Financial Reporting of Investments in Corporate Equity Securities Quiz

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5 Questions

What is the primary factor that determines the financial statement reporting for an investment in corporate equity securities?

The degree of influence the investor has over the investee

Which of the following is NOT one of the approaches recognized by GAAP for the financial reporting of investments in corporate equity securities?

The market value method

What factor typically indicates the degree of influence an investor has over an investee?

The relative size of ownership

What is the relationship between voting power and ownership of equity shares, as described in the text?

Voting power typically accompanies ownership of equity shares

What factor determines the level of influence an investor can have over an investee?

The relative size of ownership

Study Notes

Financial Reporting of Investments in Corporate Equity Securities

  • GAAP recognizes three approaches to financial reporting of investments in corporate equity securities:
    • Fair-value method
    • Cost method for equity securities without readily determinable fair values
    • Consolidation of financial statements
    • Equity method
  • Financial statement reporting depends on the degree of influence the investor has over the investee
  • Degree of influence is typically indicated by the relative size of ownership
  • Influence increases with the relative size of ownership due to accompanying voting power
  • Resulting influence can be:
    • Very little
    • Significant amount
    • Complete control

Test your knowledge on the different approaches to financial reporting of investments in corporate equity securities based on Generally Accepted Accounting Principles (GAAP). Understand the fair-value method, cost method, consolidation of financial statements, and equity method.

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