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Monday, February 15, 2010

CPA Review: Methods of Accounting for Investments



Roger Philipp, CPA discusses the three methods of accounting for investments. This brief excerpt from the FAR section of the Roger CPA Review Online and USB course introduces the concepts of Cost Method or Marketable Securities, the Equity method and Consolidation. The excerpted text below comes straight from Roger's Financial Accounting and Reporting textbook.



An investor may acquire equity securities (common or preferred stock) debt securities (bonds) and derivatives (stock rights) in other companies. When a company acquires common stock, we need to determine the appropriate method of accounting for the investment, and this will depend primarily upon the amount of stock that is owned by the investor.



0-20%: Cost Method or Marketable Securities
  • The implication is that no influence over the investee company exists.

  • If the security isn't marketable, use the cost method.


  • 20-50%: Equity Method (One-line consolidation)
  • The implication is that the investor has significant voting influence over the investee.


  • 50% or more: Consolidation
  • The implication is that the investor has control over the investee.

  • Members of the investor company constitute a majority of the board of directors of the investee.


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