财务报表分析答案Ch05Word文档下载推荐.docx
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财务报表分析答案Ch05Word文档下载推荐.docx
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Intercompanyinvestmentsplayanincreasinglylargerroleinbusinessactivities.Companiespursueintercompanyactivitiesforseveralreasonsincludingdiversification,expansion,andcompetitiveopportunitiesandreturns.Thischapterconsidersouranalysisandinterpretationoftheseintercompanyactivitiesasreflectedinfinancialstatements.Weconsidercurrentreportingrequirementsfromouranalysisperspective--bothforwhattheydoanddonottellus.Wedescribehowcurrentdisclosuresarerelevantforouranalysis,andhowwemightusefullyapplyanalyticaladjustmentstothesedisclosurestoimproveouranalysis.Wedirectspecialattentiontotheunrecordedassetsandliabilitiesinintercompanyinvestments.
OUTLINE
∙Passiveinvestments
AccountingforInvestmentSecurities
DisclosureofInvestmentSecurities
AnalyzingInvestmentSecurities
∙InvestmentswithSignificantInfluence
EquityMethodAccounting
AnalysisImplicationsofEquityInvestments
∙BusinessCombinations
AccountingMechanicsofBusinessCombinations
AnalysisImplicationsofBusinessCombinations
ComparisonofPoolingversusPurchaseAccountingforBusinessCombinations
∙DerivativeSecurities
DefiningaDerivative
ClassificationandAccountingforDerivatives
DisclosureofDerivatives
AnalysisofDerivatives
∙Appendix5A:
InternationalActivities
∙Appendix5B:
InvestmentReturnAnalysis
ANALYSISOBJECTIVES
∙Analyzefinancialreportingforintercorporateinvestments.
∙Interpretconsolidatedfinancialstatements.
∙Analyzeimplicationsofboththepurchaseandpoolingmethodsofaccountingforbusinesscombinations.
∙Interpretgoodwillarisingfrombusinesscombinations.
∙Describederivativesecuritiesandtheirimplicationsforanalysis.
∙Analyzeforeigncurrencytranslationdisclosures.
∙Analyzeinvestmentreturns.
QUESTIONS
1.Longterminvestmentsareusuallyinvestmentsinassetssuchasdebtinstruments,equitysecurities,realestate,mineraldeposits,orjointventuresacquiredwithlonger-termgoals.Suchgoalsoftenincludetheacquisitionofcontroloraffiliationwithothercompanies,investmentinsuppliers,securingsourcesofsupply,etc.Thevaluationandpresentationofnoncurrentinvestmentsdependsonthedegreeofinfluencethattheinvestorcompanyhasovertheinvesteecompany.Withnoinfluence,debtinvestmentsotherthanheld-to-maturitybondsandequityinvestmentsareaccountedforatmarketvalue.Onceinfluenceisestablished,equityinvestmentsareaccountedforundertheequitymethodorconsolidatedwiththestatementsoftheinvestorcompany.
a.Intheabsenceofevidencetothecontrary,aninvestment(directorindirect)in20%ormoreofthevotingstockofaninvesteecarriesthepresumptionofanabilitytoexercisesignificantinfluenceovertheinvestee.Conversely,aninvestmentoflessthan20%inthevotingstockoftheinvesteeleadstothepresumptionofalackofsuchinfluenceunlesstheabilitytoinfluencecanbedemonstrated.Accountingrequirementsare:
Held-to-maturitysecuritiesarereportedatamortizedcost.Noncurrentavailable-for-salesecuritiesarereportedatfairvalue.Influentialsecuritiesareaccountedforundertheequitymethod.
b.Standardsindicatethatapositionofmorethan20%ofthevotingstockmightgivetheinvestortheabilitytoexercisesignificantinfluenceovertheoperatingandfinancialpoliciesoftheinvestee.Whensuchanabilitytoexerciseinfluenceisevident,theinvestmentshouldbeaccountedforundertheequitymethod.Basicallythismeansatcost,plustheequityintheearningsorlossesoftheinvesteesinceacquisition(withtheadditionofcertainotheradjustments).Evidenceofaninvestor'
sabilitytoexercisesignificantinfluenceoveroperatingandfinancialpoliciesoftheinvesteeisreflectedinseveralwayssuchasmanagementrepresentationandparticipation.Whileeligibilitytousetheequitymethodisbasedonthepercentofvotingstockoutstanding,thatcaninclude,forexample,convertiblepreferredstock,thepercentofearningsthatcanbepickedupundertheequitymethoddependsonownershipofcommonstockonly.
2.a.Theaccountingforinvestmentsincommonstockrepresentingover20%ofequityrequirestheequitymethod.Whileuseoftheequitymethodissuperiortoreportingcost,onemustnotethatthisisnotequivalenttofairmarketvalue—which,dependingonthecircumstances,canbesignificantlyhigherorlowerthanthecarryingamountundertheequitymethod.
