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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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