华中科技大学：《财务报表分析》（英文版）CHAPTER 5 Analyzing Financing Activities

Analyzing Financing Activities CHAPTER

5 CHAPTER Analyzing Financing Activities

Intercorporate Investments Definitions Intercorporate investments investments by one corporation in the equity securities of another corporation Parent- corporation who controls generally through ownership of equity securities, the activities of another separate legal entity known as a subsidiary Parent-subsidiary relation -when one corporation owns all or a majority of the voting equity securities of another corporation

Intercorporate investments — investments by one corporation in the equity securities of another corporation Parent — corporation who controls, generally through ownership of equity securities, the activities of another separate legal entity known as a subsidiary Parent-subsidiary relation —when one corporation owns all or a majority of the voting equity securities of another corporation Intercorporate Investments Definitions

ntercorporate Investments Accounting Two basic methods for a parent to account for its ownership in a subsidiary: 1. Consolidated Financial Statements Balance sheet 2. Equity method accounting Balance sheet

Two basic methods for a parent to account for its ownership in a subsidiary: 1. Consolidated Financial Statements 2. Equity method accounting Intercorporate Investments Accounting

Intercorporate Investments Consolidated Financial Statements Consolidated financial statements report the results of operations and financial condition of a parent corporation and its subsidiaries in one set of statements Basic Technique of Consolidation Consolidation involves two steps: aggregation and elimination Aggregation of assets, liabilities, revenues, and expenses of subsidiaries with the parent Elimination of intercompany transactions (and accounts) between subsidiaries and the parel Note: Minority interest represents the portion of a subsidiary's equity securities owned by other than the parent company

Consolidated financial statements report the results of operations and financial condition of a parent corporation and its subsidiaries in one set of statements Consolidation involves two steps: aggregation and elimination Aggregation of assets, liabilities, revenues, and expenses of subsidiaries with the parent Elimination of intercompany transactions (and accounts) between subsidiaries and the parent Note: Minority interest represents the portion of a subsidiary’s equity securities owned by other than the parent company Intercorporate Investments Consolidated Financial Statements Basic Technique of Consolidation

ntercorporate Investments Illustration of Consolidation The Facts. Pharmaceutical Corp(parent) acquires silicon Supplies (subsidiary Assets and liabilities in the balance sheet of Silicon Supplies are at fair values Pharmaceutical pays $78, 000 (in millions) for 90% of Silicon Supplies' common stock fair values of net assets acquired equal 90%of$80,000,or$72,000 Accounts receivable of Pharmaceutical los. include $4, 000 owed to it by Silicon Supplies

The Facts: • Pharmaceutical Corp (parent) acquires Silicon Supplies (subsidiary) • Assets and liabilities in the balance sheet of Silicon Supplies are at fair values • Pharmaceutical pays $78,000 (in millions) for 90% of Silicon Supplies’ common stock — fair values of net assets acquired equal 90% of $80,000, or $72,000 • Accounts receivable of Pharmaceutical include $4,000 owed to it by Silicon Supplies Intercorporate Investments Illustration of Consolidation

Intercorporate Investments Pharmaceutical Corp and Silicon Supplies Consolidated Balance sheet Worksheet Adjustments Pharma Silicon ceutical Supplies Elminiations Minority Consoli- Corporation Company Dr Cr. Interest dated Assets Cash 16.000 11.000 27000 Accounts receivable 32.000 19.000 (4000) 47.000 Inventories 42,000 18000 60,000 Fixed Assets 64.000 42,000 106.000 Investment in Silicon Fair value at acquisition 72,000 (72,000) Excess of cost over fair valuegoodwil 6,000 6.000 Total assets 232000 =90Q00 Llabllltles and Equity Accounts payable 12,000 10,000 4,000 18,000 Capital stock: Pharmaceutical Corporation 120.000 20.000 Silicon Supplies Company 50,000 45.000 5.000 Retained earnings Pharmaceutical Corporation 100,000 100,000 Silicon Supplies Company 30,000 27,000 3,000 Minority interest 8.000 Minority Total liabilities and equity 232.000 90.000 246,000

