How do you identify if a company uses equity method of accounting by looking at their...

How do you identify if a company uses equity method of accounting by looking at their financial statements? Please provide an example if possible.

How do you identify how a company accounts for available for sale securities and trading securities if any.

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Expert Solution

Equity method are used for strategic investments in which company have significant influence. It is generally used in Accounting for associates. There are many factors that tells us wether equity method is used or not. When in balance sheet if the value of investment changes every year that means it is accounted using equity method.

Actually in equity method we increase the investment by the amount of income representing our share in associate earned by associate. So if associate earns $100,000 in a year and our holding is 20%, we increase our investment in associate by $20,000 if it is done so then we can identify that it is equity method. In cost method we dont do this. Further in equity method we also reduce the investment balance by the amount of dividend we received. So in balance sheet if there is such change in value of Investment in associate we can identify equity method. Further notes on account also breif the details of accounting method used for recording so from there also we can identify. If in income statement the company has recorded the revenue to the extent of shares of investment then also it can be identified. In the above example if we record the earning of $20,000 of associate in our income statement then we can identify it is an equity method.

B) Available for sale or teading investment is a short term investment which are intended to be sold within 1 year or so, to earn some profit on trading and dividend income. If there is a short term investment it can be identified as Available for sale and trading investment hence it will appear in Current investment. So looking into current investment we can identify this trading investment and available for sale.

ekkarill92 answered 1 year ago

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