Hello,
I have a few questions regarding accounting for equity investment.
Q1: What is the difference between the equity method and the acquisition method (consolidation method) when accounting for an investee?
Here is what I have already known: the equity method recognizes investment as an asset in the parent's balance sheet and the parent recognizes its proportional share of the investee's profit and loss. The consolidation method combines the parent and subsidiary's financial statements and presents it as a single entity.
Q2: How the equity method can be used to manipulate financial statements?
I did some research before, some websites say that the parent company's profit can be inflated if it uses the equity method which allows the parent to share the profit with the investee, which increases the parent's profit and hence increases some financial ratios, such as ROE and ROA.
Could you share more light on those questions?
Thanks
Adam
I have a few questions regarding accounting for equity investment.
Q1: What is the difference between the equity method and the acquisition method (consolidation method) when accounting for an investee?
Here is what I have already known: the equity method recognizes investment as an asset in the parent's balance sheet and the parent recognizes its proportional share of the investee's profit and loss. The consolidation method combines the parent and subsidiary's financial statements and presents it as a single entity.
Q2: How the equity method can be used to manipulate financial statements?
I did some research before, some websites say that the parent company's profit can be inflated if it uses the equity method which allows the parent to share the profit with the investee, which increases the parent's profit and hence increases some financial ratios, such as ROE and ROA.
Could you share more light on those questions?
Thanks
Adam