A Company Should Always Use the Equity Method to Account

question 98

Multiple Choice

A company should always use the equity method to account for an investment if:

• A) it has the ability to exercise significant influence over the operating policies of the investee.
• B) it owns 30% of another company's stock.
• C) it has a controlling interest (more than 50%) of another company's stock.
• D) the investment was made primarily to earn a return on excess cash.
• E) it does not have the ability to exercise significant influence over the operating policies of the investee.

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Definitions:

Marginal Cost

The cost of producing one additional unit of a good or service.

Average Total Cost

The total cost of production divided by the quantity produced, indicating the cost effectiveness of producing goods.

Marginal Cost Increases

The rise in the cost to produce one additional unit of a good or service.

Marginal Product

The additional output that is produced as a result of adding one more unit of a specific input, holding all other inputs constant.