If 10% of the Common Stock of an Investee Company

question 173

Multiple Choice

If 10% of the common stock of an investee company is purchased as a long-term investment the appropriate method of accounting for the investment is

• A) the cost method.
• B) the equity method.
• C) the preparation of consolidated financial statements.
• D) determined by agreement with whomever owns the remaining 90% of the stock.

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Definitions:

Free Cash Flow

The amount of cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.

Capital Expenditures

Long-term investments in physical assets such as property, plants, and equipment.

Net Cash

The amount of cash available after accounting for cash inflows and outflows.

Net Income

The total revenue minus total expenses, indicating the profit earned by a business during a specific period.