If the Cost Method Is Used to Account for an Investment

question 16

Multiple Choice

If the cost method is used to account for an investment in common stock

• A) it is presumed that the investor has significant influence on the investee.
• B) the earning of net income by the investee is considered a proper basis for recognition of income by the investor.
• C) net income of the investee is not considered earned by the investor until dividends are declared by the investee.
• D) the investment account may be at times greater than the acquisition cost.

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Definitions:

Gross Working Capital

The total amount of a company's current assets, which are assets likely to be converted into cash within one year.

Net Working Capital

The difference between a company's current assets and current liabilities, indicating the short-term financial health and operational efficiency of the business.

Short-Term Debt

Financial obligations that are due for repayment within one year.

Current Liabilities

Obligations expected to require cash in less than one year, usually payables and accruals.