Reading 21: Intercorporate Investments-LOS c 习题精选 2010, different, comparing, reported, account

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Session 5: Financial Reporting and Analysis: Intercorporate Investments
Reading 21: Intercorporate Investments

LOS c: Analyze the effects on financial ratios of the different methods used to account for intercorporate investments.

 

 

 

In comparing reported financial results between the equity method and the consolidation method, which of the methods generally produces the highest leverage measures and the lowest return on assets (ROA), respectively?

Highest leverage

Lowest ROA

A) Consolidation method Equity method

B) Equity method Equity method

C) Consolidation method Consolidation method

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The consolidation method results in the highest leverage measures – compared to the equity method, total liabilities are higher and net equity is the same.

The consolidated method results in the lowest ROA – compared to the equity method, net income is the same and total assets are higher.

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When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, leverage measures for a firm using proportionate consolidation will appear:

A) less favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.

B) less favorable than those for a comparable firm using consolidation, and more favorable than those for a comparable firm using the equity method.

C) more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.

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All else being equal, leverage measures for a firm using proportionate consolidation will appear more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. This is because the choice of accounting method will affect the value of the liabilities on the balance sheet, while the level of book equity remains the same.

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When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, net profit margin measures for a firm using proportionate consolidation will appear:

A) less favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.

B) less favorable than those for a comparable firm using consolidation, and more favorable than those for a comparable firm using the equity method.

C) more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.

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All else being equal, net profit margin measures for a firm using proportionate consolidation will appear more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. This is because the choice of accounting method will affect the level of sales, while the level of net income remains the same.

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When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, return on asset measures for a firm using proportionate consolidation will appear:

A) more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.

B) less favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.

C) less favorable than those for a comparable firm using consolidation, and more favorable than those for a comparable firm using the equity method.

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All else being equal, return on asset measures for a firm using proportionate consolidation will appear more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. This is because the choice of accounting method will affect the level of book assets, while the level of net income remains the same.

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Which of the following methods of accounting for investments will reflect the highest assets and liabilities on a company’s balance sheet?

A) Equity method.

B) Both methods result in reporting the same balances for assets and liabilities.

C) Consolidation method.

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The consolidation method will reflect the highest assets and liabilities. The equity method would reflect the lowest.

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Which of the following methods of accounting for investments will reflect the highest net income on a company’s income statement?

A) Both methods report the same net income.

B) Consolidation method.

C) Equity method.

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Both methods will report the same net income.

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A company reports an intercorporate investment using the consolidation method. Which of the following statements is most accurate?

A) The use of the consolidation method by a company will generally report the most favorable results.

B) The use of the consolidation method by a company will generally report the least favorable results.

C) The use of the proportionate consolidation method by a company will generally report the most favorable results.

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The equity method will provide the most favorable results, while the consolidation method will provide the least favorable results.

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Milburne Company purchased 1,000 shares of Marino Co. for $20 per share on January 1. By December 31, shares of Marino were trading at $15 per share in the open market. Marino Co. has 100,000 shares outstanding with a dividend yield of 2% at year end. Milburne plans to hold the shares of Marino for longer-term investment and liquidity purposes. The impact of the Marino holding on the Milburne income statement is:

A) -$4,700.

B) -$5,000.

C) $300.

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These securities are to be classified as available for sale and hence, all unrealized gains and losses are posted to a securities valuation reserve on the balance sheet. Hence, the only income statement impact is the $300 dividend = 0.02 × $15 × 1,000.

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Milburne Company purchased 1,000 shares of Marino Co. for $20 per share on January 1. By December 31, shares of Marino were trading at $15 per share in the open market. Marino Co. has 100,000 shares outstanding with a dividend yield of 2% at year end. Milburne plans to hold the shares of Marino for near-term trading purposes. The impact of the Marino holding on the Milburne income statement is:

A) -$5,000.

B) $300.

C) -$4,700.

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Since these securities are to be classified as trading securities, both the dividend received and the unrealized loss are posted to the income statement. The dividend is computed as 0.02 × $15 × 1,000 = $300 whereas the unrealized loss is $5,000 = ($15 - $20) × 1,000. The net income statement impact is $300 - $5,000 = -$4,700.

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Fiduciary Investors held two portfolios for marketable equity securities:

• $50 million in Portfolio A was accounted for as available-for-sale.

• $50 million in Portfolio B was accounted for as trading securities.

Assume that Fiduciary transferred $10 million in trading securities from Portfolio B into Portfolio A. It was determined that subsequent to the transfer these securities had a market value of $8 million. If no previous write downs were made, Fiduciary must:

A) charge $2 million to the equity section of its balance sheet.

B) charge $2 million to its income statement.

C) do nothing to its income statement or equity section of its balance sheet.

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Reclassifications allow investment managers latitude in transferring investment assets from “trading” to “available-for-sale,” thus realizing losses from the income statement to the equity section of the balance sheet.