CH 4 ANALYZING INVESTING ACTIVITIES Current Assets w

CH. 4 ANALYZING INVESTING ACTIVITIES

Current Assets w Cash and cash equivalents n n If cash equivalents are invested in equity securities, companies risk a reduction in liability should the market value of this investments decline. Cash and cash equivalents are sometimes required to be maintained as compensating balances => not available to meet normal operating needs

Current Assets w Receivables n n n Collection risk: rely on knowledge of industry conditions to assess the provision for uncollectibles Authenticity of receivables: credit policy and the right of merchandise return Securitization of receivables

Current Assets w Prepaid Expenses w Inventories n n n Inventory cost flows Inventory costing for manufacturing companies: overhead Lower of costs or market

Investment Securities w Separating investment from investing assets and performance w Analyzing accounting distortions from securities Opportunities for gains trading l Liabilities recognized at cost l Inconsistent definition of equity securities l Classification based on intent l

Derivative Securities w Derivative: a financial instrument whose value is derived from the value of another assets, class of assets, or economic variable. w Futures contract, swap contract, option contract, forward contract. w Analyzing derivatives: n n Objectives for using derivatives Risk exposure and effectiveness of hedging strategies Transaction specific versus companywide risk exposure Inclusion in operating or nonoperating income

Long-Lived Assets w Plant Assets and Natural Resources n n Historical costs & Impairment Depreciation and depletion: useful lives, allocation method

Intangible Assets w Goodwill is recorded only when acquired, most goodwill likely exists off the balance sheet. w Amortization w Valuation