Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FAIS 3 > Ch. 1 Equity Method Inv. > Flashcards

Ch. 1 Equity Method Inv. Flashcards

0
Q

When using the equity method: company’s consolidated net income

A

Includes company’s proportionate share of net income/loss

From investee companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
1
Q

Equity method is used for investments in companies if…

2) ownership interest in equity method

A

Company has the ability to exercise significant influence
Over operating and financial policies of investee

2) investor does not have control but owns 20-50% of company
So can exercise significant influence

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

3 different approaches for financial reporting of investments in equity securities under GAAP

A

1 fair value method
2 consolidation of financial statements
3 equity method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Influence increases with…

A

Relative size of ownership

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

When is fair value method for equity investments used?

A

When investor possess only small percentage of investee
Company’s outstanding stock

Investor can’t expect to significantly affect investee’s operations
Or decision making

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How are initial investments in equity securities recorded on financial statements?

A

Recorded at cost and subsequently adjusted if FMV is readily

Determinable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Trading securities

A

Under fair value method, Equity securities held for sale in
short term

Reported at FMV, with unrealized gains and losses included in
Earnings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Available-for-sale securities

A

Under fair value method, are reported at fair value

Unrealized gains and losses are excluded from earnings and
Reported in separate component of shareholder’s equity as
Part of other comprehensive income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Fair Value method dividends

A

Dividends from investments are recognized as income for

Both trading and available for sale securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Fair value method is used for equity investments when investor has…

A

Neither significant influence nor control

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

When does consolidation of financial statements occur for corporate investors?

A

When they have enough shares to gain actual control over
Investee’s operating

Accumulate over 50% of the shares outstanding of voting stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Control generally requires what for accounting information?

A

Control generally requires consolidation of accounting information
Produced by individual companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What does the equity method use to recognize income?

A

Uses accrual basis for recognizing investor’s share of investee
Income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Treatment of dividends under the equity method

A

Investor’s share of investee dividends declared are recorded

As decreases in investment account (not income)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Equity method is often used for what kind of business activity?

A

Joint ventures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Under the cost method, how is a declared dividend treated on the investor’s records?

A

Recorded as dividend income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

IASB definition of significant influence

A

Power to participate in financial and operating policy decisions
Of investee,

but not have control/joint control over those policies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

6 conditions that indicate presence of degree of influence for use of the equity method

A

1 investor representation on board of directors
2 investor participation in policy making process of investee
3 material intra-entity transactions
4 interchange of managerial personnel
5 technological dependency
6 extent of ownership by investor in relation to size and
concentration of other ownership interests in investee

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Sole criterion for use of equity method

A

Ability to exercise influence over investee

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

3 situations where equity method isn’t appropriate for investments regardless of investor’s degree of ownership

A

1 agreement exists between investor and investee, where investor
Surrenders significant rights as a shareholder
2 concentration of ownership operates the investee without
Regard for views of investor
3 investor attempts, but fails to obtain representation on investee’s
Board of directors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

If an entity can exercise control over its investee, regardless of ownership level…

A

Consolidation (rather than equity method) is appropriate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Variable interests

A

Control achieved through contractual and other arrangements

Financial control exists, absent of majority ownership interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Extensions of equity method applicability

A

It’s possible to fall short or exceed 20-50% ownership and
Still use the equity method

Ex. Being a member of a business consortium that holds voting control of investee that you own less than 20% of, or own over 50% but have contract with another company that says you share control equally

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Criterion and normal ownership level for fair value or cost method of accounting

A

Criterion: inability to significantly influence

Ownership: less than 20%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

2 possible criterion for consolidated financial statements

A

1 control through voting interests

2 control through variable interests (governance documents,
Contracts)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

2 possible normal ownership levels for consolidated financial statements

A

1 more than 50%

2 primary beneficiary status (no ownership required)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

For users of investor’s financial statements, the equity method effects…

A

Both the timing or income recognition and carrying around of
Investment account

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

In applying the equity method, the accounting objective is to report…

A

The investor’s investment and investment income reflecting

Close relationship between the companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

After recording the cost of acquisition, what 2 equity method entries periodically record the investment’s impact?

