- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 10. Intercorporate Investments
- Subject 1. Basic Corporate Investment Categories
CFA Practice Question
Which of the following statements is untrue regarding investments in equity securities?
B. If the investor owns 20-50 percent of the outstanding voting common stock, the equity method always is required.
C. If the investor owns less than 20 percent of outstanding voting common stock, the securities generally are reported at their fair value.
A. If the investor owns more than 50 percent of the outstanding voting common stock, the financial statements are consolidated.
B. If the investor owns 20-50 percent of the outstanding voting common stock, the equity method always is required.
C. If the investor owns less than 20 percent of outstanding voting common stock, the securities generally are reported at their fair value.
Correct Answer: B
The equity method is only used if the investor can significantly influence the operating and financial policies of the investee. If another investor owns 51% of the outstanding voting common stock, our investor cannot significantly influence the investee, and the equity method is not appropriate.
User Contributed Comments 11
| User | Comment |
|---|---|
| juncfa2 | Isn't C wrong too? the securities should be reported at cost. |
| robbe1 | I guess if you're holding equities for trading purposes, you'd be required to report them at fair value. |
| NufaNka | C would be reported at cost only for private company. |
| danlan2 | Good comments, NufaNka. Less than 20%, cost method for private company; market method (fair value) for public company. |
| jacobv | The key words are: B: "...always is required" C: "...generally are reported" That difference makes B the right answer |
| pochuevalex | What's the trick with B? in the text it's clear stated that if you hold 20-50% then you should use equity method. I guess it's the amount of control that matters. |
| Cesarnew | Without influence on operations, an ownership interest between 20 and 50% is considered an investment in financial assets. |
| quanttrader | equity method only used if the investor can significantly affect operations and finances of investee-- |
| diptaneal | Is Consolidation Method of accounting same as acquisition method? |
| xieyutong | 20% - 50% does not directly translate to significant impact. If there is evidence of significant impact, then the equity method should be used. |
| Freda829 | i think yutong's explanation is the clearest one...yes for those with significant impact, equity method is required. |