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Chapter 15 Investments and Fair Value Accounting Notes

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Accounting Chapter 15: Investments and Fair Value Accounting Why Companies Invest: Cash can be used for: 1. Investing in current operations ➢ Used to replace worn-out equipment or to purchase new more efficient and productive equipment ➢ Reinvested in the company to expand its current operations 2. Investing in temporary investments to earn additional revenue ➢ Have excess cash that is not needed for use in its current operations ○ Instead of letting excess cash remain idle in a checking account, most companies invest their excess cash in temporary investments ➢ Invest in debt securities (notes and bonds) and equity securities (stock) ➢ Reported in the current assets section ➢ Primary objective of investing in temporary investments: a. Earn interest revenue b. Receive dividends c. Realize gains from increases in the market price of the securities ➢ Investments in certificates of deposit or other securities that do not normally change in value are disclosed on the balance sheet as cash and cash equivalents ○ Held primarily for their interest revenue 3. Investing in long-term investments in stock of other companies for strategic reasons ➢ Long-term investments often involve the purchase of a significant portion of the stock of another company ➢ Usually have a strategic such as: a. Reduction of costs (when one company buys another company, the combined company may be able to reduce administrative expenses) b. Replacement of management (If the purchased comp ...
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