Reading 21 question

CFA Level II
#1

Can you answer this without financial information? Net Income will most likely be: a) highest if Comp X is deemed to have control of Comp Y b) highest if Comp X is deemed to have significant influence over Comp Y c) independent of the accounting method used for the investment in Comp Y

#2

C? NI is same

#3

b

#4

C Net Income doesn’t change

#5

irrespective of method used - NI is the same… so C is the right choice.

#6

OK, I just wanted to see if that was something you can remember, or if I had to calc each scenario. Thanks a lot. Oh yeah C is correct.

#7

gosh I am starting to lose it… I was thinking equity but thats cuz the ratios usually are better under that method, not NI. Ugh.

#8

equity also I believe is the same, isn’t it?

#9

cpk123 Wrote: ------------------------------------------------------- > equity also I believe is the same, isn’t it? Yup.

#10

thanks quant – just thought I lost it…

#11

FYI - ROE is the Same under all methods (equity, prop consolidation, consolidation) too. ROE/NI/Equity - Same, remember that!

#12

Sales also, correct?

#13

Sales - is a no. In Consolidation method -> full sales of sub is recognized. In Prop Consolidation -> pro-rata sales.

#14

no. Sales will be different for all three of those listed.

#15

Just real quick because i went brain dead for a second here. If you have 2 companies merging using prop consolidation and consolidation NI is 1,000 and 500 Under prop consolidation the NI will be 1,500? I know under equity NI would def be 1,500 and under consolidation the NI will be 1,500.