Net income represents the net assets the company

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Unformatted text preview: earnings due to (i.e., changes in tax rates) and foreign currency exchange rates. c. Wall Street firms employ various models to identify over­ and under­valued stocks. The choice of accounting policies by a firm is just one variable in the whole equation. Therefore, the choice of accounting policy may have some explanatory power, but alone it would not provide sufficient information to differentiate among the stocks. ID14–2 a. The Washington Post will use the equity method to record the accounting transactions related to the other companies because it holds “significant influence” over those companies. The equity method means that the Washington Post will record its ownership percentage times the companies’ net income as equity income on the Washington Post’s income statement; if the other companies lose money, the Washington Post will show a net loss from equity investments on its income statement (its ownership percentage times the companies’ net losses). If the companies pay dividends, then the Washington Post would record this amount as an increase in cash and a reduction to the investment account. b. Losses in these investments are shown as losses on the income statement of the Washington Post. However, these are non­cash losses, so these losses are added back to the net income of the Washington Post to determine the cash changes for the year. (The treatment is similar to that of depreciation expense, another non­cash deduction to earnings.) c. “Net of distributions” means the amount of income or loss that did not involve the exchange of cash between the Washington Post and the investment companies. The companies may have paid cash dividends to their owners, including the Washington Post, so these cash payments are deducted from the non­cash losses that are added back to net income to determine the Post’s operating cash flow. d. The transactions that led to these disclosures were 1) the sale of fixed assets previously owned by the Washington Post at a loss (proceeds...
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