Question

1. What are the various methods used to account for investments? When is each appropriate? Explain how each method affects a company’s balance sheet and income statement and the appropriate uses for each method.

Answer 1

As per the given Question

Ans: The cost and equity methods are main methods of accounting which are being used by companies to account for investments. It is mainly done in by one company for another company as well. Generally, the cost method is used when the investment doesn't result in a significant amount of control or influence in the company that's being invested in while the equity method is used in larger or more influential investments.

Cost Method - The method is used when making a passive and long-term investments are required and it doesn't result in influence over the existing company. The cost method should be used when the investment results in an ownership stake of less than 20%. But this is not a set-in-stone rule because here influence is the more important factor rather than others.
Equity method - In this method, accounting should generally be used when an investment results in a 20% to 50% stake in another company unless it can be clearly shown that the investment doesn't result in a significant amount of influence or control. The methods that influence monetary record and Income articulations reports the working outcomes, for example,deals and costs, thus permit speculators to assess the organization's execution and consider how future money streams may look.

In resulting periods, the financial specialist perceives its share of the benefits and misfortunes of the investee, after intra-element benefits and misfortunes have been deducted. Additionally, if the investee issues profits to the financial specialist, the profits are deducted from the speculator's interest in the investee. Accounting reports introduce vital data about the money related quality of the organization. They permit speculators to ascertain days of Working Capital, which indicates how effortlessly an organization can deal with changes in income while remaining above water. Organizations ought to have no less than 30 days of Working Capital, and monetarily solid organizations have over 180 days. Accounting reports can likewise distinguish different patterns.

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