A

1 investor’s investment account increases as investee earns and reports income

2 investor decreases its investment account for its share of
investee cash dividends

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

investor’s investment account increases as investee earns and reports income

A

Although investor initially records acquisition at cost, upward
Adjustments in asset balance are recorded as soon as investee
Makes profit

Reduction is necessary if loss is reported

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Because investor can influence their timing, investee dividends…

A

Can’t objectively measure income generated from investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

One of the most common problems encountered in applying the equity method concerns…

A

Investment costs that exceed proportionate book value of

Investee company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

A companies value at any time is based on a multitude of 5 common factors

A 
1 company profitability
2 introduction of new project
3 expected dividend payments
4 projected operating results
5 general economic conditions
33
Q

Stock prices are based (at least partially) on…

A

The perceived worth of a company’s net assets

These amounts often vary dramatically from the company’s
Underlying book value

34
Q

Asset and liability accounts shown on the balance sheets tend to measure…

A

Historical cost rather than current value

35
Q

What specific accounting methods adopted by companies lead to different book values?

A

1 LIFO
2 FIFO
3 different depreciation methods

36
Q

Income recognition for investments

A

Requires matching income generated from investment with its

Cost

37
Q

Excess costs allocated to fixed assets will likely be expensed over longer periods than…

A

Costs allocated to inventory

38
Q

In applying the equity method, the cause of excess payment can be divided into 2 general categories

A

1 specific assets and liabilities differ have FMVs that differ from
Their present book values

2 investor may pay extra amount because it expects future benefits
To accrue from investment

39
Q

Goodwill

A

Any extra payment that can’t be attributed to a specific asset
Or liability is assigned to goodwill

40
Q

Which payments should not be amortized because there is no useful life? 3

A

1 land

2 goodwill

3 indefinite life intangibles

41
Q

Goodwill associated with equity method investments vs. Goodwill associated with business combinations

A

Goodwill associated with a business combination is subject to
Annual impairment reviews

Whereas goodwill implicit in equity investment combinations
Is not

42
Q

Equity method investments are tested in their entirety for…

A

Permanent declines in value

43
Q

Special procedures involved in equity method accounting in the 4 following areas

A

1 reporting a change to the equity method
2 reporting investee income from sources other than continuing
Operations
3 reporting investee losses
4 reporting sale of an equity investment

44
Q

Reporting a change to the equity method (from the fair value method)

A

Financial statements adjusted retroactively

All accounts are restated so investor’s financial statements
Appear as if equity method has been applied from date of 1st
Acquisition

45
Q

Under the Equity method: when an investee company’s activities require recognition of other comprehensive income (OCI)…

A

Its owner’s equity (and net assets) will reflect changes not
captured in its reported net income

46
Q

Other Comprehensive Income (OCI), 2 things

A

Revenues, expenses, gains and losses under GAAP are included
In comprehensive income but excluded for net income

OCI is accumulated and reported in stock holders equity

47
Q

AOCI

A

Accumulated Other Comprehensive Income

48
Q

3 items included in Accumulated Other Comprehensive Income (AOCI)

A

1 unrealized holding gains and losses

2 foreign currency translation adjustments

3 certain pension adjustments

49
Q

OCI represents a source of change in the investee company…

A

Net assets that is recognized under the equity method

50
Q

Equity method: reporting investee losses

A

Investor recognizes appropriate percentage of each loss

And reduces carrying amount of investment account

51
Q

Loss in value of an investment which is other than temporary

A

Shall be recognized

52
Q

Evidence of loss of value on investment account 2

A

1 absence of ability to recover carrying amount of investment

2 inability of investee to sustain earnings capacity to justify
Carrying amount

53
Q

What can lead to permanent losses in fair value? 4 things

A

1 loss of major customers
2 changes in economic conditions
3 loss of significant patent or legal right
4 damage to company’s reputation

