Liabilities, Financing, Investments and Related Income Cheat

Sheet
1)

Executory Contracts: Businesses frequently enter into contracts known in law as executory contracts. These
are contracts where each party has yet to perform their part of the contract. These contracts often appear to
obligate the parties. However, in general, accounting does not recognize obligations under an executory
contract as liabilities.

2)

Key Concepts:

3)

Going Concern Concept: typically, liabilities are recorded at the amount that would be required to
settle them at the balance sheet date. In determining this amount, accounting assumes the liability
will be settled in the normal course of business, that is, the business is considered to be a going
concern.

Conservatism: The conservation concept also plays a role in the recognition and measurement of
liabilities. It suggests it is prudent to recognize liabilities as soon as reasonably possible and to avoid
understating the amount of the obligation.

Equation: Zero Coupon Debt

4) Investments and Investment Income

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5)

How to record the acquisition of short-term investments in stocks and bonds that have been
purchased as an alternative to holding cash at the bank.
How to record gains and losses on different types of short-term investments
How to record a long-term investment that results in the acquirer gaining control over the other
company and integrating the two businesses

Investment Motivations
Firms acquire the debt and equity securities of other firms for a variety of reasons.

They may use these types of investments as a convenient way to park excess cash needed to fund
working capital or long-term assets in the near future. Investing in other company debt or equity is
expected to provide a higher return than could be earned by keeping the excess cash in the bank.
Managers also make investments in other companies for strategic purposes. These types of investments
typically involve acquisition of a majority of the equity of another company. The acquiring company's
management then has control over the acquired company, enabling it integrate it into its own operations or
to take other actions that improve the performance of the newly-created combined firm.