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Equity Method Example

The Equity Method Example is Subject to Manipulation

The equity method applies in cases where the company owns between twenty to fifty percent of another company. In this case, the investing company must record a given proportion of the profits and losses of another company. The fact that it is very difficult to apply involves a lengthy process and involves a lot of data, thus making it more subjective and providing for instances of poor judgments are errors. Get legit paper writing services now!

Equity Method Example

It takes a lot of time to review, compare and obtain the figures between the subsidiary and the parent company. The slight changes in the data impact the correctness of the equity method, thus making it easier to manipulate (Carleton et al., 2018). This is because the financial information must be comparable and accurate to obtain the required value of earning for the parent company.

The management can manipulate both dividends and the percentage of ownership of a subsidiary. The financial information is not consolidated into the parent company’s financial information. To detect the manipulation, the readers of the financial statements should review disclosures and note with the inclusion of the parent company’s financial statements. Some of the errors may be sheltered in the management discussion, which readers ought to consider.

For example, the current earnings can be exaggerated in the income statement and the inflation of the gains and revenues. The current period’s expenses can also be deflated to report higher earnings. The cash flows can also be manipulated to seem higher than they acutely are (Carleton et al., 2018). This is because higher cash flows indicate creditworthiness and thus leading to lower interest rates. In general, dividends reduce the value of investments, leading to a lower dividend income. The dividends are often not reported back to the parent companies.

Equity Method Example

Equity Method Example Reference

Carleton, P. R., & Porter, J. D. (2018). A comparative analysis of the challenges in measuring transit equity: definitions, interpretations, and limitations. Journal of transport geography72, 64-75.

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