54
Q

When a permanent decline in an equity method investment’s value occurs, the investor must…

A

Recognize an impairment loss and reduce asset to fair value

55
Q

Under the equity method, a temporary drop in FMV is…

A

Simply ignored

56
Q

When an investment account is reduced to zero

A

Investor should discontinue using equity method rather than
establish negative balance

The investment retains a zero balance until subsequent investee
Profits eliminate all unrecognized losses

57
Q

Investment reduced to zero: once the original cost of investment has been eliminated…

A

No additional losses can accrue to investor (since entire cost has
been written off)

58
Q

Reporting sale of equity method investment

A

1 continue to use equity method as long as still own over 20%

2 if sold significant amount to own under 20%, use fair value
Method

59
Q

Switch from equity method to fair value method

A

Remaining book value becomes new cost figure for investment

No retrospective adjustment is made to financial statements

60
Q

Because of the relationship between investor and investee, the seller of the goods is said to retain partial stake in the inventory for…

A

As long as buyer holds it

61
Q

The earning process is not considered complete at time of…

A

Original sale

62
Q

Income recognition must be deferred until…

A

Substantial accomplishment is proven

63
Q

Equity method: reporting related profit on intra entity transfers

A

Delayed until buyer’s ultimate disposition of goods

When inventory is eventually consumed within operations or
Resold to an unrelated party, original sale is culminated and
Gross profit is fully recognized

64
Q

Downstream transfers

A

Investor’s sale of an item to the investee

65
Q

Upstream sale

A

Sale that investee makes to investor

66
Q

2 types of intra entity sales

A

1 downstream transfers

2 upstream sales

67
Q

Direction of intra-entity sales does not affect…

A

Reported equity method balances for investments when significant
Influence exists

68
Q

Direction of intra entity sales has definite consequences when…

A

Financial control requires consolidation of financial statements

69
Q

Unlike consolidated financial statements, the equity method reports upstream sales of inventory…

A

In the same manner as downstream sales

70
Q

Under the equity method for investments with significant influence, the direction of the sale between investor and investee (upstream or downstream) has…

A

No effect on final amounts reported in financial statements

71
Q

The investor’s own inventory account contains unrealized profit in…

A

An upstream sale

72
Q

In upstream sales, what is the traditional approach for deferring unrealized gross profits?

A

Decreasing the investment

73
Q

Deferred unrealized gross profit is adjusted solely through which account?

A

Adjusted solely Through the equity income account

74
Q

4 disclosures of related party transactions

A

1 nature of relationship
2 description of transactions
3 dollar amounts of transactions
4 amounts due to or from any related parties at year end

75
Q

Attention to financial reporting effects of business decisions arises because measurements of financial performance affect the following 4 items

A

1 firm’s ability to raise capital
2 managerial compensation
3 ability to meet debt covenants and future interest rates
4 manager’s reputations

76
Q

3 main reasons equity method is criticized

A

1 emphasizing 20-50 percent of voting stock in determining
Significant influence vs. Control
2 allowing off-balance sheet financing
3 potentially bias ing performance ratios

77
Q

Equity method: off balance sheet financing 3 things

A

1 By keeping ownership below 50%, company can keep assets
And liabilities off balance sheet
2 Leads to higher rates of return for assets and sales and lower
Debt to equity ratios reported in consolidated statements
3 must be disclosed in supplementary info in financial statements

78
Q

Fair value option

A

In 2007, FASB introduced a fair-value option

where entity may Irrevocably elect fair value as initial and subsequent measurement attribute for certain financial assets and liabilities

79
Q

Fair value option is designed to limit…

A

Volatility in earnings that occurs when some financial items are
Measured using cost based attributes and others using fair value

80
Q

Under the 2013 FASB proposal, firms would only be able to use fair value accounting for equity method investments…

A

Held for sale

FAIS 3 (17 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions