A Company Has Been Using the Equity Method to Account

question 37

Multiple Choice

A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant influence. Which of the following statements is true?

• A) A cumulative effect change in accounting principle must occur.
• B) A prospective change in accounting principle must occur.
• C) A retrospective change in accounting principle must occur.
• D) The investor will not receive future dividends from the investee.
• E) Future dividends will continue to reduce the investment account.

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Definitions:

Absorption Costing Income Statement

An income statement format that includes all manufacturing costs (both fixed and variable) in the calculation of the cost of goods sold.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including material and labor expenses.

Contribution Margin

The difference between the sales revenue of a product and the variable costs associated with producing it, used to cover fixed costs and contribute to profit.

Variable Costing

An accounting method that only includes variable production costs—costs that change with production volume—in the cost of goods sold.