- The companies use their cash from their operations for investing in current, temporary, and long term investments.
INVESTING CASH IN CURRENT OPERATIONS Cash is often used to support the current operating activities of a company. For example, cash may be used to purchase new equipments. Another example, a retailer based in the Philippines would like to expand his business by opening stores in the other country. COMPANIES ALSO USES CASH TO PAY: 1) Expenses 2) Suppliers of merchandise and other assets 3) Interest to creditors 4) Dividends to stockholders
INVESTING CASH IN TEMPORARY INVESTMENTS A A company may temporarily have excess cash that is not needed for use in its current operations when they have seasonal operating cycle. Instead of letting excess cash remain idle in a checking account, they will invest it in a temporary investments. CCOMPANIES INVEST SECURITIES SUCH AS: 1. Debt Securities – Notes and bonds that pay interest and have a fixed maturity date. 2. Equity Securities – Preferred and common stock that represent ownership in a company and do not have a fixed maturity date.
INVESTING CASH IN LONG-TERM INVESTMENTS AA company invest in the debt or equity of another company as a long-term investment. Long-term investments may be held for the same investment objectives as temporary investments, but long-term investments often involve the purchase of a significant portion of the another company. SSTRATEGIC PURPOSE OF THESE INVESTMENTS: 1) Reduction of Costs – A combined company may be able to reduce administrative expenses. For example, company ABC and DEF combined, they don’t need two CEOs. 2) Replacement of Management - When a company had a mismanage purchases, the company may replace the company’s management and improve operations and profits 3) Expansion – The company may purchase a company because it has a complementary product line, territory, or customer base. The combined company may be able to serve customers better than the two companies could separately. 4) Integration – A company may integrate operations by acquiring a supplier or customer. Acquiring a supplier may provide a more stable or uninterrupted supply of resources. Acquiring a customer may also provide a market for the company’s products or services.
Purchase of Bonds Investment account for the purchase price of the bond are debited in recording purchase of bonds. It includes accrued interest if the bonds are purchased between interest dates. Interest Revenue Non-operating income of a company receives from any investments. The interest earned by the company during the time period is reported under the accrual basis of accounting.
Sales of Bonds Sales of bonds could result in a gain or loss It is gain if the proceeds from the sales exceed the book value of the bonds. It is loss if the book value is greater than the proceeds
Less than 20% ownership The investor have no control over the investee. It is assumed that the investor purchased stock to earn dividends. Under the cost method, entries are recorded for the following transactions: Purchase of stock- it is recorded at its cost Receipt of dividends – company that purchase stock would receive a dividend from the company Sale of stock- if the proceeds exceed or less than from the book value it is gain or loss
Between 20%-50% ownership The investor have a significant influence over the investee. It is assumed that the investor purchased stock for strategic reasons Under the equity method: Net income- The investor records its share of the net income of the investee as an increase in the investment account. Its share of any loss is recorded as a decrease in the investment account Dividends of the investee- The investor’s share of cash dividends received from the investee decreases the investment account.
More than 50% ownership The investor has a control over the investee It is termed a business combination Parent company- A corporation owning all or a majority of the voting stock of another corporation Subsidiary company- corporation that is controlled Consolidated financial statements- are the combined parent and subsidiary financial statement
Trading Securities PPurchased and sold to earn short-term profits OOften held by banks, mutual funds, insurance companies and other financial intermediaries RReported as a current asset in the balance sheet CChanges in fair value are reported as an unrealized gain or loss in the income statement.
Available-for-sale securities NNeither held for trading, held to maturity or held for strategic reasons CChanges in the fair value are reported as a stockholder’s equity Held- to- maturity securities ddebt investments that a company intends to hold until the maturity WWithin a year maturity date is reported as a current asset BBeyond a year maturity is reported as a noncurrent asset
Price that would be received if the asset is sold or the liability is paid off Used for valuing and reporting debt and equity securities Accounts receivable and accounts payable are recorded at an amount approximates its fair value Many assets and liabilities are recorded at amounts differ from their fair values.
Dividend yield measures the rate of return to stockholders based on cash dividends. Dividend is most often computed for common stock Dividend yield= Dividend per share of common stock Market price per share of common stock
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