Both Consolidation and Equity Method Accounting Assume a Dollar Earned

question 10

Multiple Choice

Both consolidation and equity method accounting assume a dollar earned by a subsidiary is equivalent to a dollar earned for a parent, even if not received in cash. The limitations of this assumption of dollar-for-dollar equivalence include which of the following?
I. Dividends restricted by law and loan covenants.
II. Risks due to political and economic factors.
III. Tax liabilities from remittance of earnings.
IV. Minority interests that limit parent's discretion.

• A) None of the above
• B) II
• C) I and III
• D) I, II, III and IV

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Definitions:

Direct Method

A way of presenting a cash flow statement where major classes of gross cash receipts and payments are disclosed, providing insight into the sources and uses of cash.

Cash Paid

The total amount of cash disbursed by a company for various purposes, including operating expenses, investing activities, and financing activities.

Insurance

A contractual arrangement in which one party agrees to compensate another for specified loss, damage, illness, or death in exchange for a premium.

Cash Flow

The net amount of cash and cash-equivalents being transferred into and out of a business, reflecting its operational, investing, and financing activities.