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- Accounting, Finance
This assignment covers the equity method of accounting for investments. It explains the criteria for using the equity method and how to report investment-related amounts in the income statement, balance sheet, and statement of cash flows.
What's inside
- Criteria for using the equity method
- Income statement reporting
- Balance sheet reporting
- Statement of cash flows reporting
- Example with Miller Properties and Marlon Company
Who it is for: Students taking an accounting course with ACC 306. (Undergraduate)
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Summary
The equity method of accounting for investments is a topic. Students learn how to decide when to use it and how to apply it in financial statements.
Applying the equity method
The equity method applies when an investor has significant influence over another company. This influence is presumed when the investor owns 20% or more of the voting stock. Other factors may also show significant influence.
Income statement adjustments
Investment revenue is calculated based on the investee's earnings. Adjustments are made for differences between the fair value and the book value of the investee's assets. These adjustments affect the income statement.
Balance sheet adjustments
The investment account on the balance sheet includes the initial cost, the share of the investee's income, and adjustments for amortization. Dividends received from the investee reduce the investment account.
Cash flow statement adjustments
Cash flows related to the investment include the initial cash outflow and dividends received. Adjustments may be needed if the investee uses the indirect method for cash flows from operating activities.
Key terms
- Equity method
- A method of accounting for investments where the investor has significant influence over the investee.
- Significant influence
- The power to participate in the policy-making process of the investee.
- Investment revenue
- The investor's share of the investee's earnings, calculated based on the percentage of ownership.
- Amortization adjustment
- An adjustment made to the income statement for the difference between the fair value and the book value of the investee's assets.
- Indirect method
- A method of reporting cash flows from operating activities that starts with net income and adjusts for non-cash items.
- Voting stock
- Shares that carry voting rights, typically common shares.
Questions this document helps with
- When does an investor use the equity method?
- How does the equity method affect the income statement?
- What adjustments are made to the balance sheet under the equity method?
Summary written with AI from the document's text.
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