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Lecture 5

COMMERCE 1AA3 Lecture Notes - Lecture 5: Catalan Shawm, Balance Sheet, Debil

Course Code
Firat Sayin

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Chapter 5: Short Term Investments and
Short Term Investments
Short Term Investments
Also called marketable securities/temporary investments
o 2nd most liquid asset (after cash)
o Held for one year or less
Short Term Investment Categories
Trading Securities
o Expected to be sold within a short time
Available-for-Sale Securities
o Intend to sell some time in the future
Held-to-Maturity Securities
o Intend to hold until they mature
Held-For-Trading Securities
Held-For-Trading Securities
Held for a short time then sold
o Increase in market price results in gain
o Decrease in market price results in loss
Can be a debt or equity security of another company s
o Earns interest or dividend revenue
Accounting for Trade Securities
First entry
o Record purchase of stock
Second entry
o Record dividends received
Trading Securities
Trading securities
o Reported at Current Fair Value (market value)
o Amount investor can receive by selling security
Adjusting trading securities to Fair Value
o Entries made at the end of the reporting period
Word ‘realized’ is rarely used in account title
o Regular Gain/Losses are assumed to be realized

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Unrealized Gains and Losses
Unrealized Gain/Loss
Unrealized because company has not sold the investment
o Unrealized Gain Increase in Fair Value from original cost
o Unrealized Loss Decrease in Fair Value from original cost
Realized Gain and Losses
Realized Gain/Loss
Only reported when the investment is sold
o Realized Gain Sale price >
Carrying Amount
o Realized Loss Sale price <
Carrying Amount
Adjusting Securities to Fair Value
Increase in Fair Value over period
o Investment account increases
o Unrealized Gain is reported
Decrease in Fair Value over period
o Investment account decreases
o Unrealized Loss is reported

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Reporting on Financial Statements
Balance Sheet
o Appears immediately after cash
Income Statement
o Reported under other revenue, gains and losses
o E.g. Dividend revenue/gains
Monetary claims against others
o 3rd most liquid asset
o Acquired by selling goods and lending money
Uncollectible Receivables
Benefits of selling on credit
o Beneficial for customers without cash
o Increases sales and profits
Costs of selling on credit
o Company can’t collect cash from some customers
o Cost is called uncollectible-account/doubtful-account/bad-debt expense
Bad Debts
Bad Debts
Results from credit customers who do not pay what they owe
o Regardless of collection efforts
Recording Bad Debt
Uncontrollable-Account Expense
Actual amount of Bad Debt
o Also known as Doubtful-Account/Bad-Debt Expense
Allowance for Uncollectable Accounts
Shows amount of receivables expected not to be collected
o A Contra-account for Accounts Receivable
o Also Known as Allowance for Doubtful Accounts/Bad Debts
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