Short term investments are current assets and must meet two requirements: (1) they are expected to be converted into cash within one year or the current accounting cycle of the business and (2) they are readily convertible to cash.
True / False
True
Investments in shares and bonds that are not marketable or, if marketable, are not intended to be converted into cash in the short-term are called long-term investments.
True / False
True
An important requirement for a security to be classified as a long-term investment in available-for-sale securities is that it must enable the investor to have significant influence over the investee.
True / False
False
Dividends paid to the investor of long-term investments in available-for-sale securities are recorded as interest revenue.
True / False
False
When a company recognizes dividends from an investment in another company's shares as dividend revenue, the company is using the cost method of accounting for that share investment.
True / False
True
The difference between the increased fair market value of available-for-sale securities and their book value is reported on the balance sheet, not on the income statement as a gain.
True / False
True
Any realized gain/loss on trading securities is reported on the balance sheet.
True / False
False
When an investor has significant influence or controlling influence over the investee, the equity method of accounting for the investment is used.
True / False
True
When the Investment in the Elmwood Company account of the investor is increased at the time the Elmwood Company informs the investor of its income, the investor is using the equity method of accounting for stock investments.
True / False
True
If ABC Corporation owns a controlling interest (more than 50% of the voting shares) in XYZ Corporation, ABC Corporation is a parent company to the XYZ Corporation.
True / False
True
If Leland Corporation is controlled by the Janet Corporation because the Janet Corporation owns more than 50% of the voting shares of the Leland Corporation, the Leland Corporation is a subsidiary of the Janet Corporation.
True / False
True
Financial statements that show the results of all operations under the parent's control, including those of any subsidiaries, are called consolidated financial statements.
True / False
True
A company that operates in a large number of different countries is referred to as an international business.
True / False
False
The price of one currency stated in terms of another currency is called the foreign exchange rate.
True / False
True
When collecting an account receivable from a foreign entity, if the exchange rate decreased since the time of the sale, there is a reportable foreign exchange gain.
True / False
False
Financial statements that show the results of all operations under the parent's control, including those of any subsidiaries, are called _______________ financial statements.
CONSOLIDATED
An accounting method used for long-term investments when the investor has significant influence over the investee is called the _______________ method.
EQUITY
The price of one currency stated in terms of another currency is called the _______________ rate.
FOREIGN EXCHANGE
Investments in shares and bonds that are not marketable or, if marketable, are not intended to be converted into cash in the short-term are called _______________ investments.
LONG-TERM
A company that operates in a large number of different countries is referred to as a _______________ business.
MULTINATIONAL
If ABC Corporation owns a controlling interest (more than 50% of the voting shares) in XYZ Corporation, ABC Corporation is a _______________ company to the XYZ Corporation.
PARENT
If Leland Corporation is controlled by the Janet Corporation because the Janet Corporation owns more than 50% of the voting shares of the Leland Corporation, the Leland Corporation is a _______________ of the Janet Corporation.
SUBSIDIARY
Financial statements that show the results of all operations under the parent's control, including those of any subsidiaries, as though the business were in fact a single company are called _______________ financial statements.
CONSOLIDATED
An accounting method used for long-term investments when the investor has significant or controlling influence over the investee is called the _______________ method.
EQUITY
The portion of a subsidiary company's shareholders' equity that is not owned by the parent corporation is called _______________.
MINORITY INTEREST
Consolidated financial statements:
Financial statements that show the results of all operations under the parent's control, including those of any subsidiaries; assets and liabilities of all affil-iated companies are combined on a single balance sheet, revenues and expenses are combined on a single income statement, and cash flows are combined on a single statement of cash flow as though the business were in fact a single company.
Control:
When an investor can dominate all other shareholders in electing the corporation's board of directors and has control over the investee corporation's management. The process of monitoring planning decisions and evaluating the organization's activities and employees.
Cost method:
An accounting method used for long-term investments where the investor does not have significant influence over the investee.
Debt investment:
Represents an amount owed and arises when one company lends money to another, such as in the case of a bond. Also called debt security.
Equity method:
An accounting method used for long-term investments when the investor has significant influence over the investee; t he investment account is initially debited for cost and then is increased to reflect the investor's share of the investee's earnings and decreased to reflect the investor's receipt of dividends paid by the investee.
Equity securities with controlling influence
The definition for a long-term investment when the investor is able to exert controlling influence over the investee; investors owning 50% or more of a company's voting shares are presumed to exert controlling influence over the investee.
Equity securities with significant influence
The definition for a long-term investment when the investor is able to exert significant influence over the investee, usually investors owning 20% or more of a company's voting shares are presumed to exert significant influence over the investee.
Foreign exchange rate:
The price of one currency stated in terms of another currency.
Held-to-maturity securities:
Debt securities that the company has the intent and ability to hold until they mature.
Intercorporate investments:
Debt and shares of one corporation purchased by another corporation.
Investee:
The company whose debt or shares are being purchased.
Investment portfolio:
A group of investments held by the investor.
Investor:
The company that purchases as an investment the debt or shares of another.
Long-term investments:
Assets such as notes receivable or investments in shares and bonds that are held for more than one year or the operating cycle. (Chapter 5) Investments in shares and bonds that are not marketable or, if marketable, are not intended to be converted into cash in the short-term; also funds earmarked for a special purpose, such as bond sinking funds, and land or other assets not used in the company's op erations. See also held-to-maturity securities. (Chapter 18)
Lower of cost or market (LCM):
The required method of reporting merchandise inventory in the balance sheet where market value is reported when market is lower than cost; the market value may be defined as net realizable value or current replacement cost on the date of the balance sheet. The required method of reporting temporary investments in marketable securities in the balance sheet at the lower of the total cost of all the investments (called the portfolio ) or their market value on the balance sheet date.
Marketable securities:
See temporary investments.
Minority interest:
Investors who do not own more than 50% of the voting shares in a corporation.
Multinational business:
A company that operates in a large number of different countries.
Parent company:
A corporation that owns a controlling interest in another corporation (more than 50% of the voting shares is required).
Short-term investments:
See temporary investments.
Significant influence:
The ability of the investor to influence the investee even though the investor owns less than 50% of the investee's voting shares.
Subsidiary:
A corporation that is controlled by another corporation (the parent) because the parent owns more than 50% of the subsidiary's voting shares.
Temporary investments:
Current assets that serve a similar purpose to cash equivalents; generally management expects to convert them into cash within twelve months (or the operating cycle if longer); can be either debt or equity securities.
