So my question has to do with Reading 21 – Intercorporate Investments - Investment in Associates Here’s what I understand: Under equity method: a) Proportionate share of earnings increase investment account on balance sheet and income statement. b) dividends received reduce investment account on balance sheet. c) dividends are not recognized in the investor’s income statement. If b and c are both true, where are the dividends being received by the investor being acounted for in the financial statements?
cash flows under the equity method are the dividends received from the investee. The undistributed earnings (difference in equity income from investee and the dividends received) are subtracted from net income when calculating cash flow from operations using the indirect method.
eeek… :s i’m not dealing with cash flows quite yet. I think I figured out the solution to my problem. The proportionate share of the investee’s earnings are included in the investor’s income statement. This is the value pre- giving out dividends. Therefore, that is where the dividends that would otherwise ber eceived by the investor is account for in financial statements. Dividends received by investor reduce the investment account in the balance sheet because these dividends are no longer contribute to the book value of the company.
it goes to cash account I guess. So in the asset side: Cash account + dividend received Investment account - dividend received and no impact on income statement, So the balance sheet is balancing