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Reading 21:Intercorporate Investments LOS d ~ Q1-5

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

Q2. 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.

Q3. 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)   more 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.

Q4. 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.

Q5. Which of the following methods of accounting for investments will reflect the highest assets and liabilities on a company’s

    balance sheet?

A)   Consolidation method.

B)   Equity method.

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

答案和详解如下:

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

Correct answer is C)

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.

Q2. 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.

Correct answer is C)

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.

Q3. 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)   more 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.

Correct answer is B)

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.

Q4. 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.

Correct answer is A)

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.

Q5. Which of the following methods of accounting for investments will reflect the highest assets and liabilities on a company’s

    balance sheet?

A)   Consolidation method.

B)   Equity method.

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

Correct answer is A)

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

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