Intercorporate Investments Pharmaceutical Corp and Silicon Supplies Consolidated Balance Sheet Worksheet Adjustments Pharma- Silicon and ceutical Supplies Elminiations Minority Consoli￾Corporation Company Dr. Cr. Interest dated Assets Cash 16,000 11,000 27,000 Accounts receivable 32,000 19,000 (4,000) 47,000 Inventories 42,000 18,000 60,000 Fixed Assets 64,000 42,000 106,000 Investment in Silicon Fair value at acquisition 72,000 — (72,000) — Excess of cost over fair value (goodwill) 6,000 — 6,000 Total assets 232,000 90,000 246,000 Liabilities and Equity Accounts payable 12,000 10,000 4,000 18,000 Capital stock: Pharmaceutical Corporation 120,000 120,000 Silicon Supplies Company 50,000 45,000 5,000 Retained earnings: Pharmaceutical Corporation 100,000 100,000 Silicon Supplies Company 30,000 27,000 3,000 Minority interest 8,000 Minority Total liabilities and equity 232,000 90,000 246,000

Intercorporate Investments Pharmaceutical Corp and silicon Supplies Consolidated Income Statement Steps Income statement of silicon Supplies is combined with that of Pharmaceutical Corp 10% share of the minority interest in the net income or loss of silicon Supplies for the period is deducted from the consolidated incomer loss) and added to the minoritys interest to show the consolidated net results of operations of the total entity Any intercompany profits on sales of inventories held by the consolidated entity at year-end, along with any intercompany profits on other asset transactions, are eliminated

• Income statement of Silicon Supplies is combined with that of Pharmaceutical Corp • 10% share of the minority interest in the net income or loss of Silicon Supplies for the period is deducted from the consolidated income (or loss) and added to the minority’s interest to show the consolidated net results of operations of the total entity • Any intercompany profits on sales of inventories held by the consolidated entity at year-end, along with any intercompany profits on other asset transactions, are eliminated Pharmaceutical Corp and Silicon Supplies Consolidated Income Statement Steps Intercorporate Investments

Intercorporate Investments Exposure Draft on Consolidation ED establishes presumption of control if an entity: Has a majority voting interest in or a right to appoint a majority of an entity's governing body Has a large minority voting interest and no other party or organized group of parties has a significant voting interest Has a unilateral ability to (1)obtain a majority voting interest in or 2) obtain a right to appoint a majority of the corporation's governing body through the present ownership of convertible securities or other rights that are currently exercisable at the option of the holder and the expected benefit from converting those securities or exercising that right exceeds its expected cost Is the only general partner in a limited partnership and no other partner or organized group of partners has the current ability to dissolve the limited partnership or otherwise remove the general partner FASB

ED establishes presumption of control if an entity: ➢ Has a majority voting interest in or a right to appoint a majority of an entity’s governing body ➢ Has a large minority voting interest and no other party or organized group of parties has a significant voting interest ➢ Has a unilateral ability to (1) obtain a majority voting interest in or (2) obtain a right to appoint a majority of the corporation’s governing body through the present ownership of convertible securities or other rights that are currently exercisable at the option of the holder and the expected benefit from converting those securities or exercising that right exceeds its expected cost ➢ Is the only general partner in a limited partnership and no other partner or organized group of partners has the current ability to dissolve the limited partnership or otherwise remove the general partner Intercorporate Investments Exposure Draft on Consolidation FASB

Intercorporate Investments Equity Method Accounting Equity method accounting reports the parent's investment in the subsidiary, and the parent's share of the subsidiary's results, as line items in the parent's financial TT statements(referred to as one-line consolidation) Note: Generally used for investments representing 20 to 50 percent of the voting stock of a company,'s equity securities--main difference between consolidation and equity method accounting rests in the level of detail reported in financial statements

