Page 581 - Accounting Principles (A Business Perspective)

14. Stock investments

consolidated statements reflect the financial position and results of operations of a single economic
enterprise.
Consolidated statement work sheet An informal record on which elimination entries are made to show
account balances as if the parent and its subsidiaries were a single economic enterprise.
Cost method A method of accounting for stock investments in which the investor company does not adjust
the investment account balance for its share of the investee's reported income, losses, and dividends.
Dividends received are credited to Dividends Revenue.
Dividend yield on common stock ratio Equal to dividend per share of common stock divided by the
current market price per share. Investors use this ratio to compare stocks.
Elimination entries Entries made on a consolidated statement work sheet to remove certain intercompany
items and transactions. Elimination entries allow the presentation of all account balances as if the parent and
its subsidiaries were a single economic enterprise.
Equity method A method of accounting for stock investments where the investment account is adjusted
periodically for the investor company's share of the investee's income, losses, and dividends as they are
reported by the investee.
Goodwill An intangible value attached to a business primarily due to above-average earnings prospects.
Intercompany transactions Financial transactions involving a parent and one of its subsidiaries or
between two of the subsidiaries.
Investee A company that has 20 per cent to 50 per cent of its stock purchased by another company (the
investor) as a long-term investment.
Investor A company that purchases 20 per cent to 50 per cent of another company (the investee) as a long-
term investment.
Marketable equity securities Readily saleable common and preferred stocks of other companies.
Minority interest The claim or interest of the stockholders who own less than 50 per cent of a subsidiary's
outstanding voting common stock. The minority stockholders have an interest in the subsidiary's net assets
and share the subsidiary's earnings with the parent company.
Parent company A corporation that owns more than 50 per cent of the outstanding voting common stock
of another corporation.
Payout ratio on common stock Calculated by dividing dividend per share of common stock by earnings
per share (EPS). The ratio indicates whether a company pays out a large percentage of earnings as dividends
or reinvests most of its earnings.
Subsidiary company A corporation acquired and controlled by a parent corporation; control is established
by ownership of more than 50 per cent of the subsidiary's outstanding voting common stock.
Trading securities Securities bought principally for sale in the near term.
Self-test
True-false

Indicate whether each of the following statements is true or false.
Under the cost method, the investment account is adjusted when dividends are received.
The cost method should be used when a corporation makes a long-term investment of less than 20 per cent, and
there is no significant control.
In a stock split, the investor does not recognize revenue, but reduces the cost per share of stock.
Trading securities and available-for-sale securities should be grouped separately in applying the fair market
value rules.

When making elimination entries, the entries are made only on the consolidated statements work sheet and not
on the accounting records of the parent and subsidiary.
Multiple-choice
Select the best answer for each of the following questions.

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