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Advanced Accounting 10th Edition by Thomas Schaefer, Joe Ben Hoyle, Timothy Doupnik
Edition 10ISBN: 978-1260575910Advanced Accounting 10th Edition by Thomas Schaefer, Joe Ben Hoyle, Timothy Doupnik
Edition 10ISBN: 978-1260575910 Exercise 40
DID THE COST METHOD INVITE EARNINGS MANIPULATION
Prior to GAAP for equity method investments, firms often used the cost method to account for their unconsolidated investments in common stock regardless of the presence of significant influence.The cost method employed the cash basis of income recognition.When the investee declared a dividend, the investor recorded "dividend income." The investment account typically remained at its original cost-hence the term cost method.
Many firms' compensation plans reward managers based on reported annual income.How might the cost method of accounting for significant investments have resulted in unintended wealth transfers from owners to managers Do the equity or fair-value methods provide similar incentives
Prior to GAAP for equity method investments, firms often used the cost method to account for their unconsolidated investments in common stock regardless of the presence of significant influence.The cost method employed the cash basis of income recognition.When the investee declared a dividend, the investor recorded "dividend income." The investment account typically remained at its original cost-hence the term cost method.
Many firms' compensation plans reward managers based on reported annual income.How might the cost method of accounting for significant investments have resulted in unintended wealth transfers from owners to managers Do the equity or fair-value methods provide similar incentives
Explanation
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The cost method of accounting for invest...
Advanced Accounting 10th Edition by Thomas Schaefer, Joe Ben Hoyle, Timothy Doupnik
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