Compared to the Equity Method, the Cost Method of Accounting

question 65

Multiple Choice

Compared to the equity method, the cost method of accounting for an investment in a profitable company results in:

• A) lower earnings, and lower cash flows.
• B) higher earnings, and higher cash flows.
• C) lower earnings, and no effect on cash flows.
• D) higher earnings, and no effect on cash flows.
• Guido Inc. buys 2,000 shares of Weiner Company for $30 per share on January 1, 2006. At the end of 2006, Weiner shares are trading at $33 per share. Weiner has a total of 200,000 shares outstanding and reported net income of $3,000,000 and paid dividends of $1,000,000 for fiscal 2006.

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Definitions:

Monocline

A geological fold where all strata are inclined in the same direction, forming a step-like structure.

Anticline

A type of fold in sedimentary strata that appears as an arch-like structure, with the oldest layers at its core.

Strike-Slip Fault

A type of fault where the movement of the Earth's crust is primarily horizontal, parallel to the fault line.

Thrust Fault

A type of fault where rock strata are pushed upwards on one side due to compressional forces.