Question

In: Accounting

Although the equity method is a generally accepted accounting principle (GAAP), recognition of equity income has...

Although the equity method is a generally accepted accounting principle (GAAP), recognition of equity income has been criticized. What theoretical problems can opponents of the equity method identify? What managerial incentives exist that could influence a firm’s percentage ownership interest in another

Solutions

Expert Solution

Answer:-

●The equity method has been criticized because it allows the investor to recognize income that may not be received in any usable form during the foreseeable future.

●Income is being accrued based on the investee's reported earnings, not on the investor's share of investee dividends.

●Frequently, equity income will exceed the investor's share of investee cash dividends with no assurance that the difference will ever be forthcoming.

●●Many companies have contractual provisions (e.g., debt covenants, managerial compensation contracts) based on ratios in the main body of the financial statements.

●Relative to consolidation, a firm employing the equity method will report smaller values for assets and liabilities.

●Consequently, higher rates of return for its assets and sales, as well as lower debt-to-equity ratios may result.

●Meeting such contractual provisions of may provide managers incentives to maintain technical eligibility for the equity method rather than full consolidation.

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

Although the equity method is a generally accepted accounting principle (GAAP), recognition of equity income has...
Although the equity method is a generally accepted accounting principle (GAAP), recognition of equity income has many critics. For this discussion, use your knowledge of the equity method of accounting for investments to complete the following: What problems could opponents of the equity method identify? Note that some research may be necessary to answer this question. Which managerial incentives could influence a firm's percentage ownership interest in another firm?
It is standard accounting procedure, or a generally accepted accounting principle (GAAP), to make a journal...
It is standard accounting procedure, or a generally accepted accounting principle (GAAP), to make a journal entry to remove the current year's principle from the long-term liabilities. This entry reduces the long-term liabilities and increases the current liabilities. Your company has a bank loan that requires a current ratio of 1.5 times. The owner has asked you, the bookkeeper, not to make the adjusting entry that would take the current portion from the long-term liabilities. If you make the adjusting...
What are the differences between Generally Accepted Accounting Principles (GAAP) and IFRS concerning recognition of accounts...
What are the differences between Generally Accepted Accounting Principles (GAAP) and IFRS concerning recognition of accounts receivables?
Generally Accepted Accounting Principles (GAAP) allow companies to choose any inventory costing method. GAAP also requires...
Generally Accepted Accounting Principles (GAAP) allow companies to choose any inventory costing method. GAAP also requires that companies consistently stick to one method. However, companies do switch back and forth from FIFO to LIFO to Weighted Average and vice versa. International Financial Reporting Standards (IFRS) value inventory in a similar method as GAAP. Companies can use FIFO or average costs, but LIFO is not an option. Access and review the following article from the CSU-Global Library: Krishnan, S. (2012). Inventory Valuation...
Prepare a chronology of generally accepted accounting principles (US, GAAP).
Prepare a chronology of generally accepted accounting principles (US, GAAP).
The Financial Accounting Standards Board is the primary source of generally accepted accounting principles (GAAP) for...
The Financial Accounting Standards Board is the primary source of generally accepted accounting principles (GAAP) for all health care organizations. Do you agree with this statement? Why or why not?
The ____ basis of accounting is not a generally accepted method of determining profit for a...
The ____ basis of accounting is not a generally accepted method of determining profit for a businesses that have significant credit transactions.
Generally accepted accounting principles (GAAP) fail to capture all the transactions that are relevant for the...
Generally accepted accounting principles (GAAP) fail to capture all the transactions that are relevant for the valuation of a firm. Discuss the main areas where GAAP is deficient for the purposes of valuation.
Describe the purpose of U.S. generally accepted accounting principles (U.S. GAAP) and the benefits that these...
Describe the purpose of U.S. generally accepted accounting principles (U.S. GAAP) and the benefits that these rules provide.
1. Accounting is subject to the rules of Generally Accepted Accounting Principles (GAAP), which sets provisions...
1. Accounting is subject to the rules of Generally Accepted Accounting Principles (GAAP), which sets provisions for how accounting information is presented. Sometimes, GAAP requires actions that affect reported financial results, think revemue recognition, reserves for doubtful accounts, alternative depreciation methods, accounting for taxes. Do accounting profits provide a good measure of business performance? Why or why not? 2. The goal of financial management is to maximize the wealth of the shareholders. Do you think management should focus more on...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT