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Equity Method definitions Flashcards

Equity Method definitions
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  • Equity Method
    Accounting approach for investments with significant influence, typically 20-50% ownership, reflecting investor's share of investee's net income and dividends.
  • Significant Influence
    Ability to affect decisions of another company, usually indicated by 20-50% ownership and board representation.
  • Controlling Interest
    Ownership exceeding 50%, granting power to direct financial and operating policies, requiring consolidation accounting.
  • Cost Method
    Investment accounting for holdings with less than 20% ownership, where dividends are recognized as income.
  • Ownership Percentage
    Proportion of shares held in an investee, used to determine share of net income, losses, and dividends under the equity method.
  • Equity Method Investment Account
    Asset account tracking the carrying value of an investment, adjusted for investor's share of net income, losses, and dividends.
  • Investment Income
    Proportional share of investee's net income recognized by the investor, increasing the investment account.
  • Investment Loss
    Proportional share of investee's net loss recognized by the investor, decreasing the investment account.
  • Dividends Received
    Distributions from the investee that reduce the carrying value of the investment, not recognized as income under the equity method.
  • Book Value
    Carrying amount of the investment on the investor's balance sheet, reflecting purchase cost plus share of net income minus losses and dividends.
  • Gain on Sale
    Excess of selling price over book value when disposing of an equity method investment, reported on the income statement.
  • Loss on Sale
    Shortfall when selling price is less than book value of an equity method investment, reported on the income statement.
  • T Account
    Visual tool used to track increases and decreases in the equity method investment account, similar to retained earnings tracking.
  • Retained Earnings Analogy
    Comparison of the equity method investment account to retained earnings, as both are adjusted for net income and dividends.
  • Consolidation Accounting
    Method used when an investor has controlling interest, combining financial statements of parent and subsidiary.