Why is the current ratio highest under the equity method, as opposed to consolidation and proportionate consolidation? I thought that with influential investments, cash goes down by the amount of the investment and the offsetting entry is ‘investment account’ which is a non-current asset?
Current ratio is highest because you are not including the the sub’s assets and liabilities when using the consolidation methods.
usually a corporation will have current ratio greater than 1. I think so because current assets should be greater than current liabilities. If on consolidation the numerator is not exceeding by a huge multiple (as compared to the increase in denominator) then the current ratio will be lower. What you stated about investment account is right.
Technically, a good question on this would give you the pre investment ratios for each firm so you can see composition of accounts to know if the ratio for the investment would skew the calculation.