Equity method accounting—reports the parent’s investment in the subsidiary, and the parent’s share of the subsidiary’s results, as line items in the parent’s financial statements (referred to as one-line consolidation) Note: Generally used for investments representing 20 to 50 percent of the voting stock of a company’s equity securities--main difference between consolidation and equity method accounting rests in the level of detail reported in financial statements Intercorporate Investments Equity Method Accounting

Intercorporate Investments Procedures in Equity Method Accounting Intercompany profits and losses are eliminated until realized by the investor or investee Difference between the cost of an investment and the amount of equity in net assets of an investee is accounted for as if the investee is a consolidated subsidiary-amortization of any goodwill is required Y Investment(s) in common stock is shown in the balance sheet of an investor as a single amount, and the investor's share of earnings or losses of an investee(s) is ordinarily shown in the income statement as a single amount except for any extraordinary items and prior period adjustments that are separately classified in the investor's income statement v Capital transactions of an investee affecting the investor's share in the equity of the investee are accounted for as if the investee is a consolidated subsidiary Selling stock of an investee by an investor is accounted for as a gain or loss equal to the difference between the stock's selling price and carrying amount when sold the investor should record its share of the earnings or losses of an investee from the most recen ethod v If an investee's financial statements are not sufficiently timely for an investor to apply the equity m financial statements v Loss in value of an investment that is other than a temporary decline is recognized the same as a loss in value of other long term assets v An investor should discontinue equity method accounting when the investment(and net advances) is reduced to zero, and should not provide for additional losses unless the investor has guaranteed obligations of the investee or is otherwise committed to providing further financial support to the investee; if the investee subsequently reports net income, the investor should resume equity method accounting only after its share of that net income equals the share of net losses not recognized during the period it suspended the equity method v When an investee has outstanding cumulative preferred stock, an investor computes its share of earnings (losses) after deducting the investee's preferred dividends, whether or not such dividends are declared v Carrying amount of an investment in common stock of an investee that qualifies for equity method accounting can differ from the equity in net assets of the investee-this difference affects determination of the investor's share of earnings or losses of an investee as if the investee is a consolidated sidiary; if the investor is unable to link this difference to specific accounts of the investee, the difference is considered goodwill and amortized

✓ Intercompany profits and losses are eliminated until realized by the investor or investee ✓ Difference between the cost of an investment and the amount of equity in net assets of an investee is accounted for as if the investee is a consolidated subsidiary—amortization of any goodwill is required ✓ Investment(s) in common stock is shown in the balance sheet of an investor as a single amount, and the investor’s share of earnings or losses of an investee(s) is ordinarily shown in the income statement as a single amount except for any extraordinary items and prior period adjustments that are separately classified in the investor’s income statement ✓ Capital transactions of an investee affecting the investor’s share in the equity of the investee are accounted for as if the investee is a consolidated subsidiary ✓ Selling stock of an investee by an investor is accounted for as a gain or loss equal to the difference between the stock’s selling price and carrying amount when sold ✓ If an investee’s financial statements are not sufficiently timely for an investor to apply the equity method, the investor should record its share of the earnings or losses of an investee from the most recent financial statements ✓ Loss in value of an investment that is other than a temporary decline is recognized the same as a loss in value of other long term assets ✓ An investor should discontinue equity method accounting when the investment (and net advances) is reduced to zero, and should not provide for additional losses unless the investor has guaranteed obligations of the investee or is otherwise committed to providing further financial support to the investee; if the investee subsequently reports net income, the investor should resume equity method accounting only after its share of that net income equals the share of net losses not recognized during the period it suspended the equity method ✓ When an investee has outstanding cumulative preferred stock, an investor computes its share of earnings (losses) after deducting the investee’s preferred dividends, whether or not such dividends are declared ✓ Carrying amount of an investment in common stock of an investee that qualifies for equity method accounting can differ from the equity in net assets of the investee—this difference affects determination of the investor’s share of earnings or losses of an investee as if the investee is a consolidated subsidiary; if the investor is unable to link this difference to specific accounts of the investee, the difference is considered goodwill and amortized Intercorporate Investments Procedures in Equity Method Accounting