The Equity Method of Accounting for an Investment in the Common

question 69

Multiple Choice

The equity method of accounting for an investment in the common stock of another company should be used when the investment

• A) is composed of common stock and it is the investor's intent to vote the common stock.
• B) ensures a source of supply such as raw materials.
• C) enables the investor to exercise significant influence over the investee.
• D) gives the investor voting control over the investee.

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Definitions:

Variable Cost

A type of cost that varies with production volume, increasing as production increases and decreasing as production decreases.

Carrying Cost

Expenses incurred by holding inventory or assets over a period, including storage, insurance, and opportunity costs.

Present Value

The present value of an amount of money or series of payments to be received in the future, calculated using a particular interest rate.

Credit Policy Change

Adjustments made to the guidelines that govern the extension of credit to customers, affecting terms of payment and eligibility.