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Questions and Answers

What are the different categories of financial asset investments?

Short-term or long-term, trading, held-to-maturity, and available-for-sale.

What are the characteristics of trading securities?

Short-term investments in marketable securities, reported immediately after cash on the Balance Sheet, and are reported at mark to market with unrealized gains or losses.

What are the accounting methods for equity investments based on varying levels of influence?

M&A for high influence, equity method for lighter influence, and available-for-sale or trading securities for very little influence.

How are held-to-maturity bonds reported?

Held-to-maturity bonds are reported at amortized cost and fluctuate with market interest rates, with prices quoted as a percentage of par. Signup and view all the answers

Who makes the decision on investment classification?

The decision on investment classification is made by the Board of Directors, with the CFO likely making a proposal and auditors checking the decision. Signup and view all the answers

Explain the concept of goodwill in financial statement analysis and managerial accounting.

Goodwill is the excess of the cost of an acquired company over the sum of the FMV of its identifiable assets less the liabilities. In mathematical terms, Goodwill = Price paid - Equity book value – FMV adjustments, which can be represented as $253 million - $213 million- ($35 million-$20 million) = $25 million. Signup and view all the answers

What is the significance of the term 'minority interests' or 'interest of the non-controlling company' in the context of purchasing, acquiring, and accounting for goodwill?

If A does not buy 100% of B, but only a portion of it, there will be a residual part which will remain in the hands of the shareholder of B. In this case, once A + B are consolidated, there is an item called 'minority interests' or 'interest of the non-controlling company' that needs to be identified and disclosed in some way. Signup and view all the answers

Explain the difference between equity attributable to the parent company and equity attributable to the shareholder of B on a balance sheet.

Equity attributable to the parent company represents the ownership interest held by the parent company in its subsidiaries, while equity attributable to the shareholder of B represents the ownership interest held by B in the parent company. Signup and view all the answers

What is the threshold for an equity investment to result in consolidation, and how is the treatment of the entities changed?

An equity investment of over 50% results in consolidation, treating the entities as a single legal entity. Signup and view all the answers

What constitutes a financial investment, and what level of ownership is associated with it?

Ownership between 20% and 50% constitutes a financial investment, leading to an affiliation where the investing company has power to influence decisions. Signup and view all the answers

What is the Equity Method used for, and how does it adjust the investment?

The Equity Method is used for financial investments to adjust the investment based on the investee's profits and dividends. Signup and view all the answers

How are available for sale or trading securities reported on the balance sheet, and where are unrealized gains or losses from these securities recorded?

Available for sale or trading securities are reported on the Balance Sheet using mark-to-market, reflecting current market value. Unrealized gains or losses from available for sale or trading securities are recorded in the Income Statement under other comprehensive income. Signup and view all the answers

Why do we need an indirect method for preparing the Cash Flow Statement?

We need an indirect method for preparing the Cash Flow Statement because revenues and expenses reported using the accrual basis do not always align with cash inflow and outflow. The indirect method helps reconcile the income position to the cash position. Signup and view all the answers

What is the beginning equation for the Cash Flow Statement preparation using the indirect method?

The beginning equation is the Balance Sheet equation: $ASSET = LIABILITY + EQUITY$. Signup and view all the answers

How is the Cash Flow Statement equation rearranged in the indirect method?

The rearranged Cash Flow Statement equation is: $Cash = Net Income - Non-cash Current Assets + Current Liabilities - Long-lived assets + Long-term Liabilities + Capital - Dividends$. Signup and view all the answers

What does the change in cash equation represent in the indirect method?

The change in cash equation, $\Delta +/- Cash = - Net Income - \Delta +/- Non-cash Current Assets + \Delta +/- Current Liabilities - \Delta +/- Long-lived Assets + \Delta +/- Long-term Liabilities + \Delta +/- Capital - Dividends$, represents the change in cash equal to the change in all the other items. Signup and view all the answers

How can we observe the cash flow changes using the indirect method?

To observe the cash flow changes, we can look at the cash flow changes on the left side of the equation. Signup and view all the answers

Explain the concept of accrued liabilities and provide an example.

Accrued liabilities include expenses that have been incurred but not yet paid or invoiced. An example of accrued liabilities is accrued interest on a loan, where the interest has been earned but not yet paid by the borrower. Signup and view all the answers

What are unearned revenues and how are they recorded?

Unearned revenues represent payments received for services not yet delivered. They are recorded as a liability on the balance sheet until the services are provided. Signup and view all the answers

Define contingent liabilities and provide an example.

Contingent liabilities depend on future events and may not require an outflow of resources. An example of a contingent liability is a pending lawsuit against a company. Signup and view all the answers

How are bonds reported on the balance sheet?

Bonds are reported at their present value on the balance sheet. Signup and view all the answers

What factors determine whether a bond is issued at par, discount, or premium?

Bonds may be issued at par, discount, or premium based on the relationship between the coupon rate and the market interest rates. Signup and view all the answers

Explain the key considerations in bond valuation.

The key considerations in bond valuation include the amount of money at issuance, determination of interest expense, amortization of discount/premium, and payment due at maturity. Signup and view all the answers

How are short-term, definite, and certain liabilities reported?

Short-term, definite, and certain liabilities are reported at nominal value. Signup and view all the answers

What are the four classifications for liabilities?

Liabilities are classified as short-term or long-term, definite or indefinite in amount, certain or contingent. Signup and view all the answers

What are the three categories into which cash inflows and outflows are grouped in a cash flow statement?

Cash inflows and outflows are grouped into operations, investing, and financing activities. Signup and view all the answers

Which method is used by most companies for preparing the cash flow statement?

The indirect method is used by 99.9% of companies for preparing the cash flow statement. Signup and view all the answers

Study Notes

Bonds Valuation and Cash Flow Statement Preparation

Bonds are evaluated by discounting future cash flows at present value
Liabilities are classified as short-term or long-term, definite or indefinite in amount, certain or contingent
Short-term, definite, and certain liabilities are reported at nominal value, while long-term, definite, and certain liabilities are reported at present value
Liabilities of indefinite amount need to be estimated and contingent liabilities are disclosed in the notes
Four key issues to consider in bond valuation: amount of money at issuance, determination of interest expense, amortization of discount/premium, and payment due at maturity
Cash flow statement explains changes in a firm's cash balance during an accounting period
Cash inflows and outflows are grouped into operations, investing, and financing activities
Cash flow statement can be prepared using the direct method (labeling each cash flow as operating, investing, or financing) or the indirect method
The indirect method is used by 99.9% of companies for preparing the cash flow statement
The indirect method involves adjusting net income for non-cash items and changes in operating assets and liabilities to derive cash flow from operations
The direct method involves reporting actual cash receipts and payments for operating, investing, and financing activities
The cash flow statement provides a detailed explanation of cash inflows and outflows related to the functioning, investment, and financing of a business

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Description

Test your knowledge of bonds valuation and cash flow statement preparation with this quiz. Explore concepts such as discounting future cash flows, classification of liabilities, key issues in bond valuation, and the preparation of cash flow statements using direct and indirect methods.