Accounting for Passive Inv

ACCOUNTING FOR PASSIVE INVESTMENTS IN SECURITIES

NATURE OF INVESTMENTS IN SECURITIES

Many strategic factors motivate managers to invest in securities. A company that has extra cash and simply wants to earn a return on the idle funds can invest those funds in shares or debt securities issued by other companies, either short-term or long-term. These investments are passive because the managers have no intent to influence or control other companies whose securities they have purchased.

Sometimes a company decides to invest in another company with the purpose of influencing that company’s operating, investing, and financing activities. When management of one company decides to control another company, the investing company either purchases the target company outright or becomes its majority shareholder. In this case, the two companies must report their financial positions and the results of their operations in a single set of consolidated financial statements. For example, Dell Inc. (the focus company of Chapter 8) prepares a set of consolidated financial statements because it controls a number of companies that are listed in the notes to its financial statements. Dell’s balance sheet, shown in Exhibit 1, includes both short-term and long-term investments as at January 28, 2005.

EXIHBIT 1

DELL INC.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Partial)

(in millions of U.S. dollars)

January 28, January 30,

ASSETS 2005 2004

|Current assets: |  |  |  |

|  |Cash and cash equivalents |$ 4,747 |  |$ 4,317 |

|  |Short-term investments | 5,060 |  |835 |

|  |Accounts receivable, net | 4,414 |  | 3,635 |

|  |Inventories...