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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.

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