Equity Income

CFA Level II
#1

Does the equity income in equity method count into Cash Flow?

#2

Yes indirectly. Higher income reported of investor reported under equity method will increase Operating CF.

#3

Yeah, because under the equity method, you add the subsidiaries pro-rata share of income into your own income statements, thereby affecting your net income and thereby affecting OCF.

#4

But is there any real CASH flowing from investee to investor company??

#5

Yes, you are getting the pro-rata share of the subsidiary’s net income.

#6

The dividends received does not go to Income statement, but affects CF, right?

#7

only cash you receive is from your pro-rata share of divs. if the company does not pay divs, then no you will not receive any cash

#8

@lzhao No, the dividends do not go into the income statement. Instead they reduce the investment account on the balance sheet.

#9

I know, but it will increase your cash account, so it affects CF statement, right?

#10

yes, your cash increases and the reduce the investment account

#11

Are you referring to equity income from affiliates? These are backed out when calculating operating cash flow using the indirect method.

#12

Is it considered a cash flow from Investing?

#13

Since when does net income in affiliates affect cash flow? Agree with MrGrey. Your investment paying dividends will be a cash flow from operations under US GAAP or operating/investing under IFRS

#14

i didn’t think investments accounted by the equity method affect cash flows other than with dividends. either most of you are wrong or i’m really fucked.

#15

supersharpshooter Wrote: ------------------------------------------------------- > i didn’t think investments accounted by the equity > method affect cash flows other than with > dividends. either most of you are wrong or i’m > really fucked. You are right.

#16

nice, thanks bpdulog - one less thing i need to learn

#17

They do affect Cash flows, read it today and it’s also explained on one of the sample exams

#18

Actually sorry, it wasn’t explained on any of the sample exams but I did read it 2day. The net income received is reflected under CFO. Cause I also remember reading that the Long term debt acquired DOES NOT affect the cash flow stmt. It says the investment, in the company, is classified as an outflow from CFI

#19

investment as equity method?

#20

Yes I could see CFI as an outflow - you will physically pay cash for investment in another firm’s common stock I can see CFO as dividends received; I can’t see net income as being a cash flow. Retained earnings are just retained earnings, they don’t mean anything until you sell or receive dividends from the company