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Basic Question 5 of 10
Western Manufacturing Company owns 40% of the outstanding common stock of Eastern Supply Company. During 2011, Western received a $50 million cash dividend from Eastern. What effect did this dividend have on Western's 2011 financial statements?
B. Net income increased.
C. The investment account decreased.
A. Total assets decreased.
B. Net income increased.
C. The investment account decreased.
User Contributed Comments 8
| User | Comment |
|---|---|
| YeahMe | Isn't that investment account is part of total assets? please confirm, anyone |
| mtnn | yes but the investee must have paid the 60% to outside entities. |
| Nancie | For Western, their cash increased from the dividend received, but investment account decreased at the same time, so net effect for total asset is zero. |
| danlan2 | Good comment, Nancie. Investment account decreased, but the investment revenue did not, investment revenue depends on the net income only, not the dividend. |
| vi2009 | Cool danlan2, that is good clarification for me tq |
| quanttrader | in equity method, only net income is recorded as investment revenue; div is deducted from the investment account. |
| Teeto | dividend increased cash account and decreased the investment account so total assets did not change. One may reason about dividend through an extreme case - the associate ceases to exists and repays all equity in the form of dividend to the shareholders. That would bring some cash out of the associate but then there will be no investment. |
| birdperson | @nancie nailed it. |
I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach
Learning Outcome Statements
describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities;
distinguish between IFRS and US GAAP in their classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities;
analyze how different methods used to account for intercorporate investments affect financial statements and ratios.
CFA® 2025 Level II Curriculum, Volume 2, Module 10.