Reading 22- LOS g～ Q1－4 investment, statements, following, company, reports

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

A)   The use of the proportionate 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 equity method by a company will generally report the least favorable results.

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

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

A)   Consolidation method.

B)   Equity method.

C)   All three methods report the same net income.

D)   Proportionate consolidation method.

3.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)   Consolidation method.

C)   Proportionate consolidation method.

D)   All three methods result in reporting the same balances for assets and liabilities.

4.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)   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.

D)   more 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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1.A company reports an intercorporate investment using the consolidation method. Which of the following statements is most accurate?

A)   The use of the proportionate 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 equity method by a company will generally report the least favorable results.

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

The correct answer was B)

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

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

A)   Consolidation method.

B)   Equity method.

C)   All three methods report the same net income.

D)   Proportionate consolidation method.

The correct answer was C)

All three methods will report the same net income.

3.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)   Consolidation method.

C)   Proportionate consolidation method.

D)   All three methods result in reporting the same balances for assets and liabilities.

The correct answer was B)

The consolidation method will reflect the highest assets and liabilities, the equity method the lowest, and the proportionate consolidation method somewhere in between.

4.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)   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.

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

The correct answer was C)

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.