Application of the Cost Model to the Investment One Company

question 54

Multiple Choice

Application of the cost model to the investment one company makes in another entity's shares is straightforward and includes all of the following EXCEPT

• A) recognize the cost of the investment at the fair value of shares acquired.
• B) unless impaired, report the investment at its fair value at each balance sheet date.
• C) recognize dividend income when the entity has a claim to the dividend.
• D) when the shares are disposed of, derecognize them and report a gain or loss on disposal in net income.

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Definitions:

Indirect Method

A method of computing the net cash provided by operating activities that starts with net income and adjusts it to a cash basis. It is also known as the reconciliation method.

Inventory

Raw materials, work-in-process, and finished goods that a company holds with the intent to sell or use in production.

Wages Payable

An account that records the amounts owed to employees for work performed that have not yet been paid.

Cash Flow

The total sum of cash and cash-like assets moving in and out of a company.