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chapter_1_10th_word - 1. The equity method should be...

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1. The equity method should be applied if the ability to exercise significant influence over the operating and financial policies of the investee has been achieved by the investor. However, if actual control has been established, consolidating the financial information of the two com- panies will normally be the appropriate method for reporting the investment. 3. The equity method is appropriate when an investor has the ability to exercise significant influ- ence over the operating and financing decisions of an investee. Because dividends represent financing decisions, the investor may have the ability to influence the timing of the dividend. If dividends were recorded as income (cash basis of income recognition), managers could affect reported income in a way that does not reflect actual performance. Therefore, in reflecting the close relationship between the investor and investee, the equity method employs accrual ac- counting to record income as it is earned by the investee. The investment account is increased for the investee earned income and then appropriately decreased as the income is distributed. From the investor’s view, the decrease in the investment asset is offset by an increase in the as- set cash. 6.
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chapter_1_10th_word - 1. The equity method should be...

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