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Lecture Notes CH5.pdf

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McMaster University
Aadil Merali Juma

Instructors Resource Manual for Harrison et al Financial Accounting 5ce CHAPTER 5 LEARNING OBJECTIVES After studying Chapter 5 you should be able to 1 Account for shortterm investments 2 Account for and control accounts receivables 3 Estimate and account for uncollectible accounts receivable 4 Account for notes receivable 5 Explain how to improve cash flows from sales and receivables 6 Evaluate a companys liquidityInstructors Resource Manual for Harrison et al Financial Accounting 5ce CHAPTER OUTLINEOBJECTIVE 1 Account for shortterm investmentsAShortterm investments are investments that a company plans to hold for one year or less and are also called marketable securities or temporary investmentsBInvestments in marketable securities fall into one of three categories 1Shortterm investments 2Longterm investments in shares including availableforsale 3Longterm investments in bondsAvailableforsale investments are usually classifies as longterm unless they mature in the current periodCOne common type of shortterm investment is a heldfortrading investment which is 1held for a short period of time and then sold it for more than its cost 2in the form of shares or bonds in another company 3reported on the balance sheet at fair valueDTrading investments are intended by the company to be held in the form of shares or bonds in another company for a short term and then sold for more than their cost They are required to be measured at fair value at each reporting date Resulting unrealized gainslosses are reflected on the Income Statement in a section below operating revenues and expenses Exhibit 51 reflects financial statement treatmentE Gainslosses are unrealized when the investment has not yet been sold and its reported fair value is more gain or less loss than the investment costF Gainslosses are realized when the investment is sold for more gain or less loss than the investment carrying amountGThe notes to the financial statements should disclose the details of the specific types of shortterm investments owned at the end of the year
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