When the Cost Method Is Used to Account for a Stock

question 42

Multiple Choice

When the cost method is used to account for a stock investment the carrying value of the investment is affected by

• A) the earnings of the investee.
• B) the dividend distributions of the investee.
• C) the earnings and dividend distributions of the investee.
• D) neither the earnings nor the dividends of the investee.

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Definitions:

Changes in Equity

Movements in the value of an entity's equity over a period due to profits, losses, contributions from or distributions to owners.

Retained Earnings

The portion of net income that is not distributed to shareholders as dividends but retained by the company for reinvestment.

Dividends Declared

The announcement by a company's board of directors of the intention to pay a dividend to shareholders, indicating the amount and payment date.

Financial Position

A snapshot of a company's assets, liabilities, and equity at a specific point in time, illustrating its economic standing.