Financial Accounting: In an Economic Context

CHAPTER 8

Investments in Equity Securities

KEY POINTS

The following key points are emphasized in this chapter:

• Criteria that must be met before a security can be listed in the current assets section of the balance sheet.
• Trading and available-for-sale securities and how the mark-to-market rule is used to account for them.
• Why companies make long-term investments in equity securities.
• The mark-to-market method, the cost method, and the equity method of accounting for long-term equity investments, and the conditions under which each method is used.
• Consolidated financial statements, when they are prepared, and how they differ from financial statements that account for equity investments using the equity method.

In early 2000, Cisco Systems boasted the greatest market value in the history of Wall Street—nearly half a trillion dollars, with almost all of that wealth created since 1995. While its market value has since declined significantly, Cisco is still a great engineering company, well-managed and technically astute, and almost all of its growth has come from acquiring other companies. How it chose those companies has defined its corporate strategy; how it integrated them into its empire has defined its corporate politics; and how it retained the people acquired with the companies has defined its corporate culture. These acquisitions and others like it, where ownership is transferred, involve the purchase and sale of equity securities, the subject of this chapter.

An equity investment ...