BSAD 221Introductory 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 SheetIncome Statement

Stakeholders

InvestmentsStrategic

Investments

Investment made with a long-term

strategy in mind for the betterment of the

Company

PassiveInvestments

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 anti-competitive threats from Microsoft, Apple and other companies.”

Level of Influence Little or None Significant Control

Type of No Significant Significant SubsidiaryInvestment Influence Influence

Accounting Fair Value Equity Consolidation;Method (AFS) Method

PercentageOwnership

0% 20% 50% 100%

Equity Investments:Common Shares

Use the fair value methodfor 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.

Suppose ATCO Ltd. purchases 1,000 Agrium Inc. common shares at the market

price of $50.00.

ATCO intends to hold these sharesfor longer than one year.

Accounting for Available-for-Sale Investments

Long-term Investment 50,000Cash

50,000

Purchased investment (1,000 × $50.00)

Accounting for Available-for-Sale Investments

Assume that ATCO receives a $0.14 pershare cash dividend on this investment.

Remember they purchased 1,000 shares

Accounting for Available-for-Sale Investments

Assume that ATCO receives a $0.14 pershare cash dividend on this investment.

Cash 140Dividend Revenue 140

Received cash dividend (1,000 × $0.14)

Accounting for Available-for-Sale Investments

Value of an Investment

Assume that the market value of the Agrium commonShares 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 commonShares is $53,000 on December 31, 2010.

Long-Term Investment3,000

Unrealized Gain on Investment3,000

Adjusted investment to market value ($53K - $50K)

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.

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 57,000Long-Term Investment 53,000Gain on Sale of Investment 4,000

Use the equity methodfor 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 decisionsof the investee.

1. Includes investment as an asset account

2. Recognizes proportionate share of the investee’s operating income as their own income

3. Recognizes proportionate share of dividends paid

Increases investment account

Decreases investment account

Equity Method

NPC Corporation paid $611 millionfor 32% of the common shares of Bruce

Power in Ontario

Accounting for Equity Method Investments

NPC Corporation paid $611 millionfor 32% of the common shares of Bruce

Power in Ontario

Long-Term Investment 611Cash 611

Accounting for Equity Method Investments

Investor’s Percentageof Investee Income

Bruce Power reportsnet income of $100 million for the year.

Remember, NPC owns 32% and has significant influence in Bruce power.

Investor’s Percentageof Investee Income

Bruce Power reportsnet income of $100 million for the year.

Long-term Investment 32,000,000Equity Investment Revenue 32,000,000

To record investment revenue ($100 × 0.32=$32)

Remember, NPC owns 32% and has significant influence in Bruce power.

Receiving DividendsUnder the Equity Method

Bruce Power declares and paysa cash dividend of $10 million.

NPC receives 32% of this amount.

Receiving DividendsUnder the Equity Method

Bruce Power declares and paysa cash dividend of $10 million.

Cash 3,200,000Long-Term Investment 3,200,000

To receive cash dividend on equity-method investment ($10 × 0.32)

NPC receives 32% of this amount.

Investment Account

Long-Term InvestmentJan. 2 Purchase 611Dec. 31 Net income 32Dec. 31 Balance 640

Dec. 31 Dividends 3

After the preceding entries are posted, NPC’s Investment account reflects its equity in the

net assets of Bruce Power (in millions):

Understand consolidatedfinancial statements.

Consolidated Subsidiaries

Parent Company

Subsidiary A

100%ownership

Subsidiary B

85%ownership

Consolidated Subsidiaries

SubsidiaryFinancial

Statements _____ __________ __________ _____

ConsolidatedFinancial

Statements_____ __________ __________ _____

ParentFinancial

Statements_____ __________ __________ __________ _____

Income of a Consolidated Entity

Net Income

(Net loss)of Each

Company  

Parent’sOwnership

of EachCompany

Parent Company $330,000 100%Subsidiary S-1 $150,000 100%Subsidiary S-2 $(100,000) 60%

Income of a Consolidated Entity

Net Income

(Net loss)of Each

Company  

Parent’sOwnership

of EachCompany  

Parent’sConsolidate

dNet Income(Net Loss)

Parent Company $330,000 x 100%= $330,000 Subsidiary S-1 $150,000 x 100%= $150,000 Subsidiary S-2 $(100,000) x 60%= $(60,000)Consolidated net income $420,000

Account for long-terminvestments in bonds.

Account forinternational operations.

Foreign Currenciesand Exchange Rates

The measure of one currency against anotheris called the foreign-currency exchange rate.

Using an exchange rate to convert the costof an item given in one currency to its costin a second currency is called a translation.

€£ $ ¥

Foreign Currenciesand Exchange Rates

CountryMonetary

Unit

CanadianDollarValue

Hong KongFranceGermanyItalyJapanMexicoUnited KingdomUnited States

DollarEuro (€)Euro (€)Euro (€)Yen (¥)Peso (P)Pound (£)Dollar ($)

$0.129 1.35 1.35 1.35 0.010 0.823 1.544 1.00

Managing Cash inInternational Transactions

Hedging means to protect oneself from losingmoney in one transaction by engaging in

counterbalancing transactions.

Losses on the receipt of one currency may beoffset by gains of the payment on another currency.