CH.

4
ANALYZING INVESTING ACTIVITIES
 Current Assets

 Cash and cash equivalents

 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

 Receivables
 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

 Prepaid Expenses
 Inventories
 Inventory cost flows
 Inventory costing for manufacturing companies:
overhead
 Lower of costs or market
 Investment Securities

 Separating investment from investing assets

and performance
 Analyzing accounting distortions from
securities
 Opportunities for gains trading
 Liabilities recognized at cost

 Inconsistent definition of equity securities

 Classification based on intent

 Derivative Securities

 Derivative: a financial instrument whose value is

derived from the value of another assets, class of
assets, or economic variable.
 Futures contract, swap contract, option contract,
forward contract.
 Analyzing derivatives:
 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

 Plant Assets and Natural Resources

 Historical costs & Impairment
 Depreciation and depletion: useful lives,
allocation method
 Intangible Assets

 Goodwill is recorded only when acquired,

most goodwill likely exists off the balance
sheet.
 Amortization
 Valuation