Ananalystalsomustrememberthatthepresumptionthataninvestmentholdingof20%ormoreofthevotingsecuritiesofaninvesteeresultsinsignificantinfluenceoverthatinvesteeisarbitrary—anassumptionmadeintheinterestofaccountinguniformity.Ifsuchinfluenceisabsent,thenthereissomequestionregardingtheinvestor'
sabilitytorealizetheamountreported.
b.Alossinvalueofaninvestmentthatisotherthanatemporarydeclineshouldberecognizedthesameasalossinvalueforotherlongtermassets.Thisstatementsuggestsconsiderablejudgmentandinterpretationand,inthepast,hasresultedincompaniesbeingveryslowtorecognizelossesintheirinvestments.Since
accountingdoesnotconsideradeclineinmarketvaluetobeconclusiveevidenceofsuchaloss,theanalystmustbealerttosituationswherehoperatherthanreasonsupportsthecarryingamountofaninvestment.Itmustberecognizedthattheequitymethodreflectsonlycurrentoperatinglossesratherthanthecapitallossesthatoccurwhentheearningpowerofaninvestmentdeterioratesordisappears.
3.Someweaknessesandinconsistenciespertainingtotheaccountingformarketablesecuritiescarriedasnoncurrentassetsinclude:
∙Theclassificationofsecuritiesasnoncurrentinvestmentsisbasedonmanagementintent,asubjectivenotion.
∙Changesinthefairvalueofnoncurrentavailable-for-salesecuritiesbypassnetincome.
∙Equitysecuritiesofcompaniesinwhichtheenterprisehasa20percentorlargerinterest,andinsomeinstancesanevensmallerinterestthan20percent,neednotbeadjustedtomarket.Instead,itisreportedusingtheequitymethod,whichmayattimesyieldvaluessignificantlybelowandatothertimesabove,market.
∙Withregardtosuchrelativelysubstantialblocksofsecurities,thevaluesatwhichtheyarecarriedonthebalancesheetmaybesubstantiallydifferentthattheirrealizablevalues.
4.Generally,investmentsinmarketablesecuritiesareoneuseofexcesscashavailabletomanagers.Otherusesincludefinancinggrowthprojects,payingdowndebt,payingdividends,orbuyingbackstock.Incertaininstances,thepurchaseofinvestmentsecuritiesisviewedasanadmissionbythecompanythattheyhavenopositivenetpresentvaluegrowthprojectsavailabletodirectitsmonies.
5.Hedgingactivitiesaredesignedtoprotectthecompanyagainstfluctuationsinmarketinstruments.Speculativeactivitiesseektoprofitonfluctuationsinmarketinstruments.
6.Afuturescontractisanagreementbetweentwoormorepartiestopurchaseorsellacertaincommodityorfinancialassetatafuturedateandatadefiniteprice.
7.Aswapcontractisanarrangementbetweentwoormorepartiestoexchangefuturecashflows.Swapsaretypicallyusedtohedgeriskssuchasinterestrateandforeigncurrencyrisks.
8.Anoptioncontractgivesapartytheright,butnotanobligation,toexecuteatransaction.Anoptiontopurchaseasecurityataspecifiedpriceatafuturedateisanexampleofanoptioncontract.Thisoptionislikelytobeexercisedifthesecuritypriceonthatfuturedateishigherthanthecontractpriceandnototherwise.
9.Ahedgetransactionisatransactionexecutedinanattempttoprotectthecompanyagainstaspecificmarketrisk.
10.Toqualifyforhedgeaccounting,aderivativeinstrumentmusthedgeeitherthefairvalueorthecashflowsofanasset,liability,orsomeotherexposure.
11.
Acashflowhedgeisdesignedtohedgeexposuretovolatilityincashflowsattributabletoaspecificrisk.Anexampleofacashflowhedgeisafloating-for-fixedinterestrateswap.Thisswaphedgesthecashflowsrelatedtoaninterest-bearingfinancialinstrument.Anexampleofafairvaluehedgeisafixedfuturecommitmenttosellafixedquantityofacommodityataspecifiedprice.Thistransactionhedgesthefairvalueofthecommodityagainstlossbeforethetimethatitissold.
12.Infairvalueaccounting,boththehedginginstrumentandthehedgedassetorliabilityarerecordedatfairvalueinthebalancesheet.Allrealizedandunrealizedgainsandlossesonboththehedginginstrumentandthehedgedassetorliabilityareimmediatelyrecognizedinincome.
Unrealizedgainsandlossesrelatingtotheeffectiveportionofacashflowhedgeareimmediatelyrecordedaspartofothercomprehensiveincomeuptotheeffectivedateofthetransaction.Aftertheeffectivedateofthetransaction,thegainsandlossesaretransferredtoincome.Thecashflowhedginginstrumentisrecordedatfairvalueonthebalancesheet.However,thereisnooffsettingassetorliabilityasinthecaseofafairvaluehedge.Instead,theoffsetinthebalancesheetoccursthroughaccumulatedcomprehensiveincome,whichispartofequity.
13.Speculativederivativesarerecordedatfairvalueonthebalancesheetandanyunrealizedorrealizedgainsorlossesareimmediatelyrecordedinnetincome.
14.Fromastrictlegalviewpoint,thestatementisbasicallycorrect.Still,wemustrememberthatconsolidatedfinancialstatementsarenotpreparedaslegaldocuments.Consolidatedfinancialstatementsdisregardlegaltechnicalit
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