In the analysis of profitability,if equity earnings are substantial,it is advisable to:
A)consider them as extraordinary.
B)consider them as nonrecurring.
C)investigate the earning power of the parent outside of the related investing activities.
D)recompute the debt ratio and times interest earned to remove the impact of equity earnings.
E)use the DuPont method to lessen the impact of equity earnings.

Question

Quizplus · Accepted Answer

Equity earnings are related to the investing activities of the parent company, which may not reflect its true earning power. Therefore, it is crucial to investigate the overall earning power of the parent outside of the related investing activities to understand the true profitability of the company. Options A and B are not suitable because equity earnings may not be extraordinary or nonrecurring. Option D is also not appropriate as equity earnings are already incorporated into the debt ratio and times interest earned calculations. Option E is not applicable as the DuPont method does not address the issue of equity earnings.

In the Analysis of Profitability,if Equity Earnings Are Substantial,it Is