InvestmentsGroup 6CayabyabGorospeGumpalJimenezSamson

Investment In business, the purchase by a producer of a

physical good, such as durable equipment or inventory, in the hope of improving future business.

In finance, the purchase of a financial product or other item of value with an expectation of favorable future returns.

Why Companies Invest• Investing in current operations• Investing in temporary investments to earn additional

revenue• Investing in long-term investments in stock of other

companies for strategicreasons.

Investing in Current Operations Cash is often used to support the current operating

activities of a company. Cash may be used to replace a worn-out equipment or to purchase new, productive, and more efficient equipment. Cash can also be reinvested in the company to expand its current operations.

A company uses cash to support its current level of operations by paying:1. Expenses

2. Suppliers of Merchandise and other assets

3. Interest to creditors

4. Dividends to stockholders

Investing in Temporary Investments

Primary objective of investing in temporary investments is to:

Earn interest revenue. Receive dividends. Realize gains from increases in the market price of

securities. Companies invest their excess cash in temporary

investments instead of letting excess cash remain idle. In doing so, companies invest in debt and equity securities.

Investing in Long-Term InvestmentsA company may invest cash in the debt or equity of another company

as a long-term investment. Long-term investments often involve the purchase of a significant portion of the stock of another company.

Purposes: Reduction Cost – when one company buys another company, the

combined company may be able to reduce administrative expenses. Replacement of Management – if the purchased company has

been mismanaged, the acquiring company may replace the company's management to improve operations and profits.

Expansion – the acquiring company may purchase a company because it has a complementary product line, territory, or customer base.

Integration – a company may integrate operations by acquiring a supplier or customer.

ACCOUNTING FOR DEBT INSTRUMENT

Debt instrument• This are instrument in which the market and the

participant uses to easily transfer debt obligations to one party to another.

• Evidence of repayment of debt• Used as a medium to facilitate debt trading.• Examples are bills, bonds, notes, Commercial

papers (CPs), Certificate of Deposits (CDs).• Debt securities are recorded at cost when

purchased and interest revenue for investments in debt securities is recorded when earned.

• Ways of Earning: Interest; Trading gains; Marking to Market (MTM).

Debt Securities• Purchase of Bonds

Recorded by debiting in investments account for the purchase price of the bonds, including any brokerage commissions. If the bonds are bought between interest dates, the price of the bond includes the accrued interest.

• Interest Revenue Recorded by the company after the purchasing the bond. It

is determined by multiplying the cash received, the interest rate and the time. 

• Sale of Bonds These are investments that normally results in a gain or

loss. If sales > book value then gain is recorded and vice versa.

EXAMPLE EXERCISE• Music City paid $29,500 plus a $500 brokerage fee on September 1, 2005; to buy

Dell’s 7%, two-year bonds payable with a $30,000 par value. The bonds pay interest semi-annually on December 31, 2005 and February 28, 2006 . Music City intends to hold the bonds until they mature on August 31, 2007.

• 2005

Sept 1 Long-term Investment 30,000

Cash 30,000

On Dec 31, Music City accrues interest receivables.

Dec 31 Interest Receivable 700

Interest Revenue 700

Accrued Interest earned (30,000 x 7% x 4/12)

• 2006

On Feb 28, Music City records a semi-annual interest

Feb 28 Cash 1050

Interest receivables 700

Interest Revenue 300 • 2007

Aug 31 Cash 30,000

Long-term Investment 30,000

ACCOUNTING FOR EQUITY INVESTMENTS

• Equity investments means the acquisition of equity securities for the purpose of accruing income through dividends and increase in market value, or controlling another entity.

• Equity securities represent ownership of shares such as ordinary shares, preference shares and other share capital. The owners of equity securities are legally known as shareholders.

Cash Dividends• Cash dividends do not affect the investment account.• There are three dates important for cash dividends:

1.) Date of Declaration

2.) Date of Record

3.) Date of Payment• The dividends shall be recognized as revenue on

the date of declaration.

Stock Dividends• Stock dividends are additional shares that affect the

cost of the shares of the stockholder. They do not affect the total cost of the shares. And only memorandum entry is recorded on the part of the stockholder.

Share Split• Just like, stock dividends, share splits do not affect

the total cost of the shares of the shareholder. They just affect the total shares of the shareholder and its par value. Share split may be split up or split down.

Valuing and Reporting Investments

Debt and equity securities are Financial Assets that are often traded on public exchanges such as the New York Stock Exchange. Debt and equity securities are classified as follows:

1. Trading securities

2. Available-for-sale securities

3. Held-to-maturity securities

Trading securities- Are debt equity securities that are purchased and

sold to earn short- term profits from changes in their market prices.

- Fair value- it is the market price that the company would receive for a security if it were sold.

Available-for-sale securities- Are debt and equity securities that are neither held for trading, held to maturity, or held for strategic reasons.

Held-to-maturity securities- Are debt securities, such as notes, or bonds, that a company intends to hold until their maturity date. It is primarily purchased to earn interest revenue.

END OF CHAPTER