E12-1 Max Weinberg is studying for an accounting test and has developed the foll

Question

E12-1 Max Weinberg is studying for an accounting test and has developed the following questions about investments. 1. What are three reasons why companies purchase investments in debt or stock securities? 2. Why would a corporation have excess cash that it does not need for operations? 3. What is the typical investment when investing cash for short periods of time? 4. What are the typical investments when investing cash to generate earnings? 5. Why would a company invest in securities that provide no curren

Explanation / Answer

1.Among the reasons that companies invest in debt and equity securities of other companies are the following: As a safety cushion, to maintain a large enough liquid investment balance to tide the company over an emergency. To meet cyclical cash needs (for companies in highly seasonal businesses). To gain a return on idle investment To gain influence over the decisions of the company being invested in. To gain complete control over another company. When one company owns more than 50% of another company, the financial statements of the first company must combine the financial performance of the other company (its subsidiary) with its own performance as if the two companies were one single company. 2. If company's net profit is too high or when a company has monopoly over certain products. 3.Fixed deposits of banks or stock markets. 4. Acquiring other companies or marketing the products. 5.Because they are safer assets and provide a cushion from volatility or security. 6. What is the typical stock investment when investing cash for strategic reasons? 6.Acquiring stocks of the other companies in the same sector you are operating.

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