Question #10
Reading: Reading 8 Intercorporate Investments
PDF File: Reading 8 Intercorporate Investments.pdf
Page: 5
Status: Correct
Correct Answer: A
Question
When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, return on asset measures for a firm using the acquisition method will appear:
Answer Choices:
A. less favorable than those for a comparable firm using the equity method
B. more favorable than those for a comparable firm using the equity method
C. same as for a comparable firm using the equity method
Explanation
All else being equal, return on asset measures for a firm using consolidation will appear
less favorable than those for a comparable firm using the equity method. This is because
the choice of accounting method will affect the book value of assets, while the level of net
income remains the same.