize an unrealized holding gain.mThe u

19、nrealized holding gain is closed to income,appears on the income statement and increases retained earnings.mThe new book value of the trading securities is now$435,000.11-15Trading Securities mRecord the sale for$480,000 in Jan.3 of year 4,the next year.mRecall at this time the new value of the secu

20、rities is$435,000.Jan 3cash 480,000Year 4 marketable securities435,000 realized gain on sale45,000mThis realized gain(because it is supported by a sale)is closed to income also.mOver the life of holding this security,the company earned$80,000,$35,000 in year 3 income statement,$45,000 in year 4 inco

21、me statement.11-16Securities Available for SalemSecurities available for sale are neither trading securities or securities held to maturity.They are an intermediate class and are typically tied to a specific cash need.mThey are held by non-financial companies.mFor example,a manufacturing firm may bu

22、ild a large fund of securities to pay for a renovation to its plant or to retire bonds that will come due.11-17Securities Available for Sale(AFS)mSimilar to trading security,AFS balance is adjusted to the market value at financial statement dates;after this adjustment,the new balance would equal to

23、current market value.mSimilar to trading security,any difference between previous balance and current market value is recorded as unrealized gains(losses).mUnlike trading securities,unrealized gains(losses)do not show up on the income statement,but directly show up on the balance sheet equity sectio

24、n as an equity account.11-18Securities Available for SalemConsider the previous example,but assume that the securities are properly classified as securities available for sale.mRecord acquisition of trading securities at acquisition cost just as beforeDec 31Marketable securities 35,000Year 3 Unreali

25、zed holding gain 35,000mTo revalue the securities to market value and recognize an unrealized holding gain(also like before).mThis unrealized holding gain is not closed to income,but appears in the equity section of the balance sheet having bypassed the income statement.11-19Securities Available for

26、 Sale mRecord the sale for$480,000 in the next yearmRecall at the new value of the securities is$435,000.Jan 3 Unrealized holding gain 35,000Year 4 Marketable securities 35,000 Cash 480,000 Marketable securities 400,000 Realized gain on sale80,000mThe first journal entry reverses the journal entry i

27、n the previous slide and set the book value of marketable security to acquisition cost of$400,000.Then,mThis realized gain(because it is supported by a sale)is closed to income also.mThe company earned$80,000 for holding this security,and recognize the entire amount of$80,000 in year 4,the year of s

28、elling the security,unlike under trading security.11-20Comparing Trading Securities with Securities Available for SalemBoth are recorded at acquisition cost.Both are written up or down to market with adjusting entries.mBoth give rise to an unrealized holding gain or loss account upon adjustment.mHow

29、ever,the unrealized holding gain or loss for trading securities is considered income;it is closed to income statement and increases or decreases net income.mWhile the unrealized holding gain or loss for available for sale securities is not closed to income statement but remains on the balance sheet.

30、mWhen these securities are sold,the total amount of holding gains(losses)recognized over holding the security is the same for both types of securities.11-21Disclosure about SecuritiesFASB 115 requires the following disclosures for each period for marketable securities:1.The aggregate market value,gr

31、oss unrealized holding gains,gross unrealized holding losses,and amortized costs for debt securities held to maturity and equity securities available for sale.2.The proceeds from sales of securities available for sale and the gross realized gains and losses on those sales.3.The change during the per

32、iod in the net unrealized holding gains or loss on trading available for sale securities included in a separate shareholders equity account.4.The change during the period in the net unrealized holding gain or loss on trading securities included in earnings.11-22ControversymThe accounting for marketa

33、ble securities has been controversial.The accounting issues are:mWhether to report these instruments at historical cost(or some method based on historical cost)or at market value,andmIf at market value,whether to report the changes from period to period as part of that periods income or to await the

34、 period when the firm sells or otherwise disposes of the instrument to record the gain or loss in income.11-23Minority,PassivemMinority refers to less than 50%ownership.mGreater than 50%of the voting stock means absolute control over the corporation.mWhen the investing firm cannot or does not influe

35、nce the decisions of the owned firm,the investment is passive(normally less than 20%is considered passive)mThe account titles should be investment in Security(long-term assets)to difference from trading security(current assets)mThe owner of a passive minority investment must account for the investme

36、nt using themInitial investment is recorded at acquisition costmDividends are recorded as revenuemAt the end of accounting periods,the asset is adjusted to the market valuemThe treatment of unrealized gains(losses)is the same as securities available for sale.mA sale of the asset results in a realize

37、d gain or loss,treatment of unrealized gains(losses)is the same as securities available for sale.11-24Minority,ActivemBetween 20%and 50%gives rise to the presumption of active because an investor can often exert influence over the decisions of the firm with less than 50%of the voting stock provided

38、the remainder of the votes are split.mRequire the equity method of accountingmInitial purchase is recorded as an asset at the acquisition cost.mEach period,the investing firm recognized revenue equal to its proportionate share of the firm.mDividends reduce the asset and are not revenue but rather a

39、return of capital.11-25Rationale for Equity MethodIf not using equity method,every time the subsidiary firm declares dividend,the purchaser Dr.Dividend receivable(cash)#Cr.Dividend revenues#Since the purchaser is assumed to be able to influence the decision of the purchased firm including its divide

40、nd policy,mThere is a risk that the purchaser might use this influence to manipulate its own incomemby having the purchased firm declare or fail to declare a dividend.mRecognizing a proportionate share of the purchased firms income and not recognizing received dividends as revenues removes this risk

41、.11-26Accounting for the equity method1.P firm purchases 30%of outstanding shares of S firm.2.Dr.Investment in Stock S(equity method)3.Cr.Cash 4.2.On Dec.31,S reports net incomes,P 5.Dr.Investment in Stock S (30%of Ss Net Income)6.Cr.Equity in earnings of affiliates(revenues)7.3.On Jan.5,S declares

42、dividends,P8.Dr.Dividend receivable(30%of Ss dividends)9.Cr.Investment in stock S11-27Majority,ActivemA parent firm holds more than 50%of the voting stock of another firm,which is called the subsidiary firm.mThis gives the parent complete control over the subsidiary.mThe portion of the subsidiary no

43、t owned by the parent is called the minority interest.mA corporation is a legal entity and not necessarily an economic entity.Laws might require or allow separate legal entities that are controlled by one entity,thus being one economic entity.mCertain legal risks can be reduced by having legally sep

44、arate corporations.Copyright 2000 by Harcourt Inc.All rights reserved.11-28Majority,Active(Cont.)mBecause one economic entity can control several legal entities and because there is a risk that income might be manipulated by economic transactions between the legal entities,mU.S.GAAP requires that th

45、e financial statements of legally separate entities be combined under one controlling economic entity and that one set of financial statements called the consolidated financial statements be produced.mConsolidated financial statements combine the individual financial statements but reverse out all t

46、ransactions that occur between the related firms(for example,sales from one to another).11-29Preparing Consolidated Financial StatementsPreparing consolidated statements requires:Add up same items on P and S balance sheets and income statements.From the combined balance sheet and income statement,1.

47、Eliminating the parents investment account,2.Eliminating inter-company receivables and payables,and3.Eliminating inter-company sales and purchases.These accounts or transactions are identified and the journal entries made to eliminate the account or reverse the transaction.Balances are taken to equity accounts.11-30The good news.Pretty much all the financial statements we analyzed so far are consolidated financial statements